As filed with the Securities and Exchange Commission on March 17, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | 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 | |
1.500% Notes due 2017 | New York Stock Exchange | |
5.650% Notes due 2018 | New York Stock Exchange | |
2.850% Notes due 2022 | New York Stock Exchange | |
2.800% Notes due 2023 | New York Stock Exchange | |
5.375% Notes due 2034 | London Stock Exchange | |
6.375% Notes due 2038 | New York Stock Exchange | |
4.200% Notes due 2043 | 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 issuers 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 | 5,368,316,062 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ 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.
☐ Yes ☒ 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.
☒ Yes ☐ 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).
☐ Yes ☐ 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 ☒ Accelerated filer ☐ Non-accelerated filer ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ |
International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ |
Other ☐ |
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 ☐ Item 18 ☐
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).
☐ Yes ☒ No
1
Pursuant to Rule 12b-23(a) of the Securities Exchange Act of 1934, as amended, the information for the 2016. Form 20-F of GlaxoSmithKline plc set out below is being incorporated by reference from the GSK Annual Report 2016 included as exhibit 15.2 to this Form 20-F dated and submitted on March 17, 2017 (the GSK Annual Report 2016).
All references in this Form 20-F to GlaxoSmithKline, the Group, GSK, we or our mean GlaxoSmithKline plc and its subsidiaries; the company means GlaxoSmithKline plc.
References below to major headings include all information under such major headings, including subheadings, unless such reference is a reference to a subheading, in which case such reference includes only the information contained under such subheading.
In addition to the information set out below, the information set forth under the headings Cautionary statement on the inside front cover and the inside back cover, Directors Report on page 110, Directors statement of responsibilities on page 148, Directors statement of responsibilities in relation to the companys financial statements on page 232, Share capital and control on pages 263 to 264, Financial calendar, Results announcements; and Financial reports on page 265, Annual General Meeting 2017 on page 266, Registrar on page 268, ADR Depositary, Glaxo Wellcome and SmithKline Beecham Corporate PEPs, Donating shares to Save the Children, Contacts, Share scam alert and Responsible Business Supplement on page 269, Section 13(r) of the US Securities Exchange Act on page 271 and Glossary of terms on page 283 in each case of the GSK Annual Report 2016 is incorporated by reference.
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 certain portions of the GSK Annual Report 2016 incorporated by reference herein, namely the Directors Report (for which see page 110 thereof), the Strategic Report (pages 1 to 78 thereof, portions of which are incorporated by reference as described below) and the Remuneration Report (pages 111 to 146, portions of which are incorporated by reference as described below). These reports have been drawn up and presented in accordance with, and in reliance upon, English company law. Under English law, the Directors would be liable to the company, but not to any third party, if these sections of the GSK Annual Report 2016 contain errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.
Portions of the GSK Annual Report 2016 incorporated by reference herein contain references to our website. Information on our website or any other website referenced in the GSK Annual Report 2016 is not incorporated into this Form 20-F and should not be considered to be part of this Form 20-F. We have included any website as an inactive textual reference only.
Item 1. | Identity of Directors, Senior Management and Advisers |
Not applicable.
Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
Item 3. | Key Information |
3.A | Selected financial data |
The information set forth under the heading:
| Five year record on pages 244 to 246; and |
| Dividends on page 265 |
of the GSK Annual Report 2016 is incorporated herein by reference.
3.B | Capitalization and indebtedness |
Not applicable.
3.C | Reasons for the offer and use of proceeds |
Not applicable.
2
3.D | Investor information |
Principal risks and uncertainties
The principal risks discussed below are the risks and uncertainties relevant to our business, financial condition and results of operations that may affect our performance and ability to achieve our objectives. The risks below are those that we believe could cause our actual results to differ materially from expected and historical results.
We must adapt to and comply with a broad range of laws and regulations. These requirements apply to research and development, manufacturing, testing, approval, distribution, sales and marketing of Pharmaceutical, Vaccine and Consumer Healthcare products and affect not only the cost of product development but also the time required to reach the market and the likelihood of doing so successfully.
Moreover, as rules and regulations change, and governmental interpretation of those rules and regulations evolves, the nature of a particular risk may change. Changes to certain regulatory regimes may be substantial. Any change in, and any failure to comply with, applicable law and regulations could materially and adversely affect our financial results.
