Annual Reports

  • 20-F (Feb 28, 2014)
  • 20-F (Mar 8, 2013)
  • 20-F (Mar 13, 2012)
  • 20-F (Mar 4, 2011)
  • 20-F (Mar 1, 2010)
  • 20-F (Mar 4, 2009)

 
Other

GlaxoSmithKline 20-F 2011
e20vf
Table of Contents

As filed with the Securities and Exchange Commission on March 4, 2011
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
 
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-15170
GlaxoSmithKline plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
980 Great West Road, Brentford, Middlesex TW8 9GS England
(Address of principal executive offices)
Victoria Whyte
Company Secretary
GlaxoSmithKline plc
980 Great West Road
Brentford, TW8 9GS
England
+44 20 8047 5000
company.secretary@gsk.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange On Which Registered
American Depositary Shares, each representing 2 Ordinary Shares, Par value 25 pence
  New York Stock Exchange
4.850% Notes due 2013
  New York Stock Exchange
5.650% Notes due 2018
  New York Stock Exchange
6.375% Notes due 2038
  New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
         
         
Ordinary Shares of Par value 25 pence each
    5,196,264,019  
         
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes     o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes     þ No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes     o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes     o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
             
U.S. GAAP o   International Financial Reporting Standards as issued by the International Accounting Standards Board   þ   Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o          Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes     þ No
 
 

 


Table of Contents

(GLAXOSMITHKLINE GRAPHICS)


 

Contents

         
 
       
Business review
       
    08  
    10  
    12  
    14  
    18  
    19  
    20  
    21  
    22  
    29  
    34  
    41  
    47  
    53  
 
       
 
 
       
Governance and remuneration
       
    58  
    60  
    64  
    69  
    71  
    74  
    81  
    91  
    94  
    96  
    101  
 
       
 
 
       
Financial statements
       
    102  
    103  
    104  
    109  
 
       
 
 
       
Shareholder information
       
    186  
    194  
    197  
    201  
    202  
    202  
    202  
    204  
    205  
    206  
    209  
    217  
    218  
    219  
    220  
 
       
 EX-1.1
 EX- 4.3
 EX- 4.7
 EX-12.1
 EX-12.2
 EX-13.1
 EX-15.1
Business review
This discusses our financial and non-financial activities, resources, development and performance during 2010 and outlines the factors, including the trends and the principal risks and uncertainties, which are likely to affect future development.
Governance and remuneration
This discusses our management structures and governance procedures. It also sets out the remuneration policies operated for our Directors and Corporate Executive Team members.
Financial statements
The financial statements provide a summary of the Group’s financial performance throughout 2010 and its position as at 31st December 2010. The consolidated financial statements are prepared in accordance with IFRS as adopted by the European Union and also IFRS as issued by the International Accounting Standards Board.
Shareholder information
This includes the full product development pipeline and discusses shareholder return in the form of dividends and share price movements.
Underlying sales growth excludes pandemic products, Avandia and Valtrex. See page 21.
CER% represents growth at constant exchange rates. Sterling % or £% represents growth at actual exchange rates. See page 21.
The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.


GSK Annual Report 2010


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01

We exist to improve the
quality of human life by
enabling people to do more,
feel better
and live longer.
    We work by respecting people, maintaining our focus on the patient and consumer whilst operating with both integrity and transparency.
    We are looking to deliver shareholder value through growth of a diversified and global business, by delivering more products of value, simplifying our operating model and by running our business responsibly.
    What follows is our report to shareholders for 2010.
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 Report of the Directors contained on pages 8 to 101. Under English law the Directors would be liable to the company, but not to any third party, if the Report of the Directors contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.
Report of the Directors
Pages 8 to 101 inclusive comprise the Report of the Directors that 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.
Website
Notwithstanding the references we make in this Annual Report to GlaxoSmithKline’s website, none of the information made available on the website constitutes part of this Annual Report or shall be deemed to be incorporated by reference herein.
Cautionary statement regarding forward-looking statements
The Group’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group’s current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. The Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements involve inherent risks and uncertainties. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Risk factors’ on pages 53 to 57 of this Annual Report.
GSK Annual Report 2010


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02

GSK at a glance

We are one of the world’s leading
research-based pharmaceutical and
healthcare companies. We are
committed to improving the quality
of human life by enabling people
to do more, feel better and live longer.
How we do it
GSK has focused its business on the delivery of three strategic priorities, which aim to increase growth, reduce risk and improve GSK’s long-term financial performance:
  Grow a diversified global business
 
  Deliver more products of value
 
  Simplify GSK’s operating model
Where we do it
GSK is a global organisation with offices in over 100 countries and major research centres in the UK, USA, Belgium and China. Our shares are listed on the London and New York Stock Exchanges and our corporate head office is in Brentford, UK.
Our 2010 numbers
 
£28.4bn
  32.1p
Turnover
  Earnings per share
 
   
53.9p
  65p
Earnings per share before
major restructuring
  Dividend per share
Group sales
 
(GRAPHICS)


             
Research & development   Consumer Healthcare
     
c.30
  £3.96bn   20%   No.1
A peer-leading pipeline
  In 2010, we spent £3.96bn   Growth of Horlicks   Sensodyne has been the
with around 30 late-stage
  in R&D before major   in India in 2010.   world’s fastest growing
assets.
  restructuring, or 14%       toothpaste brand over
 
  of our total sales.       the last 5 years.
 
  We are one of the world’s        
 
  biggest investors in R&D and are        
 
  the biggest private sector funder        
 
  of R&D in the UK.        
 
         
 
         
 
         
 
         
 
         
10
  14%   c.1bn   2
10 new compounds and
  We are committed to   Units of Lucozade, Ribena   New Consumer Healthcare
vaccines starting phase III
  improving returns in R&D,   and Horlicks manufactured   Research and Innovation
clinical trials since the start
  aiming to increase our   in the UK every year.   centres opened in China
of 2010.
  estimated return       and India.
 
  on investment in        
 
  this area to 14%.        
 
         
 
         
Vaccines   Emerging markets
     
1.4bn
      24%    
Doses of our vaccines
      Of total GSK turnover from    
supplied to 179 countries
      emerging markets, by the broader    
around the world in 2010.
      definition (Pharmaceutical and    
 
      Consumer Healthcare turnover    
 
      in all markets excluding USA,    
 
      Western Europe, Canada, Japan,    
 
      Australia and New Zealand).    
GSK Annual Report 2010


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03

(MAP)
         
96,500
  5%   3
Employees.
  Share of world   Leading presence in
 
  pharmaceutical market.   Consumer Healthcare
 
  (Source: IMS Health)   global categories: OTC,
 
      Oral Care, Nutritionals.

GSK’s business model
 
A balanced, synergistic business, with multiple growth drivers supporting a core pharmaceutical R&D operation.
(GRAPHICS)
Responsible business
 
Malaria vaccine
Potentially the first malaria vaccine with phase III trials ongoing in 7 African countries.
300 million
Commitment to supply 300m doses of Synflorix at a reduced price to developing countries over the next decade through the AMC financing mechanism.
5-year commitment
To treat school age children in Africa at risk of intestinal worms.
Leader
GSK ranked first in both Access to Medicine Indexes in 2008 and 2010.
2050
Target date for value chain, from raw materials to product disposal, to be carbon neutral.
     
   
 


GSK Annual Report 2010


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04

Chairman & CEO summary

Dear Shareholder
Over the last two and a half years we have been implementing a strategy to transform our business model to address the significant challenges our industry faces as payers search for ever more cost-effective healthcare, and demand escalates for new and better medicines. This is being done with the direct aim of enhancing returns to our shareholders and improving the lives of patients and consumers.
To achieve this we have substantially re-engineered GSK’s business through major restructuring and a more rigorous approach to capital allocation. The effects of these changes in 2010 were masked to some degree by specific events. Reported sales, for example, were impacted by generic competition to Valtrex, and reduced sales from Avandia and pandemic related products. Meanwhile earnings were impacted by the significant charge we took to help resolve long-standing legal matters. This belies the good progress we have made to execute our strategy and which is evident in diversified underlying sales growth and the increasing potential of our pipeline. We believe GSK is becoming a more balanced, synergistic business with a lower risk profile and the option for significant potential upside from the pipeline.
GSK is also a business built on strong values and a deep commitment to operating with integrity. In 2010 we have taken further steps to make our company more responsive, more flexible and more open to society’s expectations.
Increasing returns to shareholders
In 2010 we were able to fund returns to shareholders, bolt-on acquisitions and the significant increase in legal settlements whilst reducing net debt by £0.6 billion.
Adjusted 2010 net cash inflow before legal matters was £8.8 billion, up 9%. Cash outflow for legal settlements was £2 billion.
GSK remains financially very strong. We increased our dividend by 7% to 65p in 2010 and our priority is to deliver further growth in the dividend. Since 2005, dividends have increased each year with average growth of 8% over the five-year period. We have also started a new long-term share buy-back programme to enhance returns to shareholders, with buy-backs of £1-2 billion expected in 2011.


(GRAPHICS)
 


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05

Chairman & CEO summary

Continuing focus on return on investment
Our drive for change, and to improve returns on investment through restructuring and effective capital allocation, continued to make progress during the year.
Reinvestment of costs saved through our restructuring programme has enabled us to diversify and strengthen GSK’s sales base. To date, £1.7 billion of cost has been extracted from the business and we are on track to deliver £2.2 billion of annual savings by 2012.
We have taken cost out from lower returning activities and reinvested it in key growth areas such as Emerging Markets, Vaccines and Consumer Healthcare. 2010 reported sales for these businesses were up 22%, 15% and 5% respectively.
This is helping to reduce GSK’s dependency on sales of products generated in ‘white pills/western markets’. Sales from these markets and products have decreased from 40% in 2007, to 25% in 2010. Over time, this should help to reduce the adverse impact of patent expirations on the Group.
Delivering diversified underlying sales growth
In 2010, reported sales fell 1%, impacted by the continued effect of generic competition to Valtrex, the rapid loss of sales of Avandia following regulatory decisions in the Autumn and a difficult comparison with the prior year which included significant sales of pandemic products.
However, underlying sales growth (sales excluding these 3 factors) was up 4.5%. This growth was achieved despite the ongoing impacts of US healthcare reform and EU government austerity measures and is testament to the strength of the rest of our portfolio.
In 2011, we expect underlying sales momentum to continue and translate into sustainable reported growth in 2012.
Increasing pipeline potential
Reforming R&D to improve returns on investment has been a key element of the strategy we are implementing. We saw further evidence that this strategy is making progress during 2010.
GSK now has a peer-leading portfolio of around 30 opportunities in phase III and registration. This portfolio is diverse with 5 biopharmaceuticals and 5 vaccines in addition to NCEs. It is also highly innovative with more than 20 assets not currently available for any indication. One such asset – Benlysta – is potentially the first new treatment for lupus in 50 years and is currently being considered for approval by regulators in the USA and Europe.
Importantly, we are delivering sustained progress, with 10 NCEs and new vaccines entering phase III since the start of 2010. By the end of 2012, we expect phase III data on around 15 assets, including potential new treatments for type 1 and 2 diabetes, several rare diseases and multiple cancer types.
We have made fundamental changes to how we allocate our R&D expenditure, directing it to our late stage pipeline; reducing cost and risk through externalising parts of early-stage discovery; dismantling infrastructure; and terminating development in areas with low financial and scientific return. Our target remains to deliver a rate of return for GSK’s R&D of around 14%. We are the only pharmaceutical company to have explicitly set such a challenging target.
Operating a values-based business with integrity
Continuing to run our business in a responsible way is also central to the changes we have made at GSK.
In 2010, we continued progress in our significant commitment to work on neglected tropical diseases. Our candidate malaria vaccine is progressing through phase III trials in Africa. If all goes well, this will be the first ever vaccine against malaria, with the potential to save the lives of millions of children and infants in Africa. We also announced that we will donate enough of our albendazole medicine to protect all school-aged children in Africa against intestinal worms. Intestinal worms cause more ill health in school-aged children than any other infection, so this will have a major positive health impact.
Improving the environmental sustainability of our business is also a priority and we have launched a new set of ambitious targets. Our goal is to reduce the environmental impact of our whole value chain, from raw materials to product disposal, and to be carbon neutral by 2050.
We are continuing to work towards resolving a number of long-standing legal matters. There is no doubt that the scale of legal provisioning that has been required is significant. However, we continue to believe that it is in the Group’s best interests to resolve this inherent unpredictability and reduce GSK’s overall litigation exposure. These legal cases underline just how important it is for us to be led by our values in everything we do.
Changes to the Board
In September we announced that Julian Heslop will retire as CFO at the end of March and be replaced by Simon Dingemans, who joined the company as CFO-designate in January 2011.
We would like to thank Julian for his dedicated service to GSK as CFO and a member of the Board over the last six years – his integrity, diligence and outstanding technical ability have ensured that GSK has remained financially strong during a period of significant economic turmoil. Simon’s appointment as CFO will bring valuable new experience and capability to support us in implementing our strategy.
Conclusion
There is no doubt that our operating environment remains challenging and that the pharmaceutical industry is undergoing a period of intense change. However we believe that GSK is well placed to succeed in this environment.
Our journey to create a more balanced, synergistic business with increasing pipeline potential is progressing well and in accomplishing this we would like to recognise the significant contribution of our employees and our many partners. We remain confident that we can generate increased value for shareholders as well as deliver better outcomes to patients and consumers.
     
-s- SIR CHRISTOPHER GENT
  -s- ANDREW WITTY
 
   
Sir Christopher Gent
  Andrew Witty
Chairman
  Chief Executive Officer
 
  See page 21.


