GlaxoSmithKline (GSK)

Operational Excellence

In October 2007, GSK announced a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations.

This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years of the programme, with approximately £350 million expected by 2008 and £550 million by 2009. These savings will partly mitigate the expected impact to 2008 earnings from generic competition and lower Avandia sales and the associated adverse impact on GSK’s gross margin. One-off charges of £338 million before tax relating to the programme were recorded in Q4 2007. There were no significant acquisition-related restructuring costs incurred in 2006 or 2007.

Because of the significance of this new programme, a columnar presentation has been adopted in the income statement in order to illustrate GSK’s underlying performance in 2007. The analysis below of operating profit and the subsequent discussion excludes restructuring costs related to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a more useful reflection of the way in which the business is managed, and accordingly this supplemental information is provided in addition to that contained in the consolidated income statement on page 90 prepared in accordance with IFRS.

Operational Excellence

GSK announced in October 2007 a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations.

This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years of the programme, with approximately £350 million expected by 2008 and £550 million by 2009. These savings will partly mitigate the expected impact to 2008 earnings from generic competition and lower Avandia sales and the associated adverse impact on GSK’s gross margin.

In Q4 2007, GSK has introduced a 3-column approach to the income statement. ‘Business Performance’ shows GSK’s underlying results excluding restructuring costs related to the new Operational Excellence programme announced in October 2007 and significant acquisitions. There were no significant acquisition-related restructuring costs incurred in 2006 or 2007. The middle column shows restructuring costs and the ‘Total’ column shows the full IFRS statutory results.

One-off charges of £338 million before tax relating to the new Operational Excellence programme were recorded in Q4 2007.

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