Similarly, our business exposes us to litigation and government investigations, including but not limited to product liability litigation, patent and antitrust litigation and sales and marketing litigation. Litigation and government investigations, including related provisions we may make for unfavourable outcomes and increases in related costs such as insurance premiums, could materially and adversely affect our financial results.
More detail on the status and various uncertainties involved in our significant unresolved disputes and potential litigation is set out in Note 46, Legal proceedings, on pages 226 to 231 of the GSK Annual Report 2016.
UK regulations require a discussion of the mitigating activities a company takes to address principal risks and uncertainties. A summary of the activities that the Group takes to manage each of our principal risks accompanies the description of each principal risk below. The principal risks and uncertainties are not listed in order of significance.
Patient safety
Risk definition
Failure to appropriately collect, review, follow up, or report adverse events from all potential sources, and to act on any relevant findings in a timely manner.
Risk impact
The impact of this risk is potentially to compromise our ability to conduct robust safety signal detection and interpretation and to ensure that appropriate decisions are taken with respect to the risk/ benefit profile of our products, including the completeness and accuracy of product labels and the pursuit of additional studies/ analyses, as appropriate. This could lead to potential harm to patients, reputational damage, product liability claims or other litigation, governmental investigation, regulatory action such as fines, penalties or loss of product authorisation.
Context
Pre-clinical and clinical trials are conducted during the development of investigational Pharmaceutical, Vaccine and Consumer Healthcare Products to determine the safety and efficacy of the products for use by humans. Notwithstanding the efforts we make to determine the safety of our products through appropriate pre-clinical and clinical trials, unanticipated side effects may become evident only when products are widely introduced into the marketplace. Questions about the safety of our products may be raised not only by our ongoing safety surveillance and post-marketing studies but also by governmental agencies and third-parties that may analyse publicly available clinical trial results.
The Group is currently a defendant in a number of product liability lawsuits, including class actions, that involve significant claims for damages related to our products. Litigation, particularly in the US, is inherently unpredictable. Class actions that seek to sweep together all persons who take our products increase the potential liability. Claims for pain and suffering and punitive damages are frequently asserted in product liability actions and, if allowed, can represent potentially open-ended exposure and thus, could materially and adversely affect the Groups financial results.
3
Intellectual property
Risk definition
Failure to appropriately secure, maintain and enforce intellectual property rights.
Risk impact
Any failure to obtain or subsequent loss of patent protection in a market, including reducing the availability or scope of patent rights or compulsory licensing (in which a government forces a manufacturer to license its patents for specific products to a competitor), could materially and adversely affect our financial results in that market. Absence of adequate patent or data exclusivity protection in a market could limit the opportunity to rely on that market for future sales growth for our products, which could also materially and adversely affect our financial results in that market.
Context
As an innovative Pharmaceutical, Vaccine and Consumer Healthcare Products company, we seek to obtain appropriate intellectual property protection for our products. Our ability to obtain and enforce patents and other proprietary rights with regard to our products is critical to our business strategy and success. Pharmaceutical products are usually only protected from being copied by generic manufacturers during the period of exclusivity provided by an issued patent or related intellectual property rights such as regulatory data protection or orphan drug status. Following expiration of certain intellectual property rights, a generic manufacturer may lawfully produce a generic version of the product.
We operate in markets where intellectual property laws and patent offices are still developing and where governments may be unwilling to grant or enforce intellectual property rights in a fashion similar to more developed regions such as the EU, Japan and the US. Some developing countries have limited, or threatened to limit, effective patent protection for pharmaceutical products in order to facilitate early competition within their markets from generic manufacturers.
We face competition from manufacturers of proprietary and generic pharmaceutical products in all of our major markets. Introduction of generic products, particularly in the US where we have our highest turnover and margins, typically leads to a rapid and dramatic loss of sales and reduces our revenues and margins for our proprietary products. Since there is no abbreviated pathway that leads to substitutable generic vaccines, competition in that market arises from branded products or generic branded products and erosion of sales, revenues and margins is less dramatic. In addition, the proprietary technology used in manufacture and the capital investment in facilities create barriers to entry into the vaccine markets.