GSK Annual Report 2010


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()
06
Discover the world of GSK
     

 



GSK Annual Report 2010


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07

Our strategy

Since 2008, we have focused our business around the delivery of three strategic priorities, which aim to increase growth, reduce risk and improve our long-term financial performance:
Grow a diversified global business
 
We are diversifying our business to create a more balanced product portfolio and move away from a reliance on traditional ‘white pills/western markets’*. Sales generated from these markets and products have decreased from 40% in 2007, to 25% in 2010. Over time this should help to reduce the adverse impact of patent expirations on the Group.
We expect to generate future sales growth by strengthening our core pharmaceuticals business and supplementing it with increased investment in growth areas such as Emerging Markets, vaccines, Japan, dermatology and Consumer Healthcare. Sales in Emerging Markets were up 22%, vaccines up 15%, Japan up 14%, dermatology up 6% (on a pro-forma basis excluding 2010 acquisitions) and Consumer Healthcare up 5% for 2010.
Deliver more products of value
 
With the aim of sustaining an industry-leading pipeline of products that deliver value for healthcare providers, we have been focusing on improving rates of return and delivering the best science in our R&D organisation. This has required a multi-faceted approach. For example we have increased the level of externalisation of our research, taken difficult decisions around pipeline progressions and focused on disease areas where we believe the prospects for successful registration and launch of differentiated medicines are greater.
We have one of the largest and most diverse development pipelines in the industry with approximately 30 late-stage assets. The vast majority of these programmes address unmet medical need and importantly nearly two-thirds are new chemical entities or new vaccines.
Simplifying the operating model
 
As our business continues to change shape, it is essential that we transform the operating model to reduce complexities, improve efficiencies and reduce cost. Through our global restructuring programme, we have removed £1.7 billion of cost since 2008 and are on track to deliver our target of £2.2 billion of annual savings by 2012. These savings have been extracted from our developed country sales and marketing, support functions, R&D and manufacturing infrastructure and reinvested in higher returning activities such as Emerging Markets, vaccines and Consumer Healthcare.
Outlook
 
Whilst our operating environment remains challenging, we have made significant progress through restructuring and a rigorous returns-based approach to capital allocation. We expect underlying sales momentum (sales excluding Valtrex, Avandia and pandemic related products) to continue in 2011 and to translate into reported growth in 2012 at constant exchange rates, despite further anticipated pricing reductions in the USA and Europe.
The US patent for compositions containing the combination of active substances in Seretide/ Advair expired during 2010, but various patents over the Diskus delivery device exist in the USA for a number of years up to 2016. The outlook for the timing and impact of entry of ‘follow-on’ competition is uncertain. GSK has not been notified of any acceptance by the US FDA of an application for a ‘follow-on’ product that refers to Seretide/Advair and contains the same active ingredients (as would be expected to precede the introduction of such a product), and is not able to predict when this may occur or when any such ‘follow-on’ product may enter the US market. Other products may experience generic competition in advance of the stated patent expiry as a result of settlement of patent proceedings. See Note 44, ‘Legal proceedings’, pages 178 to 185.
GSK has a peer-leading development pipeline, with over 20 assets not currently on the market for any indication. By the end of 2012, we expect Phase III data on around 15 additional assets.
With improvements in our net debt position, we are increasing returns to shareholders. We increased GSK’s dividend in 2010 and our priority is to deliver further growth in the dividend. We also have commenced a new long-term share buy-back programme.
We remain confident that we can generate increased value for shareholders as well as deliver better outcomes to patients and consumers.
 
*   See page 21.
Our plans
 
  Drive growth in the pharmaceutical business in our core markets
 
  Fulfil the potential of Emerging Markets
 
  Expand our business in Japan
 
  Build our leadership in dermatology
 
  Grow the Vaccines and Consumer Healthcare businesses
Our plans
 
  Focus on the best science
 
  Diversify through externalisation
 
  Re-personalise R&D
 
  Focus on return on investment
Our plans
 
  Evolve our commercial model
 
  Re-shape manufacturing
 
  Streamline our processes
 
  Reduce working capital


GSK Annual Report 2010


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08

2010 performance overview
         
Our strategies
  Our measures   Our progress in 2010
 
       
We have focused the business around the delivery of three strategic priorities.
  We use a number of measures to track our progress against the strategic priorities over the medium to long term. These include the following:

  We made good progress during the year, with a number of notable successes:
 
       
 
Grow a diversified global business

Broadening and balancing our portfolio and moving away from a reliance on ‘white pills/western markets’.
 
  Performance of core Pharmaceuticals and vaccines businesses
 
  Excluding pandemic products, Avandia and Valtrex, underlying pharmaceutical (including vaccines) sales* were £21.1 billion and grew 4% in the year.

       
 
  Diversification of sales
 
  Sales from ‘white pills/western markets’ fell from 40% of turnover in 2007 to 25% in 2010

       
 
  Contribution of Emerging Markets to our overall sales and growth
 
  Sales in our Emerging Markets pharmaceutical business grew by 22% to more than £3.6 billion and now represent 15% of pharmaceutical turnover.

       
 
  Growth of Consumer Healthcare business
 
  Sales in our Consumer Healthcare business grew by 5% to £5.0 billion and now represent 17.6% of Group turnover.

       
 
  Build our leadership position in dermatology
 
  Dermatology sales grew on a pro-forma basis (excluding 2010 acquisitions) by approximately 6% to nearly £1.1 billion, representing nearly 4% of Group turnover.

       
 
  Expansion of Japanese business
 
  Sales in GSK Japan grew 14% to nearly £2.0 billion.
     
  We received approvals for four new compounds.

       
 
  Build biopharmaceutical portfolio
 
  Arzerra recorded sales of £26 million on its first full year on the US market and was launched in Europe. Benlysta filed for approval in both the USA and Europe.

 
       

Deliver more
products of value


Transforming R&D to ensure we not only deliver the current pipeline but are also able to sustain the flow of products for years to come.
 
  Contribution to sales of new products
 
  New products launched since 2007 (excluding flu pandemic vaccines) grew 36% and contributed 7% of pharmaceutical sales in 2010.

       
 
  Number of reimbursable product approvals and filings
 
  We received six product approvals in the USA and EU since the start of 2010

     
  Seven assets are currently filed with regulators.

       
 
  Sustaining late-stage pipeline
 
  We maintained around 30 assets in phase III and registration, with ten new chemical entities and new vaccines entering phase III since the start of 2010.

       
 
  Enhanced R&D productivity and increased externalisation for Drug Discovery
 
  Our objective is to increase our estimated rate of return for R&D from around 11% to 14%.

     
  During 2010 we signed eight new collaborations to increase the external nature of our discovery, giving 54 external discovery engines to complement our 38 Discovery Performance Units.

 
       

Simplifying the operating model

Simplifying our operating model to ensure that it is fit for purpose and able to support our business in the most cost efficient way.
 
  Delivery of major restructuring programme
 
  We have achieved annual cost savings of £1.7 billion and remain on track to reach £2.2 billion of annualised savings by 2012.

       
 
  Reduce working capital.
 
  Working capital reduced by £1.3 billion in 2010 (including £600 million of cash from lower pandemic receivables).
 
*   The calculation of underlying sales growth is described on page 21.
 
  See page 21.
 


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09

2010 performance overview
Key performance indicators

()
 
  This index includes Abbott Labs, Amgen, AstraZeneca, Bristol Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Novartis, Pfizer, Roche Holdings and Sanofi-Aventis.
 
o   Reflects £4bn legal charge.
 
#   The calculation of CER growth is described on page 21.
 
*   The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.
 
+   The calculation of free cash flow is described on page 44.
 
 
In 2010, reported sales were down 1% but underlying sales growth (sales excluding pandemic products, Avandia and Valtrex) was 4.5%.
 
 
Earnings per share in 2010 was adversely impacted by legal costs of £4,001 million (2009 – £591 million). Excluding legal costs, EPS before major restructuring was 120.7 pence, 11% down on 2009.
 
 
The reduced level of free cash flow in 2010 reflected the higher legal settlements in the year. Free cash flow before legal settlements was £6,533 million (2009 – £5,508 million).


GSK Annual Report 2010


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10

Research and development

Research and development – Pharmaceuticals
GSK R&D has built one of the strongest, broadest pipelines of potential new medicines in the industry. We believe the pipeline has the potential to deliver value to patients and payers and improve rates of financial return on our R&D investment. Appropriately progressing our pipeline products safely and efficiently to deliver innovative new medicines for patients is the primary goal of our R&D function.
The development of new products typically is a long, expensive and uncertain process, and it is not possible to predict which compounds in development will succeed or fail. The risks inherent in the R&D process are described more fully in the ‘Risk factors’ section, under ‘Risk that R&D will not deliver commercially successful new products’.
GSK allocates its R&D investment with reference to the potential returns available from its target therapeutic markets and the technical and commercial risks associated with products in the pipeline. Those factors are reviewed at each phase of the development process and are central in the decision to proceed to the next stage. Costs incurred at each stage are carefully managed to maximise the likely future return consistent with the Group’s overall objective of increasing its IRR from its R&D activities from its current level, estimated in 2009 to be around 11%, to 14%. The returns generated are, however, primarily determined by the eventual commercial impact of new products as they achieve regulatory approval and are launched.
This projected rate of return includes products launched from 1st January 2007 and compounds in phases IIb and III of the development process. The calculation is based on actual sales from 2007 to 2009 and forecast sales for the relevant products up to 2030, adjusted to reflect expected failure rates, which are broadly in line with standard industry failure rates. The cost base used in this calculation comprises an estimate of attributable R&D costs and actual and projected milestone payments where appropriate. Estimated profit margins, capital investment and working capital requirements are factored into the calculation, based on our historical performance.
Details of the full product development pipeline, made up of both pharmaceutical and vaccine assets, are set out on pages 197 to 200 and the performance of marketed products is discussed in detail under ‘Financial review 2010’ on pages 34 to 40.
Discovering potential medicines
Our early stage R&D (drug discovery) seeks to identify the biological targets involved with the development of diseases, and then to create small molecules or biopharmaceuticals that interact with these disease targets. The wealth of scientific discoveries in recent years has made it essential that we are highly selective in where we invest our drug discovery resources; focusing resources on those areas most likely to deliver significant medical advances and returns on investment.
We conducted a re-evaluation of the advances and discoveries in global biomedical science. This led us to exit areas of research we judged unlikely to provide sufficient scientific and therefore financial returns. We have also tried to create an entrepreneurial environment in drug discovery pursuing the best scientific opportunities whether internal or external. We created Discovery Performance Units (DPUs), which are groups of between 5-70 scientists, with each group focusing on one particular disease or pathway and responsible for driving discovery and development of potential new medicines through to early stage clinical trials (up to the completion of Phase IIa). There are now nearly 40 DPUs.
Each DPU develops a business plan with specific deliverables and investment covering multiple years. The plans also include areas of opportunity for collaborations with external organisations that could enhance a DPU’s deliverables and return. These can include collaborations with large and small companies and academia. Our internal R&D expertise gives us a strong basis in identifying and forming these collaborations, which in drug discovery are typically in-licensing or option-based collaborations.
The Discovery Investment Board (DIB) reviews the business plans of each DPU. The DIB is responsible for revising the plans, identifying areas for improvement and monitoring DPU delivery against agreed targets and investment. Membership of the DIB comprises senior R&D and commercial management and external individuals with relevant expertise including life science investment experience and understanding of payer perspectives. It is chaired by the SVP of Medicines Discovery and Development.
No individual DPU has annual expenditure of more than 10% of the total annual R&D expenditure.
Delivering these medicines to patients
A compound that advances into late-stage development (typically after Phase lla) will undergo much larger scale studies in humans to investigate its efficacy and safety further. At the same time, we work at optimising both the compound’s physical properties and its formulation so that it can be produced and delivered efficiently and in sufficient quantities through the manufacturing process. We then convert the results of these activities into a regulatory file for submission to regulatory agencies.
Medicines Development Teams (MDTs) are small units of six to ten people who have responsibility for a compound through the later stages of development to filing with the regulatory agencies. There are around 30 assets in late-stage development, comprising more than 50 individual projects.
GSK also actively seeks out opportunities to add products to its late-stage portfolio through relationships with other companies. For late-stage assets, these typically take the form of in-licensing or co-promotion arrangements and are most likely to be aligned to existing areas of therapy expertise or investment.
The Product Management Board (PMB), assesses the technical, commercial and investment case for each project to progress in development. The PMB is co-chaired by the Chairman, R&D and the President, North America Pharmaceuticals, and includes the heads of each pharmaceutical region and global manufacturing.
Projects are reviewed by the PMB at certain key decision points: ‘Commit to Medicine Development’, ‘Commit to Phase III’ and ‘Commit to File and Launch’. Funding is generally allocated up to the next key decision point, typically between two and four years ahead. The PMB also carries out an annual late-stage funding review, where investment in all projects is reviewed, adjusted if necessary and prioritised.
No individual late-stage project has incurred annual expenditure of more than 10% of the total annual R&D expenditure.
Governance
R&D decisions are overseen by a number of boards. The oversight of strategic issues and overall budget management across R&D is owned by the R&D Executive team (RADEX). DIB and PMB control investment decisions in early and late stage R&D as described above.
The Scientific Advisory Board (SAB) is chaired by the SVP Medicines Discovery and Development and includes a number of external scientific experts. The SAB reviews and challenges the science underlying development programmes and provides advice on related issues to the PMB at the key investment points.