We depend on certain key products for a significant portion of our sales. One such product is our respiratory pharmaceutical product Seretide/Advair which accounts for significant Group sales worldwide. The patent for compositions containing the combination of active substances in Seretide/Advair has expired. Generic products containing the same combination of active substances as Seretide/Advair (in both dry powder inhalers and metered dose inhalers) have been launched by several manufacturers in a number of European markets. New drugs applications (ANDAs) have been filed in the US by generic competitors for Seretide/Advair Diskus. The date of such approvals is uncertain at this time but could come as early as March 2017. The timing of an ANDA for Advair HFA in the US is uncertain. We have patents on the formulation and device used in the metered dose inhaler, although the protection afforded by these patents is uncertain at present. Similar patents exist for Ventolin HFA and Flovent HFA.
The expiration dates for patents for our major products which may affect the dates on which generic versions of our products may be introduced are set out on pages 250 to 251. The listed annual expiration dates are not meant to indicate the certainty of exclusivity for the listed products, as patents may be designed around or invalidated prior to their expiration, resulting in earlier entry of a generic product. Legal proceedings involving patent challenges are set out in Note 46 to the financial statements, Legal proceedings on pages 226 to 231 of the GSK Annual Report 2016.
Generic drug manufacturers have also exhibited a readiness to market generic versions of many of our most important products prior to the expiration of our patents. Their efforts may involve challenges to the validity or enforceability of a patent or assertions that their generic product does not infringe our patents. As a result, we are and may continue to be involved in legal proceedings involving patent challenges, which may materially and adversely affect our financial results. Moreover, in the US, it has become common for patent infringement actions to prompt claims that anti-trust laws have been violated during the prosecution of the patent or during litigation involving the defence of that patent. Such claims by direct and indirect purchasers and other payers are typically filed as class actions. The relief sought may include treble damages and restitution claims. Similarly, anti-trust claims may be brought by government entities or private parties following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of anti-trust laws. A successful anti-trust claim by a private party or government entity could materially and adversely affect our financial results.
4
Product quality
Risk definition
Failure to comply with current Good Manufacturing Practices (cGMP) or inadequate controls and governance of quality in the supply chain covering supplier standards, manufacturing and distribution of products.
Risk impact
A failure to ensure product quality could have far reaching implications in terms of patient and consumer safety resulting in product launch delays, supply interruptions and product recalls which would have the potential to do damage to GSKs reputation. Associated regulatory, legal, and financial consequences could materially and adversely affect company reputation and financial results.
Context
Patients, consumers and healthcare professionals trust the quality of our products. Product quality may be influenced by many factors including product and process understanding, consistency of manufacturing components, compliance with GMP, accuracy of labelling, reliability of the external supply chain, and the embodiment of an overarching quality culture. The internal and external environment continues to evolve as new products, new markets and new legislation are introduced, with increasing scrutiny of data integrity, supply continuity and drug shortages. Review of inspections conducted across the industry by national regulatory authorities during 2016 highlighted an ongoing focus on data integrity, third party oversight and the timely escalation of pertinent issues to regulatory authorities.
5
Financial controls and reporting
Risk definition
Failure to comply with current tax law or incurring significant losses due to treasury activities; failure to report accurate financial information in compliance with accounting standards and applicable legislation; failure to maintain adequate governance and oversight over third-party relationships.
Risk impact
Non-compliance with existing or new financial reporting and disclosure requirements, or changes to the recognition of income and expenses, could expose us to litigation and regulatory action and could materially and adversely affect our financial results. Changes in tax laws or in their application with respect to matters such as transfer pricing, foreign dividends, controlled companies, R&D tax credits, taxation of intellectual property or a restriction in tax relief allowed on the interest on intra-group debt, could impact our effective tax rate. Significant losses may arise from inconsistent application of treasury policies, transactional or settlement errors, or counterparty defaults. Any changes in the substance or application of the governing tax laws, failure to comply with such tax laws or significant losses due to treasury activities could materially and adversely affect our financial results.
Failure to adequately manage third party relationships could result in business disruption and exposure to risk ranging from sub-optimal contractual terms and conditions, to severe business sanctions and/ or significant reputational damage. Any of these consequences could materially and adversely affect our business operations and financial results.
Context
The Group is required by the laws of various jurisdictions to disclose publicly its financial results and events that could materially affect the financial results of the Group. Regulators routinely review the financial statements of listed companies for compliance with new, revised or existing accounting and regulatory requirements. The Group believes that it complies with the appropriate regulatory requirements concerning our financial statements and disclosure of material information including any transactions relating to business restructuring such as acquisitions and divestitures. However, should we be subject to an investigation into potential non-compliance with accounting and disclosure requirements, this may lead to restatements of previously reported results and significant penalties.
Our Treasury group deals in high value transactions, mostly foreign exchange and cash management transactions, on a daily basis. These transactions involve market volatility and counterparty risk. The Groups effective tax rate reflects rates of tax in the jurisdictions in which the Group operates that are both higher and lower than the UK rate and takes into account regimes that encourage innovation and investment in science by providing tax incentives which, if changed, could affect the Groups tax rate. In addition, the worldwide nature of our operations and cross-border supply routes can result in conflicting claims from tax authorities as to the profits to be taxed in individual countries. The tax charge included in our financial statements is our best estimate of the Groups tax liability pending audits by tax authorities.
There continues to be a significant international focus on tax reform, including the OECDs Base Erosion and Profit Shifting (BEPS) project and European Commission initiatives such as the increased use of fiscal state aid investigations. Together with domestic initiatives around the world, these may result in significant changes to established tax principles and an increase in tax authority disputes. These, regardless of their merit or outcomes, can be costly, divert management attention and may adversely impact our reputation.
Third parties are critical to our business delivery and are an integral part of the solution to improve our productivity, quality, service and innovation. We rely on third parties, including suppliers, distributors, individual contractors, licensees, and other pharmaceutical and biotechnology collaboration partners for discovery, manufacture, and marketing of our products and important business processes.
Third party business relationships present a material risk. For example, we share critical and sensitive information such as marketing plans, clinical data, and employee data with specific third parties who are conducting the relevant outsourced business operations. Inadequate protection or misuse of this information by third parties could have significant business impact. Similarly, we use distributors and agents in a range of activities such as promotion and tendering which have inherent risks such as inappropriate promotion or unethical business practices. Insufficient internal compliance and controls by the distributors could affect our reputation. These risks are further increased by the complexities of working with large numbers of third parties.
6
Anti-Bribery and Corruption
Risk definition
Failure of GSK employees, consultants and third parties to comply with our Anti-bribery and corruption (ABAC) principles and standards, as well as with all applicable legislation.
Risk impact
Failure to mitigate this risk could expose the Group and associated persons to governmental investigation, regulatory action and civil and criminal liability.
In addition to legal penalties, a failure to prevent bribery through complying with ABAC legislation and regulations could have substantial implications for the reputation of the company, the credibility of senior leaders, and an erosion of investor confidence in our governance and risk management.
Context
We are exposed to bribery and corruption risk through our global business operations. In some markets, the government structure and the rule of law are less developed, and this has a bearing on our bribery and corruption risk exposure. In addition to the global nature of our business, the healthcare sector is highly competitive and subject to regulation. This increases the instances where we are exposed to activities and interactions with bribery and corruption risk.
The Group has been subject to a number of ABAC inquiries. We have reached a resolution with US authorities in 2016 regarding their ABAC inquiry, whilst the inquiry of the UK authorities is ongoing. These investigations are discussed further in Note 46 Legal proceedings on pages 226 to 231 of the GSK Annual Report 2016 .
7
Commercialisation
Risk definition
Failure to execute business strategies, or effectively manage competitive opportunities and threats in accordance with the letter and spirit of legal, industry, or the Groups requirements.
Risk impact
Failure to manage risks related to commercialisation could materially and adversely affect our ability to grow a diversified global business and deliver more products of value for patients and consumers. Failure to comply with applicable laws, rules and regulations may result in governmental investigation, regulatory action and legal proceedings brought against the Group by governmental and private plaintiffs. Failure to provide accurate and complete information related to our products may result in incomplete awareness of the risk/benefit profile of our products and possibly suboptimal treatment of patients and consumers. Any of these consequences could materially and adversely affect the Group.
Any practices that are found to be misaligned with our values could also result in reputational damage and dilute trust established with external stakeholders.
Context
We operate on a global basis in an industry that is both highly competitive and highly regulated. Our competitors may make significant product innovations and technical advances and may intensify price competition. In light of this competitive environment, continued development of commercially viable new products and the development of additional uses for existing products are critical to achieve our strategic objectives. As do other pharmaceutical, vaccine and consumer companies, the Group faces downward price pressure in major markets, declining emerging market growth, and negative foreign exchange impact.
Developing new Pharmaceutical, Vaccine and Consumer Healthcare products is a costly, lengthy and an uncertain process. A product candidate may fail at any stage, including after significant Group economic and human resources have been invested. Our competitors products or pricing strategies or any failure on our part to develop commercially successful products, or to develop additional uses for existing products, could materially and adversely affect our ability to achieve our strategic objectives.