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11

Research and development

GSK’s Chief Medical Officer, as Chair of the Global Safety Board, is ultimately accountable for oversight of all major decisions regarding patient safety. The Global Safety Board is responsible internally for approving pivotal studies and investigating any issues related to patient safety arising during the development programme and post-launch. Information from GSK clinical trials is widely and easily available.
Diseases of the developing world
Continued investment in research into diseases of the developing world is essential if there is to be a long-term improvement in the health of people who live in these regions. As part of our response to this challenge, we operate a drug discovery unit based at Tres Cantos (Spain), which focuses on malaria and tuberculosis. We are adapting our business model to pursue an open innovation strategy for R&D for diseases of the developing world. Elements of this new approach include: being more open with our intellectual property; being more open with our resources; and being more open with our data and compounds. Additional R&D sites in the USA and the UK are focused on the development of new medicines to treat HIV/AIDS and drug resistant bacteria, while vaccine research is conducted in Rixensart (Belgium).
Through these R&D efforts, we are addressing the prevention and treatment of all three of the World Health Organization’s (WHO) priority infectious diseases.
Vaccines R&D
We are active in the fields of vaccine research, development and production and have a portfolio of over 30 vaccines approved for marketing. We have over 1,600 scientists devoted to discovering innovative vaccines that contribute to the health and well-being of people of all generations around the world. The discovery and development of a new vaccine is a complex process requiring long-term investment and, with more than 20 vaccines in development, we have one of the strongest vaccine pipelines in the industry. Traditionally vaccines have been used to ward off illness; our vaccine division is working now to develop immunotherapeutics aimed at educating the patient’s immune system to identify and attack cancer cells in a highly specific manner.
Vaccine discovery involves many collaborations with academia and the biotech industry to identify new vaccine antigens which are then expressed in yeast, bacteria or mammalian cells and purified to a very high level. This is followed by formulation of the clinical lots of the vaccine. This may involve mixing antigens with selected GSK novel proprietary adjuvant systems, which are combinations of selected adjuvants designed to elicit the most appropriate immune response to a specific antigen. The right combination of antigen and adjuvant system can help the body mobilise the most effective immunological pathway, which is designed to provide maximum protection against specific diseases in targeted populations.
Once formulated, the candidate vaccine is evaluated from a safety and efficacy perspective through the different phases of preclinical testing, then through the clinical trials involving healthy individuals. These will range from safety analysis in a small group of volunteers in phase I, dose adjustment and proof of concept in phase II, to large-scale safety and efficacy analysis in phase III. The results obtained during clinical trials and data regarding the development of a quality and large-scale production process and facilities are then combined into a regulatory file which is submitted to the authorities in the countries where the vaccine will be made available.
The Biologicals Scientific Committee (BSC) defines the overall R&D and new product licensing strategy for our vaccines business. It is chaired by the Biologicals President and includes heads of our vaccines R&D, disease areas, clinical, epidemiology, business development and other departments as members. The BSC assesses high potential vaccine in-licensing opportunities, decides on exploratory projects and in-licensing opportunities and also endorses target product profiles before the start of early vaccine projects. In addition the BSC aligns R&D, clinical and commercial plans for early projects and is responsible for prioritising exploratory, research and early vaccine projects.
The Development Review Committee (DRC) oversees the late development vaccine portfolio including strategy, project prioritisation and resource allocation. The DRC is chaired by the head of Global Vaccine Development and its membership includes the heads of clinical research, global industrial operations, global commercial centre of excellence, R&D, industrialisation and medical.
After launch, post marketing studies are set up to assess vaccination programmes and to monitor vaccine safety.
In 2010 two distinct R&D groups were formed for vaccines to provide specific focus for prophylactics and for our Antigen Specific Cancer Immunotherapeutic (ASCI) portfolio. A new Global Vaccine Development organisation was created pulling together our clinical and late development R&D organisations. It has allowed us to give a clear focus to projects through Vaccine Development Leaders who have overall responsibility for the development of a particular project.
Animals and research
For ethical, regulatory and scientific reasons, research using animals remains a small but vital part of research and development of new medicines and vaccines. We only use animals where there is no alternative and constantly strive to reduce the numbers used. We are committed to maintaining high standards for the humane care and treatment of all laboratory animals and undertake internal and external review to assure these standards.
The vast majority of the experimental methods do not use animals. We are actively engaged in research to develop and validate more tests that either avoid the use of animals or reduce the numbers needed. When animals are used, all due measures are taken to prevent or minimise pain and distress.
We understand that use of animals for research purposes commands a high level of public interest. Our statement on ‘The care and ethical use of animals in research’, our views on use of non-human primates and details of our voluntary decision not to use great apes (chimpanzees), together with further information and reports, are available.
Research and development – Consumer Healthcare
The continuous creation and development of innovative products keeps our brands relevant, vibrant and valuable. Our portfolio spans three major categories: OTC medicines, Oral healthcare and Nutritional healthcare. For our major brands, dedicated R&D teams, including regulatory, partner with and work alongside their commercial brand team colleagues in office-free hub environments that foster collaboration and fast decision-making. Hubs have quickly become a preferred way of working at our Innovation Centres in Weybridge, UK, and Parsippany, USA, and we have expanded this model to China and India.
We have a full and diverse product development pipeline. Our key late stage projects include novel technologies, new combinations and superior formulations.


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12

Pipeline summary
We have a full and diverse product development pipeline. All our projects comprising new chemical entities, biological entities or vaccines, new combinations and new indications for existing compounds that are in Phase III, have been filed for approval or have been recently approved are highlighted here. The most advanced status is shown and includes 2010 and 2011 approvals in the USA and EU.
         
10
  6   5
assets moved into
  approvals in USA   assets terminated
Phase III
  or EU   from Phase III development
 
       
IPX066, for Parkinson’s disease

1120212, a MEK
inhibitor, for metastatic
melanoma

2118436, a BRaf inhibitor,
for metastatic melanoma

573719 + vilanterol,
a combination drug
for COPD

1605786, for
Crohn’s disease

Zoster vaccine, for the
prevention of shingles

2402968, for Duchenne
muscular dystrophy

migalastat HCI, for
Fabry disease

1349572, an integrase
inhibitor, for HIV and as
a fixed dose combination
with Epzicom/Kivexa

2696273, for adenosine
deaminase severe
combined immune
deficiency
  Tyverb/Tykerb, for
first line therapy for
hormone receptor positive
breast cancer (USA/EU)

Arzerra, for refractory
chronic lymphocytic leukaemia (EU)

Revolade/Promacta,
for idiopathic
thrombocytopaenic
purpura (EU)

Duodart/Jalyn, a fixed
dose combination drug
for benign prostatic
hyperplasia (USA/EU)

Votrient, for renal
cell cancer (EU)

Prolia, for post-
menopausal osteoporosis
(EU)
  Avandamet XR,
for type 2 diabetes

Avandia + statin,
for type 2 diabetes

almorexant, for
primary insomnia

New generation flu, for
influenza prophylaxis

Simplirix, for genital
herpes prophylaxis.
In-licence or other alliance relationship with a third party
Key:
Phase III
Large comparative study (compound versus placebo and/or established treatment) in patients to establish clinical benefit and safety.
Filed
Following successful Phase III trials, we file the product for approval by the regulatory authorities.
Approval
Only when approval is granted can we begin to market the medicine or vaccine.
Our full pipeline is on pages 197 to 200.


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13

Pipeline summary
                     
Therapeutic area   Compound   Indication   Phase III   Filed   Approved
 
                   
Biopharmaceuticals
  albiglutide   type 2 diabetes   l        
 
                   
 
  Arzerra   chronic lymphocytic leukaemia, first line therapy and use in relapsed patients   l        
 
                   
 
  Arzerra   diffuse large B cell lymphoma (relapsed patients)   l        
 
                   
 
  Arzerra   follicular lymphoma (refractory & relapsed patients)   l        
 
                   
 
  otelixizumab   type 1 diabetes   l        
 
                   
 
  Benlysta   systemic lupus erythematosus       l    
 
                   
 
  denosumab   bone metastatic disease       l    
 
                   
 
  Arzerra   chronic lymphocytic leukaemia (refractory patients)           l
 
                   
 
  Prolia   hormone ablative/chemotherapy bone loss in prostate cancer patients           l
 
                   
 
  Prolia   postmenopausal osteoporosis           l
 
                   
Cardiovascular & metabolic
  darapladib   atherosclerosis   l        
 
                   
Infectious diseases
  Relenza   treatment of influenza   l        
 
                   
Neurosciences
  IPX066   Parkinson’s disease   l        
 
                   
 
  Horizant   restless legs syndrome       l    
 
                   
 
  Trobalt/Potiga (retigabine/ezogabine)   epilepsy – partial seizures       l    
 
                   
Oncology
  1120212   metastatic melanoma   l        
 
                   
 
  2118436    metastatic melanoma   l        
 
                   
 
  Votrient   ovarian cancer, maintenance therapy   l        
 
                   
 
  Revolade/Promacta   chronic liver disease induced thrombocytopaenia   l        
 
                   
 
  Revolade/Promacta   hepatitis C induced thrombocytopaenia   l        
 
                   
 
  Tyverb/Tykerb   breast cancer, adjuvant therapy   l        
 
                   
 
  Tyverb/Tykerb   gastric cancer   l        
 
                   
 
  Tyverb/Tykerb   head & neck squamous cell carcinoma (resectable disease)   l        
 
                   
 
  Votrient   renal cell cancer, adjuvant therapy   l        
 
                   
 
  Votrient   sarcoma   l        
 
                   
 
  Votrient + Tyverb/Tykerb   inflammatory breast cancer   l        
 
                   
 
  Avodart   reduction in the risk of prostate cancer       l    
 
                   
 
  Duodart/Jalyn   benign prostatic hyperplasia -fixed dose combination           l
 
                   
 
  Revolade/Promacta   idiopathic thrombocytopaenic purpura           l
 
                   
 
  Tyverb/Tykerb   breast cancer, first line therapy           l
 
                   
 
  Votrient   renal cell cancer           l
 
                   
Respiratory &
  573719    COPD   l        
 
                   
immuno-inflammation
  573719 + vilanterol   COPD   l        
 
                   
 
  vilanterol (642444)   COPD   l        
 
                   
 
  1605786 (CCX282)   Crohn’s disease   l        
 
                   
 
  Relovair
(vilanterol + 685698)
  asthma   l        
 
                   
 
  Relovair
(vilanterol + 685698)
  COPD   l        
 
                   
Paediatric vaccines
  Mosquirix   malaria prophylaxis (plasmodium falciparum)   l        
 
                   
 
  Nimenrix (MenACWY-TT)   neisseria meningitis groups A, C, W & Y disease prophylaxis       l    
 
                   
 
  MenHibrix (Hib-MenCY-TT)   neisseria meningitis groups C & Y & haemophilus influenzae type b disease prophylaxis       l    
 
                   
Other vaccines
  Flu vaccine   seasonal influenza prophylaxis   l        
 
                   
 
  Zoster   herpes zoster prevention   l        
 
                   
 
  Flu (pre-) pandemic   pre-pandemic & pandemic influenza prophylaxis       l    
 
                   
 
  Pumarix   pandemic influenza prophylaxis       l    
 
                   
Antigen Specific Cancer
  MAGE-A3    treatment of melanoma   l        
 
                   
Immunotherapeutic (ASCI)
  MAGE-A3    treatment of non-small cell lung cancer   l        
 
                   
Rare diseases
  2402968   Duchenne muscular dystrophy   l        
 
                   
 
  2696273   adenosine deaminase severe combined immune
deficiency
  l        
 
                   
 
  migalastat HCI   Fabry disease   l        
 
                   
Dermatology
  tazarotene foam   acne vulgaris   l        
 
                   
 
  Duac low dose   acne vulgaris       l    
 
                   
 
  calcipotriene   mild to moderate plaque psoriasis           l
 
                   
 
  itraconazole tablets   onychomycosis           l
 
                   
 
  Veltin   acne vulgaris           l
 
                   
HIV
  1349572   HIV infections   l        
 
                   
 
  1349572 + abacavir
sulphate + lamivudine
  HIV infections   l        
 
                   
  In-licence or other alliance relationship with a third party
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14

Products, competition and intellectual property

Pharmaceutical products
Our principal pharmaceutical products are currently directed to nine main therapeutic areas. A description of the products is on pages 15 to 16 and an analysis of sales by therapeutic area, is on page 35.
Competition
Our principal pharmaceutical competitors range from small to large pharmaceutical companies often with substantial resources. Some of these companies are:
  Abbott Laboratories
 
  Amgen
 
  AstraZeneca
 
  Bristol-Myers Squibb
 
  Eli Lilly
 
  Johnson & Johnson
 
  Merck
 
  Novartis
 
  Pfizer
 
  Roche Holdings
 
  Sanofi-Aventis
Pharmaceuticals may be subject to competition from other products during the period of patent protection and, once off patent, from generic versions. The manufacturers of generic products typically do not incur significant research and development or education and marketing development costs and consequently are able to offer their products at considerably lower prices than the branded competitors. As a research and development based company we will normally seek to achieve a sufficiently high profit margin and sales volume during the period of patent protection to repay the original investment, which is generally substantial, and to generate profits and fund research for the future. Competition from generic products generally occurs as patents in major markets expire. Increasingly patent challenges are made prior to patent expiry, claiming that the innovator patent is not valid and/or that it is not infringed by the generic product. Following the loss of patent protection, generic products rapidly capture a large share of the market, particularly in the USA.
We believe that remaining competitive is dependent upon the discovery and development of new products that deliver value to healthcare providers and improved outcomes for patients, together with effective marketing of existing products.
Within the pharmaceutical industry, the introduction of new products and processes by our competitors may affect pricing or result in changing patterns of product use. There is no assurance that products will not become outmoded, notwithstanding patent or trademark protection. In addition, increased government and other pressures for physicians and patients to use generic pharmaceuticals, rather than brand-name medicines, may increase competition for products.
Intellectual property
Intellectual property is a key business asset for our company, and the effective legal protection of our intellectual property (via patents, trademarks, registered designs, copyrights and domain name registrations) is critical in ensuring a reasonable return on investment in R&D.
Trademarks
All of GSK’s commercial products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademark Advair covers the same product sold in the EU as Seretide. Trademark protection may generally be extended as long as the trademark is used by renewing it when necessary. GSK’s trademarks are important for maintaining the brand identity of its products. GSK enforces its trademark rights to prevent infringements.
Patents
It is our policy to try to obtain patents on commercially important, protectable inventions discovered or developed through our R&D activities. Patent protection for new active ingredients is available in major markets and patents can also be obtained for new drug formulations, manufacturing processes, medical uses and devices for administering products. Although we may obtain patents for our products, this does not prevent them from being challenged before they expire. Further, the grant of a patent does not mean that the issued patent will necessarily be held valid and enforceable by a court. If a court determines that a patent we hold is invalid, non infringed or unenforceable, it will not protect the market from third party entry prior to patent expiry. Significant litigation concerning such challenges is summarised in Note 44 to the financial statements, ‘Legal proceedings’.
The life of a patent in most countries is 20 years from the filing date. However the long development time for pharmaceutical products may result in a substantial amount of this patent life being used up before launch. In some markets (including the USA and Europe) it is possible to have some of this lost time restored and this leads to variations in the amount of patent life actually available for each product we market. Further, certain countries provide a period of data or market exclusivity that prevents a third party company from relying on our clinical trial data to enter the market with its copy for the period of exclusivity.
The patent expiry dates for our significant products are in the following table. Dates provided are for expiry of patents in the USA and major European markets on the active ingredient, unless otherwise indicated, and include extensions of patent term, including for paediatric use in the USA, where available. The patents on vaccines relate to vaccine compositions.


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15

Products, competition and intellectual property
Pharmaceutical products
                     
                USA   EU
Products   Compounds   Indication(s)   Major   Patent expiry dates
            competitor brands   USA   EU
Respiratory
Veramyst
  fluticasone furoate   rhinitis   Nasacort   2021    2023 
 
                   
Flixotide/Flovent
  fluticasone propionate   asthma/COPD   Qvar, Singulair   expired
(compound)
2011-2016
(Diskus device)
2013-2025
(HFA-device/
formulation)
  expired
(compound)
expired
(Diskus device)
2012-2017
(HFA-device/
formulation)
 
                   
Seretide/Advair*
  salmeterol xinafoat/ fluticasone propionate   asthma/COPD   Singulair, Symbicort,
Spiriva, Asmanex, Pulmicort,
Foster
  expired
(combination)
2011-2016
(Diskus device)
2013-2025
(HFA-device/
formulation)
  20131
(combination)
expired
(Diskus device)
2012-2017
(HFA-device/
formulation)
 
                   
Serevent
  salmeterol xinafoate   asthma/COPD   Foradil, Spiriva   expired
(compound)
2011-2016
(Diskus device)
NA
  expired
(compound)
expired
(Diskus device)
2012-2019
(HFA-device/
formulation)
 
                   
Anti-virals
Relenza
  zanamivir   influenza   Tamiflu   2013    2014 
 
                   
Valtrex
  valaciclovir   genital herpes, coldsores, shingles   Famvir   expired   expired
 
                   
Zeffix/Epivir-HBV
  lamivudine   chronic hepatitis B   Hepsera   2013
(use)
  2012
(use) 
 
                   
Central nervous system
Lamictal
  lamotrigine   epilepsy, bipolar disorder   Keppra, Dilantin   expired   expired
 
                   
Imigran/lmitrex
  sumatriptan   migraine   Zomig, Maxalt, Relpax   expired   expired
 
                   
Requip
  ropinirole   Parkinson’s disease, restless legs syndrome   Mirapex   expired   expired
 
                   
Requip XL
  ropinirole   Parkinson’s disease   Mirapex   2012
(formulation)
  2011
(use)
 
                   
Seroxat/Paxil
  paroxetine   depression, various
anxiety disorders
  Effexor, Cymbalta,
Lexapro
  expired   expired
 
                   
Treximet
  sumatriptan and naproxen   migraine   Zomig, Maxalt, Relpax   20171
(combination
and use)
  NA
 
                   
Wellbutrin SR
  bupropion   depression   Effexor, Cymbalta, Lexapro   expired   expired
 
                   
Cardiovascular and urogenital
Arixtra
  fondaparinux   deep vein thrombosis, pulmonary embolism   Lovenox, Fragmin
Innohep
  expired   expired
 
                   
Avodart
  dutasteride   benign prostatic hyperplasia   Proscar, Flomax, finasteride   20151   2017 
 
                   
Coreg CR
  carvedilol phosphate   mild-to-severe heart failure,
hypertension, left ventricular
dysfunction post MI
  Toprol XL   2016
(formulation)
  NA
 
                   
Fraxiparine
  nadroparin   deep vein thrombosis,
pulmonary embolism
  Lovenox, Fragmin
Innohep
  expired   expired
 
                   
Lovaza
  omega-3 acid ethyl esters   very high triglycerides   Tricor   20171
(formulation)
  NA
 
                   
 
*   See Outlook on page 7 for details of uncertainty on the timing of follow-on competition.
 
  Generic competition possible in 2011.
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16

Products, competition and intellectual property
Pharmaceutical products
                     
                USA   EU
Products   Compounds   Indication(s)   Major   Patent expiry dates
            competitor brands   USA   EU
 
                   
Anti-bacterials
Augmentin
  amoxicillin/clavulanate   common bacterial
potassium infections
  generic products   expired   expired
 
                   
 
                   
Oncology
Arzerra
  ofatumumab   refractory chronic lymphocytic leukaemia   MabThera/Rituxan   pending    pending 
 
                   
Hycamtin
  topotecan   ovarian cancer, small cell
lung cancer, cervical cancer
  Doxil, Gemzar   expired   2011 
 
                   
Promacta/Revolade
  eltrombopag   idiopathic thrombocytopenic
purpura
  Nplate   2021    2021 
 
                   
Tykerb/Tyverb
  lapatanib   advanced and metastatic
breast cancer in HER2
positive patients
  Herceptin   2020    2023 
 
                   
Votrient
  pazopanib   metastatic renal cell carcinoma   Sutent, Nexavar, Afinitor   2021    2021 
 
                   
 
                   
Vaccines
Boostrix
  diphtheria, tetanus, acellular
pertussis
  booster vaccination   Adacel   2017   2017
 
                   
Infanrix/Pediarix
  diphtheria, tetanus, pertussis,
polio, hepatitis B (HepB),
inactivated antigens
  diphtheria, tetanus, pertussis,
polio, hepatitis B (HepB),
  Pentacel, Pediacel,
Pentaxim, Pentavac
  2017    2014 
 
                   
Cervarix
  HPV 16 & 18 virus like particles
(VLPs), AS04 adjuvant (MPL +
aluminium hydroxide)
  human papilloma virus
type 16 & 18
  Gardasil (Silgard)   2020    2020 
 
                   
Fluarix
  split inactivated influenza virus
subtypes A and type B antigens
  seasonal influenza   Vaxigrip, Mutagrip, Fluzone,
Influvac, Aggripal, Fluad
  2022    2022 
 
                   
FluLaval
  split inactivated influenza virus
subtypes A and type B antigens
  seasonal influenza   Vaxigrip, Mutagrip, Fluzone,
Influvac, Aggripal, Fluad
  none   none
 
                   
Pandemrix
  derived split inactivated
influenza virus antigen,
A503 adjuvant
  A(H1N1)v2009 influenza
prophylaxis
  Focetria, Celvapan, emerflu   2014   2014
 
                   
Prepandrix
  derived split inactivated
influenza virus antigen,
A503 adjuvant
  influenza prophylaxis   Aflunov   2014   2014
 
                   
Synflorix
  conjugated pneumococcal
polysaccharide
  invasive pneumococcal
disease
  Prevenar (Prevnar)   NA   2021 
 
                   
 
                   
HIV
Combivir
  lamivudine and zidovudine   HIV/AIDS   Truvada, Atripla   20121
(combination)
  2013
(combination)
Epivir
  lamivudine   HIV/AIDS   Truvada, Atripla   expired   expired 
Epzicom/Kivexa
  lamivudine and abacavir   HIV/AIDS   Truvada, Atripla   2016
(combination)
  2016
(combination)
 
                   
Lexiva
  fosamprenavir   HIV/AIDS   Prezista, Kaletra, Reyataz   2017    2019 
 
                   
Selzentry
  maraviroc   HIV/AIDS   Isentress, Intelence, Prezista   2021    2021 
Trizivir
  lamivudine, zidovudine and abacavir   HIV/AIDS   Truvada, Atripla   2016
(combination)
  2016
(combination)
 
                   
 
1   See Note 44 to the financial statements, ‘Legal proceedings’
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Products, competition and intellectual property
Consumer Healthcare products
                 
 
               
Brand   Products   Application   Markets   Competition
 
               
Oral healthcare
Aquafresh
  toothpastes, toothbrushes, mouthwashes   prevention of caries, gum
disease and bad breath
  global   Colgate-Palmolive’s Colgate, Procter & Gamble’s Crest
 
               
Sensodyne
  toothpastes, toothbrushes   prevention of dental
sensitivity
  global   Colgate-Palmolive sensitivity toothpastes
 
               
Biotene
  mouthwash, gel   treat dry mouth   many markets   none
 
               
Polident
Poligrip
Corega
  denture adhesive,
denture cleanser
  to improve comfort of fitted dentures and to clean dentures   global   Fixodent
 
               
OTC medicines
Panadol
  tablets, capulets, infant drops   paracetamol-based treatment
of headache and joint pain,
fever, cold symptoms
  global, except USA   Nurofen
 
               
NicoDerm,
NiQuitin CQ,

and Nicabate.
Also Nicorette
(USA only)
  gum, patch, mini lozenge,
original lozenge
  treatment of nicotine
withdrawal as an aid to
quitting smoking
  global   Novartis’ Nicotinell,
retailers’ own brands
 
               
Nutritional healthcare
Lucozade
  energy and sports drinks   energy and hydration   UK, Ireland, some
other markets
  various sports drinks
 
               
Horlicks
  malted, milk-based drinks
and foods
  nutrition   UK, Ireland, India   Ovaltine, Milo
 
               
Ribena
  blackcurrant juice-based drink   vitamin C-delivering
health drink
  UK, Ireland, some
other markets
  Robinsons
 
               
Consumer Healthcare competition
GSK holds leading positions in all its key consumer product areas. Worldwide it is the second largest in OTC medicines and the third largest in Oral healthcare. In Nutritional healthcare it holds the leading position in the UK, Ireland and India.
The environment in which the Consumer Healthcare business operates has become ever more challenging:
  consumers are demanding better quality, better value and improved performance
 
  retailers have consolidated and globalised which has strengthened their negotiation power
 
  cycle times for innovation have reduced.
The main competitors include the major international companies Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever and Pfizer. In addition, there are many other smaller companies that compete with GSK in certain markets.
The major competitor products in OTC medicines are:
  in the USA: Metamucil (laxative), Pepcid (indigestion) and private label smoking control products
 
  in the UK: Lemsip (cold remedy), Nurofen and Anadin (analgesics), and Nicorette and Nicotinell (smoking control treatments).
In Oral healthcare the major competitors are Colgate-Palmolive’s Colgate and Procter & Gamble’s Crest.
In Nutritional healthcare the major competitors to Horlicks are Ovaltine and Milo malted food and chocolate drinks. Competitors to Ribena are primarily local fruit juice products, while Lucozade competes with other energy drinks.
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Regulation

Regulation – Pharmaceuticals
Region and country-specific laws and regulations are major factors in determining whether a product may be successfully developed and approved. They define the information needed to evaluate the safety and efficacy of pharmaceutical products, as well as governing their testing, approval, manufacturing, labelling and marketing. There is an increasing level of co-operation and exchange of information among the major regulatory authorities encompassing development plans, data to support product registration, post-marketing safety information and inspections.
Although the evaluation of benefit and risk continue to be paramount considerations for the approval of a new drug in the USA, there is enhanced focus by the FDA on the safety of medicines from approval through the post-marketing phase of the product. In 2010 the FDA announced four strategic priorities for the next five years: advance regulatory science and innovation, strengthen the safety and integrity of the global supply chain, strengthen compliance and enforcement activities to support public health; and address the unmet public health needs of special populations. We will be engaged in these key areas of interest.
In Europe, new regulations aimed at strengthening the safety monitoring of medicines have now been agreed by EU legislators and will be implemented from 2011. Discussions continue on draft legislation on improving citizens’ access to reliable information on medicines, and on strengthening EU laws to protect citizens from the threats posed by fake medicines. The European Medicines Agency (EMA) and the Heads of National Medicines Agencies (HMA) both published five-year strategic plans during 2010; these were aimed mainly at strengthening the operation of the existing EU regulatory network. The EU Commission published a report on the operation of the EMA in preparation for a potential legislative proposal for changes to the regulatory framework by 2014, and also continued with its review of the regulation of Clinical Trials in Europe – this review is expected to conclude in 2012.
The regulatory environment in Emerging Markets and Asia-Pacific continues to evolve, with a number of countries continuing to develop their regulatory review systems. We actively participate in a number of specific regional and national regulatory initiatives, which provide opportunities for meaningful scientific and regulatory dialogue between industry, agencies and other stakeholders. We continue to include broader sets of patient populations from a number of these countries in medicine development programmes in order to increase global patient access to new innovative medicines, and optimise regulatory approvals.
Regulation – Consumer Healthcare
The consumer healthcare industry is subject to national regulation comparable to that for prescription medicines for the testing, approval, manufacturing, labelling and marketing of products. High standards of technical appraisal frequently involve a lengthy approval process before a new product may be launched.
GSK Consumer Healthcare continues to gain centralised regulatory approvals for over-the-counter products. Since the 2009 history-making first for the OTC industry when the European Medicines Agency granted centralised approval of the weight loss medicine alli which has now been granted approval in more than 50 countries; a line extension chewable product has also been granted centralised approval. Additionally, GSK Consumer Healthcare has embraced the principle of centralised applications and has achieved GSK’s first pan-Gulf Cooperation Council approvals for alli and Niquitin in 2010, permitting launch across all seven markets of the Gulf region.
Value for money
Payers around the world are concerned about the cost of healthcare and the pricing of medicines. The requirement to satisfy healthcare purchasers on value for money is becoming an additional hurdle for product acceptance over and above the regulatory tests of safety, efficacy and quality.
Price controls
In many countries the prices of pharmaceutical products are controlled by law. Governments may also influence prices through their control of national healthcare organisations, which may bear a large part of the cost of supplying medicines to consumers.
Recent government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.
Currently in the USA, there are no government price controls over private sector purchases, but federal law requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to be eligible for reimbursement under several state and federal healthcare programmes. In 2010, the US President and Congress passed the Affordable Care Act (ACA) to reform the US healthcare system to drive down cost, improve quality and increase access to millions of Americans without health insurance. These reforms have the potential to create positive changes in the US healthcare system and expand access to our products. However, the ACA also increased prescribed rebates under government-run programmes and changed the balance between private and public sector purchases.
Despite passage of the ACA, the pressure to control healthcare costs will continue into 2011 and beyond. Issues such as cross-border trade, the acceleration of generics to market, comparative effectiveness research, and pharmaceutical pricing will continue to be part of the ongoing healthare debate in the USA. Fortunately, we are positioned to be a constructive contributor to these debates since there has been increased recognition that chronic disease is the primary driver of healthcare spending and pharmaceutical products deliver important interventions that help hold down healthcare costs.


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19

Manufacturing and supply

GSK’s manufacturing covers Pharmaceutical, Consumer Healthcare and Vaccines.
Pharmaceutical Global Manufacturing and Supply (GMS)
More than 27,000 people work in GMS across our network of 77 sites in 32 countries. GMS supports the commercial ambition of GSK by delivering quality medicines and consumer products to patients and customers around the world.
The scale of manufacturing in GSK is huge, with the manufacture of over 4 billion packs per year in 28,000 different presentations (including tablets, creams/ointments, inhalers, injections, liquids and steriles), which are then supplied to over 150 markets. Over £4.1 billion was spent by GMS on production in 2010.
GMS operates a procurement operation on behalf of the Group. We spend over £2 billion annually with external suppliers, purchasing active ingredients, chemical intermediates, packaging components and part-finished and finished products.
During 2010, as our internal customers sought every opportunity to grow their businesses, we focused on the cost-competitive supply of quality product to meet their ambitions. We worked diligently to leverage our network of sites and contractors to give us built-in flexibility to sustain future growth and adapt to emerging commercial business models. In an increasingly rigorous external regulatory environment, we have continued to leverage technology in support of process understanding, control, and capability.
Our Pharmaceutical Launch and Global Supply sites work closely with R&D’s development teams to ensure that the right technical competencies are in place to support rapid and successful new product introduction. These sites serve as the focal point for developing and introducing new secondary manufacturing technologies. The Primary supply sites in our Pharmaceutical Launch and Global Supply division supply high quality, competitively priced bulk actives and focus on improvements in primary technologies and processes. The sites in our Antibiotics and Emerging Markets supply division focus on manufacturing products in the late stage of their life cycle, allowing GSK to compete more effectively in all its markets.
Consumer Healthcare manufacturing
Most of Consumer Healthcare Manufacturing is also managed by GMS apart from our Coleford site which is managed directly by Nutritional healthcare.
Our Consumer Healthcare sites deliver high-quality, competitively priced products and support rapid new product introduction in a highly innovative and competitive business. New technologies have become a fundamental platform for driving innovation, lowering costs and providing flexibility in operations.
We are continuously improving and embedding new ways of working that are simplifying the business and achieving greater efficiencies. It is our focus on customer service, including support for new product launches, our strong compliance culture, our commitment to health, safety and the environment, and our commitment to developing our people that have delivered strong results for GSK even as the external environment has become more demanding.
Vaccine manufacturing
Vaccine manufacturing, which is managed separately from GMS, is an integral part of the Biologicals business, and is particularly complex as it requires the use of innovative technologies and living micro-organisms. Comprehensive quality assurance and quality control procedures are in place to ensure the vaccine’s quality and safety. Due to their biological nature, individual health authorities may subject vaccines to a second control to guarantee the highest quality standards.
GMS supports GSK’s commercial ambition to deliver quality medicines and consumer healthcare products to patients and consumers around the world.
(IMAGE)


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World market – pharmaceuticals
The global recession caused by the international financial crisis continued to impact the world’s economies during 2010. Although many countries and industry sectors saw some improvement over 2009, significant growth remained elusive and the recovery was fragile at best.
Following its 22% rise in 2009, the FTSE 100 Index achieved more modest gains in 2010, at 9%. In the USA, the Dow Jones Industrial Average rose by 11%. Stock exchanges across Europe recorded mixed performances, with the 16% rise in Germany contrasting with losses of 17% and 13% in Spain and Italy respectively. In Asia, the Chinese stock market posted an annual decline of almost 15% and the Nikkei in Japan one of 3%.
The debt crisis in Greece spread to other economies such as Spain, Portugal, Italy, Ireland and Romania. As we moved towards the end of the year, many governments introduced austerity measures to complement the fiscal stimulus initiatives of 2009. These cuts, which in some cases were both severe and rapid, were implemented across education, healthcare and other public services. Each government took a different approach to healthcare with specific pricing cuts being applied to selected medicines and vaccines. These measures affected the pharmaceutical industry to varying degrees depending on each company’s exposure to the areas impacted. At the same time, 2010 also saw the implementation of healthcare reform in the USA with associated discounts and price cuts for the pharmaceutical industry.
Global pharmaceutical sales in 2010 were £476 billion, compared with £468 billion in 2009.
                 