We are committed to the ethical and responsible commercialisation of our products to support our mission to improve the quality of human life by enabling people to do more, feel better, and live longer. To accomplish this mission, we engage the healthcare community in various ways to provide important information about our medicines.
Promotion of approved products seeks to ensure that healthcare professionals (HCPs) globally have access to information they need, that patients and consumers have access to the information and products they need and that products are prescribed, recommended or used in a manner that provides the maximum healthcare benefit to patients and consumers. We are committed to communicating information related to our approved products in a responsible, legal, and ethical manner.
While business units within the Group are confronted by common types of commercialisation risks, differences do exist in the types of risks that present themselves, the degree of risk presented in that business unit and, consequently, how those risks are managed. This reflects the different nature and profile of the business units across the Group.
8
Research practices
Risk definition
Failure to adequately conduct ethical and sound preclinical and clinical research. In addition, failure to engage in scientific activities that are consistent with the letter and spirit of the law, industry, or the Groups requirements.
Risk impact
The impacts of the risk include harm to human subjects, reputational damage, failure to obtain the necessary regulatory approvals for our products, governmental investigation, legal proceedings brought against the Group by governmental and private plaintiffs (product liability suits and claims for damages), and regulatory action such as fines, penalties, or loss of product authorisation. Any of these consequences could materially and adversely affect our financial results.
Context
Research relating to animals can raise ethical concerns. While we attempt to address this proactively, animal studies remain a vital part of our research. In many cases, they are the only method that can be used to investigate the effects of a potential new medicine in a living body before it is tested in humans, and they are generally mandated by regulators and ethically imperative. Animal research can provide critical information about the causes of diseases and how they develop. Nonetheless, we are continually seeking ways in which we can minimise our use of animals in research, whilst complying with regulatory requirements.
Clinical trials in healthy volunteers and patients are used to assess and demonstrate an investigational products efficacy and safety or further evaluate the product once it has been approved for marketing. We also work with human biological samples. These samples are fundamental to the discovery, development and safety monitoring of our products. The integrity of our data is essential to success in all stages of the research data lifecycle: design, generation, recording and management, analysis, reporting and storage and retrieval. Our research data is governed by legislation and regulatory requirements. Research data and supporting documents are core components at various stages of pipeline progression decision-making and also form the content of regulatory submissions. Poor data integrity can compromise our research efforts.
There are innate complexities and interdependencies required for regulatory filings, particularly given our global research and development footprint. Rapid changes in submission requirements in developing countries continue to increase the complexity of worldwide product registration. Scientific engagement (SE), defined as the interaction and exchange of information between GSK and external communities in order to advance scientific and medical understanding, including the appropriate development and use of our products, is an essential part of scientific discourse. Such non-promotional engagement with external stakeholder groups is vital to GSKs mission and necessary for scientific and medical advance. The scope of SE activities includes: advisory boards; scientific consultancies; pre-planned informal discussions with healthcare professionals (HCP); sharing medical information; publications (including abstracts to congresses); scientific interactions with payers, patients, governments and the media; and support for independent medical education. SE activities are essential but present legal, regulatory, and reputational risk if the sharing of data, invited media coverage or payments for service providers has, or is perceived to have, promotional intent. The risks are particularly high where HCP engagement and associated financial and/or transfer of value disclosures are required by GSK.
9
Environment, health and safety and sustainability
Risk definition
Failure to manage environment, health and safety and substainability (EHS&S) risks in line with our objectives and policies and with relevant laws and regulations.
Risk impact
Failure to manage EHS&S risks could lead to significant harm to people, the environment and communities in which we operate, fines, failure to meet stakeholder expectations and regulatory requirements, litigation or regulatory action, and damage to the Groups reputation and could materially and adversely affect our financial results.
Context
The Group is subject to health, safety and environmental laws of various jurisdictions. These laws impose duties to protect people, the environment, and the communities in which we operate, as well as potential obligations to remediate contaminated sites. We have also been identified as a potentially responsible party under the US Comprehensive Environmental Response Compensation and Liability Act at a number of sites for remediation costs relating to our use or ownership of such sites in the US. Failure to manage these environmental risks properly could result in litigation, regulatory action and additional remedial costs that may materially and adversely affect our financial results. See Note 46 to the financial statements, Legal proceedings on pages 226 to 231 of the GSK Annual Report 2016, for a discussion of the environmental related proceedings in which we are involved.