World market by   Value     % of  
geographic region   £bn     total  
USA
    194       41  
Europe
    129       27  
Rest of World
    153       32  
Emerging markets
    67       14  
Asia Pacific
    20       4  
Japan
    52       11  
Canada
    13       3  
 
           
Total
    476       100  
 
           
Market growth on a CER basis was USA 4.2%, Europe 3% and Rest of World 8.2%.
                 
World market –   Value     % of  
top six therapeutic classes   £bn     total  
Central nervous system
    76       16  
Cardiovascular
    69       15  
Antineoplastic/lmmunomodulatory
    63       13  
Alimentary tract and metabolic
    57       12  
Anti-infectives (bacterial,
viral and fungal) excluding vaccines
    49       10  
 
           
Respiratory
    33       7  
 
           
(Note: data based on 12 months to 30th September 2010)
Data for market share and market growth rates are GSK estimates based on the most recent data from independent external sources including IMS Health, and where appropriate, are valued in Sterling at relevant exchange rates.


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21

GSK sales performance
GSK delivered underlying sales growth (excluding pandemic related products, Avandia and Valtrex) for 2010 of 4.5% despite the ongoing impacts of EU government austerity measures and US healthcare reform which reduced sales by approximately £380 million.
Commentary on GSK’s segmental sales performance uses the performance measures set out below.
Underlying sales growth
Underlying sales growth excludes the sales of pandemic products, Avandia and Valtrex. Management believes this measure assists shareholders in gaining a clearer understanding of the Group’s sales performance and prospects because of the size and nature of the loss of sales from these products. A reconciliation to Group and pharmaceutical turnover is as follows:
                         
               
    2010     2009     Growth  
    £m     £m     CER%  
Group turnover
    28,392       28,368       (1.2 )
Avandia, Valtrex and pandemic products
    (2,285 )     (3,668 )        
               
Underlying Group turnover
    26,107       24,700       4.5  
               
                         
               
    2010     2009     Growth  
    £m     £m     CER%  
Pharmaceutical turnover
    23,382       23,694       (2 )
Avandia, Valtrex and pandemic products
    (2,285 )     (3,668 )        
               
Underlying pharmaceutical turnover
    21,097       20,026       4  
               
Sales of these products by segment were:
                                                 
                                 
                    Emerging     Asia Pacific/     Other trading        
2010   USA     Europe     Markets     Japan     and unallocated     Total  
  £m     £m     £m     £m     £m     £m  
Pandemic products
    44       494       227       462       86       1,313  
Avandia
    237       88       42       24       49       440  
Valtrex
    252       68       28       176       8       532  
 
                                   
                                                 
                                 
                    Emerging     Asia Pacific/     Other trading        
2009   USA     Europe     Markets     Japan     and unallocated     Total  
  £m     £m     £m     £m     £m     £m  
Pandemic products
    324       737       89       331       122       1,603  
Avandia
    425       171       76       41       58       771  
Valtrex
    942       160       26       152       14       1,294  
 
                                   
White pills/western markets
White pills/western markets refers to sales of tablets and simple injectables (excluding biopharmaceuticals and vaccines) in North America and Europe.
CER growth
In order to illustrate underlying performance, it is the Group’s practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
All commentaries in this Report are presented in terms of CER unless otherwise stated.
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US pharmaceuticals segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    7,648       8,578       (11 )
 
                       
Operating profit
    5,043       5,933       (16 )
 
                 
We are emerging from a period of significant patent expirations, and are making good progress to transform our US business model and operations to meet current and future challenges.
Sales in the USA were down 11% to £7.6 billion, primarily due to the impact of generic competition to Valtrex, a significant reduction in sales of pandemic related products and lower sales of Avandia. Underlying sales (excluding pandemic related products, Avandia and Valtrex) were up 3% in the USA during the year despite the discontinuation of GSK’s promotion of Boniva, the sale of Wellbutrin XL and the impact of US healthcare reform across the product range. Underlying growth was driven by strong performances from a number of our promoted medicines, including Flovent (up 8%), Ventolin (up 16%), Boostrix (up 51%), Avodart (up 5%), Lovaza (up 17%) and our oncology products (up 13%). New products launched since 2007 (excluding flu pandemic vaccines) grew 29% and contributed 8% of 2010 sales.
The reduced turnover was partially offset by lower SG&A costs reflecting savings from the restructuring programme and a receipt for the exclusive promotion rights to Boniva for 2010. Operating profit declined by 16%.
In the USA, the healthcare market is changing radically and rapidly. A significant proportion of healthcare costs continue to be paid by federal and local governments. Large pharmacy benefit managers and health plans dominate the private market. Physicians are consolidating their practices into medical centers, group practices and integrated delivery networks. Hospitals are consolidating too, with 500 fewer now than there were just three years ago. Payers are demanding higher quality care with lower costs and are increasingly linking reimbursement with improved health outcomes.
Implementation of landmark healthcare reform legislation in the USA also began during the year. As a result, in January 2010, Medicaid drug rebates increased from 15% to 23% and were extended to include Medicaid managed care plans and new formulations of existing products. Also in January, eligibility for certain government drug pricing programs was expanded to include additional hospitals and health centers.
In response to these evolving market conditions, we are making fundamental changes to our US operations to ensure that we deliver the value our customers – patients, healthcare providers and payers – demand. These changes are enabling us to more effectively meet customer needs and expectations, better deploy our resources and support an evolving, more specialised product portfolio. For example, the majority of our US pharmaceuticals sales representatives now have either customer-centred or portfolio-focused responsibilities, rather than product specific responsibilities. These changes have enabled us to increase the productivity of our sales force while reducing its size by approximately 25% since 2008. Most importantly, our new customer-centric model aligns with our customers’ desire to work with us as a business-to-business partner.
We have been making continued efforts to change the company’s model to improve levels of openness and transparency. For example in 2008, we voluntarily stopped all corporate political contributions, and in 2009, we became the first company to report voluntarily payments to healthcare professionals in the USA on a named, individual basis for speaking and consulting services.
In 2011 the US business is implementing a new system for evaluating and compensating our professional sales representatives. Under the new programme, bonuses to sales representatives who work directly with customers will no longer be based on achievement of individual sales targets. Instead, they will be assessed on scientific and business knowledge, feedback from customers in their region, including demonstration of the company’s values, and overall performance of the business unit they support. This programme will be fully implemented in July 2011.
Consistent with our values of integrity and transparency, we have also sharpened the focus of our support for continuing medical education (CME). For example, we implemented a system where we limit grant applications to approximately 20 academic medical centres and national-level professional medical associations. All CME providers that we support must be directly accredited by a recognised accrediting body, and we now only fund CME by not-for-profit providers.
Although the US healthcare and business environment is challenging, it also presents opportunities for companies that can deliver truly innovative medicines to the market. Since 2007, we have launched more than 20 new products in the US market. In 2011, we look forward to a regulatory decision on Benlysta, which if approved will be the first new treatment for Lupus in the last 50 years. Overall we believe the improvements we are making to our cost structure and how we operate are enabling us to compete more effectively in the evolving marketplace.
Our Research Triangle Park campus in North Carolina, USA, is a home to a number of business functions.
(PHOTO)


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Europe pharmaceuticals segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    6,548       7,087       (6 )
 
                       
Operating profit
    3,744       3,993       (4 )
 
                 
Our European pharmaceutical business delivered solid performance in 2010, despite significant government led austerity measures and price cuts.
Although reported sales were down 6% to £6.5 billion, underlying performance (excluding pandemic related products, Avandia and Valtrex) was flat. This was a creditable performance as it includes approximately £150 million sales impact from government price cuts. It was driven by the introduction of new products and growth from other products in our portfolio. Despite likely continued government pricing pressure in 2011, this strong product portfolio gives us confidence in future performance of this business.
We introduced five new products in 2010. A particular highlight was Duodart, our treatment combination of Avodart and tamsulosin for benign prostatic hyperplasia. Other recently introduced brands such as Avamys, Requip Modutab, Tyverb, Volibris and Wellbutrin all achieved double digit growth.
Our major product, Seretide for asthma and COPD, while impacted by the price cuts, achieved sales of £1.6 billion, up 2% whilst maintaining its leadership position in the respiratory market. We continue to bring the benefits of this product to more patients across Europe. Our portfolio of vaccines also contributed to growth with Synflorix, a pneumococcal conjugate vaccine, winning several national tenders and increasing sales by 38% to £43 million.
To manage our operating costs, the business has also delivered improvements in efficiency. Close control of our operating expenses delivered savings in excess of 10% and our programme to reduce the diversity of cartons, labels and leaflets used across our range of medicines delivered further savings. As part of this initiative we will reduce 35 different formats of tablet blister packs to just 3 by 2013.
An 11% reduction in SG&A costs, reflecting savings from the restructuring programme, helped to limit the decline in operating profit to 4%.
Our commitment to work with communities across Europe to support greater access and to build trust with stakeholders continues. An example is a project in Bulgaria to promote awareness for vaccines among vulnerable ethnic minority groups through collaboration between the health mediators, general practitioners and the representatives of the regional health inspectorates. The initiative facilitates the access of these groups to the national healthcare system, focusing on prevention and health awareness. A particular benefit from this work in 2010 was an improved rate of immunisation in this group which in turn reduced the impact from an outbreak of measles.
As we enter 2011, the continuing pressure on cost and the change to a value-based medicine approach (where in addition to demonstration of safety and efficacy, governments or their agencies assess medicines for the value they deliver to their healthcare system) makes the development of effective dialogue with governments, regulators and payers across Europe absolutely vital. Within our business we continue to place emphasis on being able to demonstrate the cost effectiveness of GSK products and to deliver new medicines and vaccines that address unmet medical need and also have demonstrable value. Much of our work is targeted on building evidence on the cost effectiveness of our medicines when compared to current treatments. For example, in the UK we have agreed an innovative pricing agreement with the National Institute for Clinical Excellence (NICE) for our advanced kidney cancer medicine, Votrient. If Votrient is not as effective as sunitinib, the current standard of care, in the comparative trials which are currently underway, we have offered a future financial rebate.


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Emerging Markets pharmaceuticals segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    3,556       2,895       22  
 
                       
Operating profit
    1,271       948       31  
 
                 
Our Emerging Markets pharmaceutical business continues to perform very strongly with sales up 22% to £3.6 billion in 2010. Underlying growth in these markets (excluding pandemic related products, Avandia and Valtrex) was 20%. This is the second consecutive year following the introduction of GSK’s strategic initiatives that the Emerging Markets business has outgrown pharmaceutical market growth in this region, estimated at 15%.
We delivered particularly strong performances in Latin America which grew 44% and in China and the CIS, which grew 21% and 20% respectively. In addition, we produced growth across all three sectors of the Emerging Markets business – Innovative brands (new patent protected products), Classic brands (non-patent protected) and Vaccines.
Our Innovative brands business showed consistent performance in 2010, with sales growth of 16% to approximately £1.1 billion. Sales of respiratory medicine, Seretide, were over £300 million, and grew 16%, with particularly strong performances in key markets including China.
Our Classic brands business also continues to go from strength to strength with sales growth of 18% to £1.6 billion, including continued double-digit growth of Augmentin after 30 years on the market. Vaccine sales were up 38% to £927 million, with pandemic flu products and pneumococcal vaccine Synflorix performing particularly well. Excluding pandemic flu vaccines, sales grew 14%.
Turnover by main business sector
(CHART)
Emerging Markets pharmaceuticals operating profit increased by 31% on a turnover increase of 22%, reflecting strong Synflorix and pandemic vaccine sales, together with the benefit of acquisitions, partially offset by increased SG&A investment across the region.
Operational highlights for the year include a number of new strategic alliances. We strengthened our footprint in key emerging markets through a number of business acquisitions, including Laboratorios Phoenix, a leading Argentinian Classic brands business. A number of vaccine production alliances were also concluded during the year including an alliance with JSC Binnopharm, a Russian pharmaceutical manufacturer, to enable the local secondary manufacture of a number of key GSK vaccines in Russia.
We continue to introduce flexible pricing strategies. The work is at an early stage, however the results of some of our initiatives so far are promising. For example, we significantly reduced prices of some of GSK’s newest and most innovative products, including Avodart, Avamys and Cervarix, with the aim of increasing affordability and volumes sold in middle income countries.
For the least developed countries (LDCs), last year we established a new Developing Countries and Market Access business unit. This new unit has a dedicated focus on expanding access to our medicines and vaccines to more of the 700 million people who live in the world’s poorest countries. It has the added benefit of helping us build sustainable GSK businesses in those parts of the developing world where we currently have little or no presence. It is responsible for implementing our pricing policy where we are capping the prices of our patented medicines in LDCs to 25% of the Western price, and reinvesting 20% of our profits from medicines sold in these countries back into the same countries’ healthcare infrastructure.
During the year, we were also pleased to announce the signing of the Advance Market Commitment (AMC) for pneumococcal vaccines with the Global Alliance for Vaccines and Immunisation (GAVI), providing 300 million doses of Synflorix over 10 years at a reduced price, to protect children in the poorest countries across the world against invasive pneumococcal disease.


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Asia Pacific/Japan pharmaceuticals segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    3,102       2,628       9  
 
                       
Operating profit
    1,730       1,352       15  
 
                 
In 2010, sales in Asia Pacific grew 1% to £1.1 billion. Excluding the sales of pandemic related products, Avandia and Valtrex, underlying growth in Asia Pacific was 8% which benefitted from the acquisitions of Stiefel’s dermatology portfolio and UCB’s Asian business. Strong performances were also delivered from Avamys (up 80%), Tykerb (up 20%), Seretide (up 5%) and vaccines (up 8% excluding flu pandemic).
Operating profit for Asia Pacific improved 4% to £0.5 billion, reflecting improved sales of Synflorix and Cervarix and the favourable impact of product mix on cost of goods, partially offset by lower sales of Relenza.
The middle income countries in the Asia Pacific region have been at the centre of GSK’s flexible pricing initiatives. For example as part of our innovative pricing model, monthly sales of our Cervarix vaccine have increased by approximately six times in the Philippines following a 60% price reduction. Similarly, in Indonesia and Vietnam we have introduced equivalent pricing strategies for this vaccine which has resulted in a more than six-fold increase in the number of women vaccinated. Cervarix is now the number one human papillomavirus vaccine in South East Asia, with Malaysia securing the region’s first ever tender for the product during the year. Synflorix is also growing well, delivering sales of £12 million.
The year also saw important strategic alliances signed with major local pharmaceutical companies including Dong-A in South Korea and Savipharm in Vietnam.
Japanese pipeline potential
(CHART)
 
1   Includes 4 New Chemical Entities
 
2   Includes New Chemical Entities, line extensions, new promotions or re-formulations
GSK Japan delivered another very strong year, with sales up 14% to £1,959 million. Underlying sales growth, excluding pandemic products, Valtrex and Avandia, was 6%. This growth was driven primarily by Adoair (Seretide/Advair), up 17%, and contributions from newly launched products such as Cervarix, Avolve/Avodart and Xyzal, partially offset by a Paxil sales decline of 11%, and declines in the mature respiratory products Flixotide/Flovent down 18%, and Serevent, down 26%, which in part reflected biennial price reductions.
Our vaccine franchise has become an important pillar for the company in Japan. Arepanrix became one of only two flu vaccines ever allowed for import into Japan when it received regulatory approval in January 2010. Cervarix has had a strong launch in Japan with 2010 sales of £57 million. The product was also recognised as one of the three vaccines that would receive public funding from the Japanese government from 2011 onwards.
Operating profit for Japan increased by 20% to £1.2 billion, reflecting higher Cervarix and pandemic vaccine sales and the favourable impact of product mix on cost of goods, partially offset by lower sales of Relenza.
During the year, GSK Japan received approvals for six compounds, including Revolade and Xyzal, and one new indication, Botox for spasticity. In addition, oral pulmonary arterial hypertension treatment, Volibris, was launched during the year.
GSK Japan established a rare diseases development centre in April 2010 to accelerate delivery of medicines for rare diseases for which treatment is not yet available. As part of this initiative, GSK increased investment in Japan by investing in Japan Chemical Research, a company with leading technology to manufacture bio-pharmaceuticals.


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ViiV Healthcare segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    1,556       1,605       (3 )
 
                       
Operating profit
    851       1,071       (21 )
 
                 
ViiV Healthcare celebrated its first anniversary in November 2010. The business was established by GSK and Pfizer as an independent company focused on delivering advances in clinical outcomes and enhancing the quality of life for people living with HIV. The company’s unique structure and wide portfolio of 10 available medicines, provides financial stability and the investment capital required to take a sustainable, long-term view of the HIV market.
Overall, sales of HIV products by ViiV Healthcare were down 3% to £1.6 billion in 2010. Sales of former Pfizer products Celsentri/ Selzentry and Viracept (combined sales of £118 million) and growth from Epzicom/Kivexa (up 1% to £555 million) partially offset reductions in the sales from other established HIV products including Trizivir (down 28% to £144 million), Combivir (down 16% to £363 million), Lexiva/Telzir (down 12% to £155 million) and Epivir (down 12% to £115 million) which continue to be impacted by uptake of newer alternative products.
Strong growth for Celsentri/Selzentry compared with 2009 was supported by the wide acceptance of genotypic testing across Europe, increasing first-line use in the USA and country launches in Poland, Romania, Australia, Japan and Mexico. Upward trends in Epzicom/Kivexa sales reflected the role of nucleoside reverse transcriptase inhibitors (NRTIs) as a mainstay of treatment in HIV. As part of the strategic focus on International markets (all countries excluding Europe and North America), ViiV Healthcare established new independent local operating companies in several important geographies and opened regional hubs in Asia Pacific, CIS and Latin America in 2010. As a result, revenue in the International region grew by 22%.
ViiV Healthcare operating profits decreased 21% primarily as a result of US healthcare reform and higher SG&A and R&D costs partially offset by a one-time royalty settlement. The higher SG&A costs were primarily due to the amortisation of acquired intangible assets.
2010 also saw great progress in building a late-stage pipeline. In October, Shionogi-ViiV Healthcare announced the start of their Phase III development programme for the novel integrase inhibitor S/GSK1349572 (‘572), with a further Phase III trial for fixed dose combination ‘572-Tri (‘572+Epzicom/Kivexa) initiated in February 2011.
ViiV Healthcare is committed to supporting the communities most affected by the HIV epidemic. One way the company does this is by developing innovative approaches to improve access to medicines. For example, in July 2010, ViiV Healthcare was the first company to make its entire current and future anti-retroviral portfolio available to generic manufacturers through royalty-free voluntary licences. These cover all of the least developed, low income countries and sub-Saharan Africa, the 69 countries where 80% of people with HIV live. Similarly, the not-for-profit pricing policy has been expanded to these 69 countries. During the year, ViiV Healthcare also launched the Positive Action Southern Initiative in the USA to reduce healthcare disparities among communities with the greatest needs.
Improving paediatric care of HIV
(PHOTO)
In 2010, as part of its commitment to address major unmet needs in HIV, ViiV Healthcare formed key partnerships with the Elizabeth Glaser Pediatric AIDS Foundation and amFAR to improve care of paediatric HIV and prevent mother to child transmission (MTCT) of the virus, which is the fourth Millennium Development Goal. The Positive Action for Children Fund gave more than £3 million to community projects to support mothers and children affected by HIV and to prevent MTCT. A further request for proposals at the end of the year expanded the Fund’s reach and scope.
(LOGO)


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Consumer Healthcare segment review

                         
                   
            2009        
    2010     (restated)     Growth  
    £m     £m     CER%  
Turnover
    5,010       4,674       5  
 
                       
Operating profit
    1,043       931       8  
 
                 
Consumer Healthcare sales grew 5% to £5 billion in 2010, significantly ahead of Consumer Healthcare market growth estimated to be approximately 2%. We delivered growth in all of the three categories in which we operate – Oral healthcare (up 6%), Over-the-Counter (OTC) Medicines (up 3%) and Nutritional healthcare (up 9%).
Europe sales were level with last year with sales of £2.0 billion as growth in Oral healthcare and Nutritional healthcare was offset by a decline in OTC sales. The business in the USA grew 1% to £1.0 billion, led by Oral healthcare.
Growth was particularly strong in the rest of the world which grew 13% to £2.0 billion. In the Indian sub-continent we continued to deliver new innovations for the Horlicks brand while launching three ‘Priority’ brands – Lucozade, Sensodyne and Breathe Right, resulting in combined sales growth of 20%. In China, we delivered sales growth of 20% through expanded consumer availability for Fenbid, Contac and Bactroban, strong uptake from newly launched Lucozade and continued good performance from other products including Sensodyne, Breathe Right and denture care brands. To accelerate research and innovation in these key emerging markets, we opened an Oral Healthcare Research Centre in Gurgaon, India, and an Innovation Centre in Beijing, China. The Middle East, Africa and Pakistan markets together delivered sales growth of 18%, largely through strong Panadol and Eno sales growth. South America grew sales by 16%, also led by strong Panadol and Eno consumption, with lower growth in Japan and Australia/New Zealand of 4% and 6%, respectively.
Oral healthcare grew 6% to £1.6 billion, led by a strong performance from Sensodyne, which continued as the fastest-growing toothpaste in the world, a position it has held for the last 5 years. This is a remarkable record for a brand in its 50th year. Following our 2010 launch in India, we now market Sensodyne in 124 countries. However, Aquafresh sales declined slightly. Biotene, the dry mouth treatment acquired in 2008, grew strongly.
OTC medicines recorded sales of £2.5 billion, up 3%. A good performance from smoking control products was helped by the new tax on tobacco in Japan and substantial sales in Brazil for a government-funded smoking cessation initiative. In addition to supplying products for Brazil’s initiative, we have provided training on smoking cessation to 1,400 clinics across the country. Panadol, the leading paracetamol analgesic outside the USA, delivered strong sales growth, helped by the roll-out of Panadol Advance with Optizorb technology that dissolves five times faster than regular paracetamol tablets.
Dermatology products grew 8% to £256 million but respiratory tract products declined 6% to £380 million.
Nutritional healthcare grew 9% to £952 million, led by Horlicks, with more modest growth from Ribena and Lucozade.
Operating profit increased 8% on a turnover increase of 5%, reflecting efficiencies of scale in SG&A costs, which grew more slowly than sales.
During the year, we opened a new bottle manufacturing plant at our Coleford, UK factory for Nutritional Healthcare, enabling us to mould Lucozade and Ribena bottles, formulate the drinks and fill the bottles, all at one plant. The bottle-forming facility moulds 1 billion PET bottles per year from plastic chips. This investment eliminates over 2,400 road-haulage trips of more than 110 miles from our former bottle supplier.
We recently announced our intention to accelerate growth and focus our Consumer Healthcare business around a portfolio of ‘Priority’ brands and the emerging markets. These two dimensions represent around 90% of our current Consumer Healthcare sales base. We intend to divest the remaining 10% of sales (£500 million) which mostly consist of European and American non-core OTC brands. Our aim is to divest these products by late 2011, subject to interest and realising appropriate value for shareholders. We expect to use the proceeds to fund increased returns to shareholders.
Finally, as part of our objective to deliver a sustainable business the largest array of solar panels in North America now powers our regional distribution centre in York, Pennsylvania. Almost 11,000 door-sized solar panels cover a rooftop that is equivalent to eight football fields, generating 3,400,000 kWhr per year. This solar array will eliminate nearly 1,800 tonnes of carbon dioxide emissions per year, a load on the environment that would take 15,000 mature trees to absorb.
11,000 solar panels cover the rooftop of GSK’s Consumer Healthcare regional distribution centre in York, Pennsylvania
(PICTURE)


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Pharmaceutical research and development review

In 2010, Group R&D expenditure before major restructuring was £3,964 million (2009 – £3,951 million) representing 14.0% of total turnover (2009 – 13.9%). The company expects R&D costs before major restructuring as a percentage of turnover to remain around 14% in 2011.
We are delivering sustained asset progression with 10 new chemical entities and new vaccines entering Phase III since the start of 2010. Seven assets are filed with regulators or pending filing. Five projects have been terminated from Phase III development, as listed on page 12, because of adverse trial results or feedback from regulators. By the end of 2012, we expect Phase III data on around 15 additional assets, including treatments for type 1 and type 2 diabetes, rare diseases and multiple cancer types.
Our pharmaceuticals R&D segment comprises R&D activities for the pharmaceuticals business, excluding vaccines, Consumer Healthcare and other local and central costs. The table below analyses the Group R&D expenditure by these categories.
                         
                   
    2010     2009     2008  
    £m     £m     £m  
Pharmaceuticals - direct project costs
    1,432       1,489       1,209  
(excl. vaccines)   - indirect costs
    959       1,056       844  
  - unallocated costs
    563       474       490  
               
Pharmaceuticals R&D
    2,954       3,019       2,543  
In-market pharmaceutical development
    147       81       40  
Vaccines
    533       524       369  
Corporate and other costs
    172       177       304  
               
 
    3,806       3,801       3,256  
Consumer Healthcare
    158       150       114  
               
R&D before major restructuring
    3,964       3,951       3,370  
Major restructuring
    493       155       170  
               
Total R&D
    4,457       4,106       3,540  
               
The proportion of pharmaceuticals R&D investment made in the late-stage portfolio continues to grow from 56% of the direct and indirect costs in 2006 to 61% in 2010.
Sales of new pharmaceutical products launched since 2007 (excluding pandemic flu vaccines) grew by 36% to £1,727 million in 2010 and represented 7% of total pharmaceutical sales.
                         
                   
    2010     2009     Growth  
    £m     £m     CER%  
Veramyst
    193       142       33  
Cervarix
    242       187       26  
Coreg CR
    157       161       (3 )
Lamictal XR
    68       18       >100  
Requip XL
    148       123       22  
Rotarix
    235       282       (18 )
Synflorix
    221       73       >100  
Treximet
    56       55       2  
Tykerb
    227       169       34  
Others
    180       52       >100  
               
 
    1,727       1,262       36  
               
Investment and pipeline progress in 2010
Globally, over 13,000 people work in R&D, with many of these based in our major R&D centres in the UK, USA, Belgium and China. Over 11,000 people work in pharmaceuticals R&D. In the course of 2010 we managed over 150 projects with trials in humans.
Focusing on returns in pharmaceutical R&D
We have been making fundamental changes to how we allocate our pharmaceutical R&D investment: terminating development in areas with low scientific and financial return; dismantling infrastructure; reducing cost and risk through externalising parts of early-stage discovery and directing investment to our late stage pipeline. Progress in 2010 included:
  In early 2010, we announced our intention to cease discovery research into certain areas of neurology, such as pain and depression, and instead concentrate activities in neurodegenerative and neuroinflammatory diseases where we feel the prospects for successful registration and launch of differentiated medicines are greater. This change led us to exit five R&D centres. In two of the largest of these – Verona, Italy and Zagreb, Croatia – the operations were transferred to external groups thereby preserving the majority of jobs.
  We have successfully out-licensed and spun off some of the early stage neurology assets in the UK through deals with Convergence Pharmaceuticals and Proximagen Group.
  Through these changes and other actions we have achieved a reduction in our footprint of 29% since 2006.
  We continue to increase the external nature of our discovery activities. During 2010 we signed eight new collaborations to access novel discovery, giving us a total of 54 external discovery engines to complement our 38 DPUs.
  We have streamlined the resourcing of our clinical trials contract research organisations, reducing this from over 100 to just two suppliers. While this provides savings in terms of economies of scale, it will also ensure consistency and rigour in clinical trials around the globe.
  We combined our Molecular Discovery Research (MDR) and Preclinical Development (PCD) in 2010 to create an end-to-end scientific and technical platform supporting the discovery and development efforts. The remit of this group remains to create the materials and knowledge that enable our R&D to take ideas, generate hypotheses and test them in preclinical and clinical settings and ultimately launch new medicines.
Other developments in pharmaceutical R&D
GSK Rare Diseases was created in 2010 to enable us to focus on this specialised area of drug discovery and development. Opportunities in new treatments for rare diseases are growing as increased scientific (including genetic) understanding allows researchers to identify which rare diseases are most likely to respond to therapeutic intervention. We signed two significant new rare disease alliances this year: with Amicus, for the treatment of Fabry disease, and Fondazione Telethon to research and develop novel stem-cell derived treatments to address rare genetic disorders, using gene therapy carried out on a patient’s own stem cells. These new agreements demonstrate our approach to seeking out innovative medicines that add value for both patients and payers.
This year, we also made progress on our commitment to encourage new research into neglected tropical diseases. Our research centre in Tres Cantos, Spain, released the results of our year-long screening of more than two million compounds in GSK’s chemical library to seek out those that could inhibit the malaria parasite, P. falciparum. We have made all of this data publically available online. More than 80% of the 13,500 molecule structures released are proprietary to GSK, and therefore the information released is entirely new to the research community.