We routinely accrue amounts related to our liabilities for such matters.
Information protection
Risk definition
The risk to GSK business activities if information becomes disclosed to those not authorised to see it, or if information or systems fail to be available or are corrupted.
Risk impact
Failure to adequately protect critical and sensitive systems and information may result in loss of commercial or strategic advantage, damage to our reputation, litigation, or other business disruption including regulatory sanction, which could materially and adversely affect our financial results.
Context
We rely on critical and sensitive systems and data, such as corporate strategic plans, sensitive personally identifiable information (PII), intellectual property, manufacturing systems and trade secrets. There is the potential that our computer systems or information may be exposed to misuse or unauthorised disclosure. We are also subject to various laws that govern the processing of PlI.
10
Supply continuity and crisis management
Risk definition
Failure to deliver a continuous supply of compliant finished product; inability to respond effectively to a crisis incident in a timely manner to recover and sustain critical operations, including key supply chains. This risk was previously called Crisis and continuity management.
Risk impact
We recognise that failure to supply our products can adversely impact consumers and patients who rely on them. A material interruption of supply or exclusion from healthcare programmes could expose us to litigation or regulatory action and financial penalties that could adversely affect the Groups financial results.
The Groups international operations, and those of its partners, expose our workforce, facilities, operations and information technology to potential disruption from natural events (e.g. storm or earthquake), man-made events (e.g. civil unrest, terrorism), and global emergencies (e.g. Ebola outbreak, Flu pandemic). It is important that GSK has robust crisis management and recovery plans in place to manage such events.
Context
Our supply chain operations are subject to review and approval by various regulatory agencies that effectively provide our licence to operate. Failure by our manufacturing and distribution facilities or by suppliers of key services and materials could lead to litigation or regulatory action such as product recalls and seizures, interruption of supply, delays in the approval of new products, and suspension of manufacturing operations pending resolution of manufacturing or logistics issues.
We rely on materials and services provided by third party suppliers to make our products, including active pharmaceutical ingredients (API), antigens, intermediates, commodities, and components for the manufacture and packaging of Pharmaceutical, Vaccine and Consumer Healthcare products. Some of the third party services procured, such as services provided by contract manufacturing and clinical research organisations to support development of key products, are important to ensure continuous operation of our businesses.
Although we undertake business continuity planning, single sourcing of certain components, bulk API, finished products, and services creates a supply risk in the event of regulatory non-compliance or physical disruption at the manufacturing sites or logistics system. If any of the small number of single-source, third party suppliers and service providers we use fail to fulfil their contractual obligations in a timely manner or experience regulatory non-compliance or physical disruption of their logistics and manufacturing sites, this could also result in delays or service interruptions.
We use effective crisis management and business continuity planning to provide for the health and safety of our people and to minimise impact to the Group, by maintaining functional operations following a natural or man-made disaster, or a public health emergency.
11
Item 4. | Information on the Company |
4.A | History and development of the company |
The information set forth under the heading:
| About GSK on the inside back cover; |
| Head Office and Registered Office on the outside back cover; and |
| Note 38 Acquisitions and disposals on pages 205 to 207 |
of the GSK Annual Report 2016 is incorporated herein by reference.
4.B | Business overview |
| See Item 3.D Risk factors above; |
In addition, the information set forth under the headings:
| About us on pages 2 to 3; |
| Chairmans statement on page 4; |
| CEOs statement on page 5 (excluding the pro-forma figures in the parentheticals in the first and the fourth paragraphs under the subheading Trading performance); |
| The Market in which we operate on pages 8 to 11; |
| Our business model on pages 12 to 13; |
| Our strategic priorities on pages 14 and 15 (excluding (i) the pro-forma figures in the first and third paragraphs next to Grow under the subheading Progress in 2016 on page 14 and (ii) the pro-forma figure in the parenthetical under Core operating profit margin next to Simplify under the subheading Progress in 2016 on page 14); |
| A clear strategy for growth on pages 14 to 15; |
| Pharmaceuticals on pages 22 to 27 (excluding (i) page 23 and (ii) the pro-forma figure in the last sentence of the second paragraph under the subheading Simplify on page 27); |
| Vaccines on pages 30 to 33 (excluding (i) page 31; and (ii) the pro-forma figure in the last sentence of the second paragraph under the subheading Simplify on page 33); |
| Consumer Healthcare on pages 36 to 39 (excluding (i) page 37 and (ii) the pro-forma figure in the third sentence of the first paragraph under the subheading Simplify on page 39); |
| Responsible business on pages 42 to 51; |
| Note 6 Segment information on pages 169 to 172; |
| Note 38 Acquisitions and disposals on pages 205 to 207; |
| Pharmaceutical products, competition and intellectual property on pages 250 to 251; |
| Vaccines products, competition and intellectual property on page 251; and |
| Consumer Healthcare products and competition on page 252 |
of the GSK Annual Report 2016 is incorporated herein by reference.