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Responsible business

Creating a successful and sustainable business is about more than financial results. We place great importance not just on what we achieve but on how we achieve it. Running a responsible, values-based business is embedded in our strategy
We are working hard to build a culture in which our decisions are guided by our values:
  Commit to transparency
  Show respect for people
  Always demonstrate the highest integrity in our conduct
  Be patient focused.
We know that the research and development, manufacture and sale of our products can raise ethical issues, and we aim to be open about how we tackle them. We understand how important it is to communicate with our stakeholders, seeking to understand their views and being transparent about any setbacks we have experienced as well as the progress we have made.
For example, our commitment to putting patients first means we are focusing on improving access to our medicines and vaccines for all patients irrespective of where they live and their ability to pay. We believe this is the right thing to do and that it will contribute to sustainable business growth.
Ultimately we believe that responsible business is good for society and good for GSK. It helps us to operate efficiently, to gain the trust of our stakeholders, to create the products that patients and healthcare payers really need and to foster the right conditions for expansion of our business.
Our 2010 Corporate Responsibility Report (CR Report) will be published on 21st March 2011.
Our Principles
Our principles sum up our approach to responsible business and are underpinned by our values. They provide guidance for employees on the standards to which GSK is committed.
Access to medicines
We will continue to research and develop medicines to treat diseases of the developing world. We will find sustainable ways to improve access to medicines for disadvantaged people, and will seek partnerships to support this activity. Read more on page 30.
Standards of ethical conduct
We expect employees to meet high ethical standards in all aspects of our business, by conducting our activities with honesty and integrity, adhering to our corporate responsibility principles, and complying with applicable laws and regulations. Read more on page 33.
Research and innovation
In undertaking our research and in innovating we may explore and apply new technologies and will constructively engage stakeholders on any concerns that may arise. We will ensure that our products are subject to rigorous scientific evaluation and testing for safety, effectiveness and quality. We will comply with or exceed all regulations and legal standards applicable to the research and development of our products. Read more on page 11.
Products and customers
We will promote our products in line with high ethical, medical and scientific standards and will comply with all applicable laws and regulations. Read more on page 18.
Caring for the environment
We will operate in an environmentally responsible manner through systematic management of our environmental impacts, measurement of our performance and setting challenging performance targets. We will improve the efficiency of all our activities to minimise material and energy use and waste generated. We aim to find opportunities to use renewable materials and to recycle our waste. Read more on page 32.
Employment practices
We will treat our employees with respect and dignity, encourage diversity and ensure fair treatment through all phases of employment. We will provide a safe and healthy working environment, support employees to perform to their full potential and take responsibility for the performance and reputation of the business. Read more on page 33.
Human rights
We are committed to upholding the UN Universal Declaration of Human Rights, the OECD guidelines for Multi-National Enterprises and the core labour standards set out by the International Labour Organization. We expect the same standards of our suppliers, contractors and business partners working on GSK’s behalf. Read more in our CR Report.
Leadership and advocacy
We will establish our own challenging standards in corporate responsibility, appropriate to the complexities and specific needs of our business, building on external guidelines and experience. We will share best practice and seek to influence others, while remaining competitive in order to sustain our business. Read more in our CR Report.
Engagement with stakeholders
We want to understand the concerns of those with an interest in corporate responsibility issues. We will engage with a range of stakeholders and will communicate openly about how we are addressing CR issues, in ways that aim to meet the needs of different groups while allowing us to pursue legitimate business goals. Read more in our CR Report.
Community investment
We will make a positive contribution to the communities in which we operate, and will invest in health and education programmes and partnerships that aim to bring sustainable improvements to under-served people in the developed and developing world. Read more on page 30.


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Improving access to medicines
Access to healthcare in the developing world
There are no easy solutions to the challenge of providing sustainable access to healthcare in developing countries. Poverty is the single biggest barrier. In many countries people do not have enough food, access to a clean water supply, hospitals or clinics in which to receive treatment and healthcare professionals to care for them.
We are committed to playing a full part in addressing the healthcare challenges of the developing world by taking an innovative, responsible and, above all, sustainable approach. GSK is making a vital contribution to developing country healthcare through action in a number of areas including: preferential pricing of our anti-retrovirals; tiered pricing of our vaccines and medicines; investing in R&D that targets diseases particularly affecting the developing world (see page 11); being flexible with our IP; pursuing an open innovation strategy; community investment activities and partnerships that foster effective healthcare and capacity building (see page 31); and seeking innovative partnerships and solutions. We cover our contribution to improving access to medicines extensively in our Corporate Responsibility Report.
We were a clear leader in both Access to Medicines (ATM) Indexes published by the ATM Foundation in 2008 and 2010. We will continue to build on our product, pricing and partnership commitments to help improve healthcare in the developing world. In 2010 we further expanded our commitments to the UN defined list of Least Developed Countries (LDCs) by establishing a Developing Countries and Market Access operating unit with a focus on the LDCs to broaden patient access to GSK medicines and to help build our presence in other developing countries.
While much has been achieved, a significant increase in resources from the global community is still needed to support R&D and to provide access to the resultant medicines and vaccines. Sustainable progress will only be made if the significant barriers that stand in the way of better access to healthcare are tackled as a shared responsibility by all sectors of global society – governments, international agencies, charities, academic institutions, the pharmaceutical industry and others.
Access to medicines in the developed world
Programmes in the USA
We are working to provide access to medicines for people with limited financial resources and without prescription medicine insurance.
For uninsured Americans who do not qualify for Medicare or Medicaid, GSK and ten other pharmaceutical companies created Together Rx Access, a programme for qualified individuals offering reductions in the pharmacy cost on more than 300 medicines. In addition, GSK offers several patient assistance programmes to help low-income or uninsured Americans have access to GSK’s oncology and specialty products, vaccines and prescription drugs. GSK’s patient assistance programmes provided products to over 452,000 patients during 2010.
Programmes in other countries
We have also introduced Orange Cards providing discounts on certain GSK prescription medicines for eligible patients in a number of other countries. The nature of the discounts varies between countries and the ways in which the healthcare systems operate.
Our work with communities
We invest in community partnership programmes that seek to improve access to medicines and healthcare to improve the lives of people across the world. We aim to make a real difference to these communities by working with our partners to find innovative solutions to healthcare challenges. We believe that business has an important role to play in society and we strive to leverage our resources in a way that delivers shared value to our communities and business. We partner with and support organisations whose goals and objectives reflect our mission of improving the quality of human life.
Our global community investment in 2010 was £222 million. This compares with £163 million in 2009 on a like-for-like basis. This increase is due to expansion of our US patient assistance programme, scale up of our donation of albendazole for the lymphatic filariasis (LF) programme, a donation of H1N1 vaccine to the World Health Organization, plus increased grants for HIV and AIDS and the 20% reinvestment initiative for LDCs. Our 2010 giving comprised product donations of £147 million, cash giving of £53 million, in-kind donations of £4 million plus costs of £18 million to manage and deliver community programmes in almost 100 countries. The product donations include £100 million for GSK’s patient assistance programmes, £17 million worth of albendazole for the LF programme and £9 million for humanitarian product donations. Since 2008 our product donations have been valued at cost (average cost of goods) rather than wholesale price (WAC) as this is a more accurate reflection of the cost to GSK. We believe we are the first pharmaceutical company to adopt this practice. For comparative purposes the total value of donations in 2010 using WAC for products would be £564 million compared with £467 million in 2009.
We do not operate a single charitable foundation for our community investment programmes, but have a number of country-based foundations and their 2010 grants are included in the investment total.
Our cash giving was targeted primarily at health and education initiatives as follows:
(CHART)
Global health programmes
In developing countries millions of people continue to suffer and die from preventable or treatable diseases. Our global health programmes are designed to improve health and quality of life for people in these communities through provision of medicines, education and advocacy, and investment in disease prevention and healthcare infrastructure. Our global programmes are long-term commitments and designed to be scaleable, replicable and sustainable.
By working in partnership, with NGOs and leading health organisations, we believe it is possible to achieve significant and long-lasting improvements in healthcare. This section highlights our major health programmes.


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Eliminating lymphatic filariasis (LF)
Our effort to eliminate LF, one of the world’s most disabling diseases, continued in close partnership with the governments of countries where the disease is endemic, the World Health Organization and over 40 partner organisations. As a founding partner and leader in this effort, we are committed to donating as much of the anti-parasitic drug albendazole as required to reach the one billion people at risk in over 80 countries. In 2010, 556 million albendazole treatments were donated to 26 countries. We have donated almost two billion albendazole treatments since the global elimination programme started in 2000.
Positive Action on HIV/AIDS
When Positive Action was created in 1992 it was the first pharmaceutical company programme of its kind to support communities affected by HIV and AIDS. Now under the auspices of ViiV Healthcare, the new HIV-focused company, the programme targets its funds towards community-focused projects that reach those most affected by HIV, particularly in marginalised or vulnerable populations. Positive Action works with these communities to enable them to tackle stigma and discrimination, to test innovations in education, care and treatment and to deliver greater involvement of those living with HIV. Our Positive Action for Children Fund launched in 2009 to make £50 million available over 10 years to help prevent mother-to-child transmission of HIV and to support orphans and vulnerable children. It supported 12 projects in 2010. At the end of 2010, the latest call for proposals was made broadening the reach and scope of its response for babies and children affected by HIV.
The GlaxoSmithKline African Malaria Partnership
The African Malaria Partnership is our programme to alleviate the mortality and suffering malaria brings to affected communities in Africa. In 2010 four new malaria grants were awarded for community programmes to provide health education to affected populations and to train community health workers. The partnerships are: Save the Children (UK) in Kenya; Family Health International in Ghana; African Medical and Research Foundation (AMREF) in Tanzania; and Planned Parenthood Federation of Nigeria.
Humanitarian product donations
Working with our non-profit partners, AmeriCares, Direct Relief International, MAP International, Interchurch Medical Assistance and Project HOPE, we supported humanitarian relief efforts and community healthcare in over 90 countries.
We responded to the healthcare needs of the many communities affected by disasters, including the devastating earthquake that struck Haiti in January 2010, GSK donated supplies of medicines valued at over £1 million. Included in these shipments were significant volumes of antibiotics as well as respiratory and diabetes treatments. Our consumer division provided a range of products, including toothpastes, antacids, pain relievers and vitamins. During the cholera outbreak we responded to a further specific request for antibiotics and donated £250,000 to the British Red Cross to support the deployment of a mass sanitation unit serving more than 50,000 people living in temporary relief camps. Following the earthquake in Chile, in response to an urgent request we supplied 95,000 doses of Hepatitis A vaccine, antibiotics and more than 6,000 dental hygiene kits.
In Pakistan we provided medicines from local stocks for the thousands of people affected by the flooding. We also made cash donations amounting to £170,000, including a contribution to the World Food Programme to support emergency food supply.
The total value of our international humanitarian product donations was £9 million at average cost.
Local programmes
We support communities in the many different markets in which we operate. Our programmes are designed to fit local circumstances and cultures and aligned with an overall goal of supporting access to medicines and healthcare. Local community priorities vary from community to community and population to population, but there are often common challenges to address, whether in terms of a particular health need or the human or institutional capacity required to effectively tackle those needs.
In the UK, we contributed £5.4 million in 2010 to our continuing programme of charitable activities supporting over 80 organisations in health, medical research, science education, the arts and the environment. This included the UK IMPACT awards scheme which provides small charities with grants and consulting support for their work in addressing the health needs of local communities.
Programmes in North America at a national and local level focused on improving public education in the areas of science and mathematics, and increasing access to healthcare for children and the homeless. GSK’s IMPACT Awards recognise organisations that have significantly improved the health of their local communities in Philadelphia and in Research Triangle Park, North Carolina. Total funding for our North American programmes was $18 million.
In Argentina the Pro Mujer programme works with low-income women who do not have access to affordable financial services or healthcare and provides access to small loans to set up their own businesses as well as training and affordable healthcare services.
GSK returned the CommunityMark for excellence in community investment.
Employee involvement
Our employees are encouraged to contribute to their local communities through employee volunteering schemes. Support includes employee time, cash donations to charities where employees volunteer and matching gift programmes.
Through the US GSK Matching Gift Program, we matched 12,000 employee gifts at a value of $3 million in 2010 plus over $1 million to the United Way campaign. GSK’s GIVE programme provided grants of over $367,000 to 365 organisations where US employees volunteered and £205,000 to 150 UK-based non-profit organisations via the GSK Making a Difference programme.
In 2009, our Group-wide volunteer initiative was launched to give every GSK employee one paid day off each year to volunteer for a good cause. In 2010 this continued with employees supporting a wide range of charities and projects including work in local schools, shelters for the homeless, community gardens, nursing homes and aiding communities affected by natural disasters.
The GSK PULSE Volunteer Partnership launched in 2009 enables GSK employees to make a difference to communities and patients in need around the world. Volunteers work full-time with one of our partner non-profit or non-governmental organisations (NGOs). Through this experience, volunteers address a clear NGO need, while developing their own leadership capabilities. During 2009 and 2010, PULSE deployed 116 volunteers in 33 countries to work with 42 NGOs. Volunteers continue to receive their full GSK salary during their three to six month assignment. In 2010, this figure, along with the operating costs for managing the programme, represented a total in-kind donation of £2.4 million.


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Environmental sustainability
We are committed to integrating environmental sustainability into our business, especially conserving resources and addressing climate change. We see this as an opportunity as well as a responsibility.
Strategy and plans
We revised our environmental sustainability strategy in 2010, building on the strategy originally introduced in 2001. The new strategy recognises our impacts across the entire value chain, from raw materials to the disposal of our products. Our objective is to benefit the environment, engage employees in tackling key issues and benefit GSK financially-potentially saving £100 million a year by 2020 through reduced energy, materials and distribution costs.
Analysis of GSK’s impacts shows that we need to concentrate in three main areas:
  carbon dioxide and other emissions that contribute to climate change
  water use
  environmental stewardship, which covers the use of materials, generation of waste and pollution.
We have set ambitious goals for key impacts, including a 25% reduction in our carbon footprint, a 20% reduction in water use across the value chain and zero waste to landfill, all by 2020. The targets are detailed in our Corporate Responsibility report.
Climate change and energy
Our long-term vision is for our entire value chain to be carbon neutral by 2050. This very ambitious target means that there will be no net greenhouse gas emissions from manufacturing, distributing, using and disposing of our products, including sourcing raw materials.
We need to act beyond our own operations because 40% of our carbon footprint stems from our supply chain and a further 40% derives from propellants when customers use our inhalers. This was confirmed by a global carbon footprint review of our entire value chain, carried out for the first time in 2010.
GSK’s carbon footprint (million tonne CO2e per annum)
(CHART)
We met our goal of eliminating the use of chlorofluorocarbons (CFCs) in our products by the end of 2010. This has reduced greenhouse emissions associated with our inhaler products from 24 million tonnes of carbon dioxide equivalents in 1998 to approximately 4.7 million tonnes in 2010. We have research programmes under way to find ways to further reduce the impacts from these products.
In 2010 we reduced energy consumption for operations and transport by 5.5% and greenhouse gas emissions by 5.8% relative to sales. The cumulative reduction for 2006-2010 is 9.1% for energy and 10.7% for emissions. This is below our target of 20%, mainly because progress was slow in the early years of the five-year period.
A central fund to finance energy saving projects has accelerated progress since 2007. In 2010 we completed 188 projects, which will avoid around 52,000 tonnes of greenhouse gas emissions a year.
We are also increasing investment in on-site generation of renewable energy, supported by a renewable energy fund created in 2010. GSK Consumer Healthcare installed North America’s largest roof mounted solar photo voltaic system at its regional distribution centre in York, Pennsylvania. It will save nearly 1,800 tonnes of carbon dioxide emissions per year.
GSK’s global operations were certified to Carbon Trust Standard in 2010, the first company to achieve this recognition of excellence in carbon management for all global operations.
Water
Water is a particularly important natural resource, and we recognise that GSK can play a positive role in managing it more sustainably. We endorsed the United Nations CEO Water Mandate in 2009.
In 2010 we reduced water consumption by almost 500 million litres despite significant business growth in our vaccines manufacturing business. Net water consumption fell by 1.6% per £1 of sales, a cumulative reduction of 15.7% since 2006, exceeding our target of 10%.
We also exceeded our targets for improving the quality of waste water.
Environmental stewardship
We aim to use materials efficiently and safely, minimising waste and pollution and avoiding harm to people and the environment.
Increasing the efficiency with which we use materials is a priority. Our long-term aspiration is to achieve 5% mass efficiency by 2020 for new pharmaceutical products transferred from R&D to manufacturing. This is about five times the typical level in the pharmaceutical industry and will reduce input materials and waste by 80%. The average mass efficiency for new products during the 2006-2010 period has reached 3.3%.
Improvements in the efficiency of solvent use also reduced the amount of volatile organics released to air by 12.8% per £1 of sales in 2010, cumulatively 35.8% since 2006.
Packaging provides further opportunities to conserve resources and in 2010 we began to implement the sustainable packaging strategy developed in 2009. We also began to update our green packaging guide for designers and managers. In 2010, the US American Institute of Chemical Engineers presented its Industrial Practice Award in Sustainable Engineering to our operational sustainability team for its work embedding sustainability into R&D and manufacturing.
Environmental management
We manage environmental issues (as well as occupational health and safety) using a management system aligned with recognised international standards. Each business is accountable for its own sustainability plans and performance. Our central audit group includes environmental issues in its routine audits of our sites and business processes. We are working increasingly closely with suppliers and contract manufacturers to reduce environmental impacts from the supply chain.


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Ethical conduct
We are committed to creating a strong ethical culture at GSK. We do this by emphasising our values, developing robust policies, recruiting and engaging the right people and equipping them with the information they need to make ethical decisions. Putting patients first is the core principle of being an ethical pharmaceutical company.
Our Code of Conduct sets out fundamental standards for all employees. It is supported by the Employee Guide to Business Conduct which helps employees make ethical decisions and emphasises GSK’s key values:
  Commit to transparency
  Show respect for people
  Always demonstrate the highest integrity in your conduct
  Be patient focused.
We stress our commitment to performance with integrity. This means that all employees must understand our values and what we stand for as well as the policies and procedures that underpin our approach.
Our internal compliance systems are designed to identify and address breaches of our codes and reinforce GSK’s values. There is continual external pressure to enhance these systems and our compliance oversight and audits are helping to drive this change. We fully investigate suspected breaches and take appropriate disciplinary action, including dismissal where appropriate.
In 2010 we reviewed and strengthened our approach to preventing, detecting and addressing bribery and corruption. We launched a dedicated anti-bribery and corruption unit which will ensure we take a consistent approach across GSK and strengthens our monitoring capability.
Also, we introduced a Third Party Code of Conduct which applies to all GSK suppliers. This sets out the standards we expect suppliers to meet and covers ethical conduct; labour practices, environmental, health and safety standards; and management. To help suppliers understand how to interact appropriately with GSK staff, the Code includes key principles from our Employee Guide to Business Conduct such as our policy on receiving gifts.
Our due diligence process for potential acquisitions takes account of ethical risks and we integrate our ethics and compliance requirements as standard practice in newly acquired businesses. We seek to enter into joint ventures with organisations that share our values.
Our employees
Recruitment, talent management and leadership develoment
In 2010, like every year, recruiting, retaining and developing our employees were critical to enhancing and sustaining our performance and reputation. Proactive talent acquisition initiatives underpin our ability to attract specialist and leadership talent externally. Our assessment process is aligned to a core set of competencies, of which ethics and integrity are central.
We need good succession plans, not just for senior roles but for all our critical positions across the organisation. We maintain a robust leadership strategy to identify and develop our highly skilled leadership cadre and use a systematic, disciplined approach to leadership development, providing tools and programmes to help leaders master skills needed to meet customer, employee and investor expectations. In 2010, we provided training to nearly 8,000 GSK leaders worldwide and also developed new programmes for future senior leaders and senior executives.
Performance and reward
The performance and development planning process means employees have business-aligned objectives and behavioural goals. Our reward systems are geared to promote high performance and help to attract and retain the best people. Performance-based pay, bonuses and share-based equity plans align employee interests with business targets.
Communication and employee involvement
Our communication channels are designed to keep employees informed, engaged and involved in activities across all areas of our organisation. We encourage two-way, open and honest communication with employees, and in 2010 we launched a new updated global intranet portal, ConnectGSK.
Feedback and monitoring mechanisms are part of every major communication event, and Q&A and feedback facilities are a core feature of our web communications channels. In 2010 we also introduced ‘Idea Engine’, an online tool which allows employees to submit ideas and recommendations.
As our business evolves, there will be changes that affect employees and we remain committed to consulting on these changes via a number of internal consultation forums and discussions with the European Employee Consultation Forum and similar bodies in countries where this is national practice.
Employee numbers by region
(CHART)
Inclusion and diversity
We are committed to employment policies free from discrimination against existing or potential employees on the grounds of race, colour, religion or belief, gender, sexual orientation, gender identity or expression, age, national origin, genetic make-up, disability or chronic health conditions. GSK is committed to offering people with disabilities access to the full range of recruitment and career opportunities. Every effort is made to retain and support employees who become disabled while working at GSK. For more details on diversity measures, see our Corporate Responsibility Report.
Healthy and safe high performance
To meet our mission and strategy, Employee Health and Performance initiatives focus on the health factors that enable employees to perform at the highest level by sustaining energy and engagement. The programmes developed to deliver this health strategy range from the traditional – such as immunisations, smoking control and weight management – to cutting-edge programmes in the areas of team and personal resilience, ergonomics and Energy for Performance. These programmes, available in many languages, are designed to address the root causes of excessive work pressure and low energy and engagement at work and at home. They are complemented by our commitment to flexible thinking about the way we deliver our work that enables employees to do their best work in an environment that helps them integrate their work and personal lives. For more details on the scope and impact of these programmes, see our Corporate Responsibility Report.


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Financial review 2010

Pharmaceutical turnover
All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. The calculation of underlying turnover is described on page 21. Sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic areas on page 35 and by geographic segment below.
Pharmaceutical turnover declined 2% to £23.4 billion. Excluding pandemic products, Avandia and Valtrex, underlying turnover increased by 4%.
Segmental analysis
The turnover reported in the table below represents sales invoiced by GSK’s local entity to its customers in the local market plus co-promotion income within each market.
                                 
                         
    2010     2009     Growth*  
    £m     £m     CER%     £%  
USA
    7,648       8,578       (11 )     (11 )
Europe
    6,548       7,087       (6 )     (8 )
Emerging Markets
    3,556       2,895       22       23  
Asia Pacific/Japan
    3,102       2,628       9       18  
ViiV Healthcare
    1,566       1,605       (3 )     (2 )
Other
    962       901       (1 )     7  
                     
 
    23,382       23,694       (2 )     (1 )
                     
 
*   CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given on pages 188 to 192.
Sales in the USA declined 11% to £7.6 billion, primarily due to generic competition to Valtrex, a significant reduction in sales of pandemic related products and lower sales of Avandia. Excluding these products, underlying turnover grew 3%, despite the discontinuation of GSK’s promotion of Boniva, the sale of Wellbutrin XL in May 2009, and the impact of US healthcare reform across the product range. New products (excluding pandemic vaccines) launched since 2007 grew 29% and contributed 8% of 2010 sales.
Europe pharmaceuticals sales declined 6% to £6.5 billion, primarily due to the impact of a significant reduction in sales of pandemic related products, generic competition to Valtrex and lower sales of Avandia. Excluding these products, underlying sales were flat, reflecting the impact of government austerity measures.
Emerging Markets pharmaceutical sales grew 22% to £3.6 billion, with strong growth across most product categories and also helped by pandemic related product sales of £227 million (2009 – £89 million). Asia Pacific/Japan pharmaceutical sales grew 9% to £3.1 billion. Excluding pandemic related products, Valtrex and Avandia, underlying sales grew 20% in Emerging Markets and 7% in Asia Pacific/Japan.
Pharmaceutical turnover by therapeutic area
Pharmaceutical turnover declined by 2% in 2010 as the impact of generic competition to Valtrex, lower Avandia and pandemic product sales was partly offset by growth of key products such as Seretide/Advair, Avamys/Veramyst, Avodart, Lovaza, Tyverb/Tykerb, Ventolin and the vaccines franchise.
Respiratory
Respiratory sales increased 3% to £7.2 billion.
Seretide/Advair sales grew 2% to £5.1 billion, with strong growth in Japan, up 17% to £246 million and Emerging Markets, up 16% to £328 million. Sales in the USA were level at £2.6 billion and grew 2% in Europe to £1.6 billion.
Several other respiratory products delivered growth including Avamys/Veramyst, up 33% to £193 million, Ventolin, up 8% to £522 million and Flovent, up 2% to £804 million.
Anti-virals
Anti-virals decreased 56% to £1.1 billion.
Relenza sales were £121 million (2009 – £720 million), down 84%, against the previous year where significant government pandemic orders were received. Valtrex sales declined 60% to £532 million reflecting generic competition in the USA and Europe.
Central nervous system (CNS)
CNS sales decreased 8% to £1.8 billion.
The majority of GSK’s CNS franchise is impacted by generic competition in the USA. The Wellbutrin decline of 39% primarily reflected the sale of Wellbutrin XL in the USA to Biovail in the second quarter of 2009.
Cardiovascular and urogenital
Cardiovascular and urogenital sales increased 11% to £2.6 billion, reflecting continued strong growth of key products such as Arixtra, up 19% to £301 million, Avodart, up 18% to £629 million, and Lovaza, up 17% to £530 million.
Metabolic
Metabolic sales decreased 44% to £0.7 billion.
Avandia product sales declined by 44% to £440 million. On 23rd September 2010 the European Medicines Agency suspended marketing authorisation for all rosiglitazone containing products, including Avandia, and the US Food and Drug Administration announced additional measures to ensure the benefits of Avandia continue to outweigh its risks, including a Risk Evaluation and Mitigation Strategy (REMS) programme. As a result, GSK expects global sales of rosiglitazone containing products, including Avandia, to be minimal in the future.
Oncology and emesis
Oncology and emesis sales increased 9% to £0.7 billion.
Tyverb/Tykerb, up 34% to £227 million, grew strongly in all segments. Newly launched oncology products Votrient, Arzerra and Promacta delivered sales of £38 million, £31 million and £31 million, respectively.
Vaccines
Total vaccine sales grew 15% to £4.3 billion, including £1.2 billion of pandemic vaccine sales (2009 – £883 million). Excluding flu pandemic vaccine sales, growth was 10%. Several new vaccines contributed to this growth including Synflorix, more than doubling to £221 million, Boostrix, up 29% to £181 million and Cervarix, up 26% to £242 million. Sales of Hepatitis vaccines grew 7% to £720 million, Infanrix/Pediarix grew 8% to £700 million and seasonal flu sales grew 14% to £241 million. Rotarix sales were down 18% to £235 million, as the product continues to recover market share lost following its temporary suspension from several markets earlier in the year.
Dermatologicals
Dermatology sales were £1.1 billion, including heritage GSK products and those acquired through business acquisitions, principally Stiefel in July 2009. The estimated sales growth in 2010 for the business on a pro-forma basis, excluding 2010 acquisitions, was approximately 6%. In addition, GSK’s heritage consumer dermatology portfolio, reported within Consumer Healthcare, contributed sales of £256 million, up 8%.


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Financial review 2010
Pharmaceutical turnover by therapeutic area 2010
                                                                                                                                 
                           
Total     USA     Europe     Emerging Markets     Rest of World  
Therapeutic area/   2010     2009             Growth     2010             Growth     2010             Growth     2010             Growth     2010             Growth  
major products   £m     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%  
Respiratory
    7,238       6,977       3       4       3,394       1       2       2,149             (2 )     616       19       21       1,079       4       14  
Avamys/Veramyst
    193       142       33       36       69             1       56       27       24       31       >100       >100       37       94       >100  
Flixonase/Flonase
    164       171       (5 )     (4 )     37       37       37       40       (7 )     (7 )     39       11       11       48       (30 )     (27 )
Flixotide/Flovent
    804       775       2       4       431       8       9       159       (9 )     (11 )     48       38       41       166       (10 )     (1 )
Seretide/Advair
    5,139       4,977       2       3       2,604                   1,601       2             328       16       19       606       10       21  
Serevent
    201       236       (16 )     (15 )     64       (12 )     (12 )     98       (16 )     (16 )     2       (33 )     (33 )     37       (23 )     (16 )
Ventolin
    522       477       8       9       179       16     &nbs