4.C | Organizational structure |
The information set forth under the heading:
| Note 45 Principal Group companies on page 225; and |
| Group Companies on pages 272 to 282 |
of the GSK Annual Report 2016 is incorporated herein by reference.
12
4.D | Property, plant and equipment |
The information set forth under the headings:
| Property, plant and equipment within Group financial review on page 72; |
| Note 6 Segment information on pages 169 to 172; and |
| Note 17 Property, plant and equipment on pages 181 to 182 |
of the GSK Annual Report 2016 is incorporated herein by reference.
Item 4A. | Unresolved Staff Comments |
Not applicable.
Item 5. | Operating and Financial Review and Prospects |
5.A | Operating results |
The information set forth under the headings:
| The changing global political landscape on page 9; |
| Increasing payer emphasis on cost, value and access on page 10; |
| Non-controlling interests in ViiV Healthcare on page 58; |
| Cash generation and conversion on page 71; |
| Financial position and resources on pages 72 to 75; |
| Critical accounting policies on pages 76 to 77; |
| Treasury policies on pages 77 and 78; and |
| Strategic report on page 78 |
of the GSK Annual Report 2016 is incorporated herein by reference.
The following tables reconcile total results to core results. References in the GSK Annual Report 2016 to the reconciliations on page 66 of that report should be read to refer to the information in these tables.
13
14
Core results reconciliation 31 December 2015 | ||||||||||||||||||||||||||||||||
Total
results £m |
Intangible
asset amortisation £m |
Intangible
asset impairment £m |
Major
restructuring £m |
Legal
charges £m |
Transaction
-related £m |
Divestments
and other £m |
Core
results £m |
|||||||||||||||||||||||||
Gross profit |
15,070 | 522 | 147 | 563 | 89 | 12 | 16,403 | |||||||||||||||||||||||||
Operating profit |
10,322 | 563 | 206 | 1,891 | 221 | 2,238 | (9,712 | ) | 5,729 | |||||||||||||||||||||||
Profit before taxation |
10,526 | 563 | 206 | 1,896 | 221 | 2,238 | (10,559 | ) | 5,091 | |||||||||||||||||||||||
Profit after taxation |
8,372 | 402 | 156 | 1,455 | 200 | 1,886 | (8,373 | ) | 4,098 | |||||||||||||||||||||||
Earnings per share |
174.3p | 8.3p | 3.2p | 30.1p | 4.1p | 28.8p | (173.1 | )p | 75.7p | |||||||||||||||||||||||
Weighted average number of shares (millions) |
4,831 | 4,831 | ||||||||||||||||||||||||||||||
The following adjustments are made in arriving at core gross profit |
||||||||||||||||||||||||||||||||
Cost of sales |
(8,853 | ) | 522 | 147 | 563 | 89 | 12 | (7,520 | ) | |||||||||||||||||||||||
The following adjustments are made in arriving at core operating profit |
||||||||||||||||||||||||||||||||
Selling, general and administration |
(9,232 | ) | 7 | 1,009 | 221 | 88 | (7,907 | ) | ||||||||||||||||||||||||
Research and development |
(3,560 | ) | 41 | 52 | 319 | 52 | (3,096 | ) | ||||||||||||||||||||||||
Other operating income |
7,715 | 2,061 | (9,776 | ) | | |||||||||||||||||||||||||||
The following adjustments are made in arriving at core profit before tax |
||||||||||||||||||||||||||||||||
Net finance costs |
(653 | ) | 5 | 12 | (636 | ) | ||||||||||||||||||||||||||
Profit on disposal of associates |
843 | (843 | ) | | ||||||||||||||||||||||||||||
Share of after tax profits/(losses) of associates and joint ventures |
14 | (16 | ) | (2 | ) | |||||||||||||||||||||||||||
The following adjustments are made in arriving at core profit after tax |
||||||||||||||||||||||||||||||||
Taxation |
(2,154 | ) | (161 | ) | (50 | ) | (441 | ) | (21 | ) | (352 | ) | 2,186 | (993 | ) |
15
16
Financial Review 2016
In 2016, we continued to make progress in delivering against our strategy as well as the financial goals we have set out in our financial architecture. All three of our businesses contributed to the delivery of more broadly-based revenue growth. Our continued focus on the execution of our integration and restructuring programmes accelerated the delivery of the targeted benefits, allowing us to improve margins and operating leverage, while still making substantial investments behind new products, and supply chain improvements, as well as progressing the R&D pipeline.
We have also maintained our focus on financial efficiency and in the allocation of our capital, allowing us to deliver core EPS growth ahead of sales growth and at the top end of our financial guidance, as well as a significant improvement in our cash generation and a dividend of 80 pence per share.
Financial architecture
Our financial architecture is designed to support the consistent execution of our strategy and to enhance the returns we deliver to shareholders. It is focused on delivering more sustainable sales growth across the company, improving operating leverage, or profitability, and enhancing our financial efficiency. This is with the objective of driving growth in EPS ahead of our sales performance and then converting more of those earnings into cash that can be used to invest in the business or returned to shareholders, wherever we see the most attractive returns.
This clear set of priorities ensures consistency in how capital is allocated across and between the different businesses within GSK, with relative returns from each business benchmarked to relevant external comparatives using a Cash Flow Return on Investment (CFROI) based framework of metrics. Specific capital investments are also benchmarked in a similar way.
Reporting framework
In addition to total or reported results, prepared under IFRS, the Annual Report makes reference to a number of core performance measures which are used by management for planning and reporting purposes. These are non-IFRS measures adjusted for a number of items management believe it is useful to separate so that the key trends driving the performance of the business can be more clearly identified by shareholders. Core results may, however, vary significantly from total results as some of the adjustments may be material, as was the case in 2016.
The items adjusted for between total and core results are consistent each year but those that were most significant in 2016 include re-measurement charges related to the liabilities for future contingent consideration, most significantly the consideration due to Shionogi related to its former interest in dolutegravir, and the value of future put options as well as major restructuring charges.
IFRS requires us to provide for contingent consideration liabilities related to previous business acquisitions on the basis of the estimated present value of any potential future payments. These estimates could have a broad range of outcomes. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with any charges for re-measurement of them reflected immediately in other operating income. GSK will make cash payments in the future to discharge these liabilities but as the liabilities were established on acquisition or through subsequent re-measurement charges to the income statement, the payments will not be charged to future earnings.
Sales growth
All three of our businesses delivered growth in line with or above the medium-term growth expectations we laid out for them at our Capital Markets Day in 2015. Pharmaceuticals sales were up 14% at actual rates and 3% CER with growth from new products more than offsetting the decline in Seretide/Advair sales. In addition to strong growth in HIV, the respiratory portfolio returned to growth in 2016, up 13% at actual rates and 2% CER.
Vaccines sales were up 26% at actual rates and 14% CER, driven by strong execution across the business, particularly around the flu and meningitis franchises, and Bexsero in particular, together with the benefit of the comparison with 2015 which only included 10 months of the Novartis Vaccines business that was acquired on 2 March 2015.
Consumer Healthcare delivered a strong performance in the first full year of the joint venture with sales up 19% at actual rates and 9% CER as growth from the seven power brands more than offset some tough comparators and headwinds in international markets. This performance also benefited from the comparison with 2015 which only included 10 months of the Novartis Consumer Healthcare business that was acquired on 2 March 2015.
Operating leverage
The total operating margin was 9.3% of sales compared with 43.1% in 2015, the movement primarily reflecting the combination of higher remeasurement charges for the Consumer Healthcare put option and the ViiV Healthcare contingent consideration liability in 2016, and the benefit to 2015 of the profit on the disposal of the Oncology business in that year.
While our total operating margin reduced significantly, primarily because of the above factors, our core operating margin improved, driven by increased leverage in all three businesses. This was driven by a combination of leverage from stronger growth in the top line, and £1.4 billion (including £200 million of currency benefits) of additional integration and restructuring benefits, as well as continued tight cost control that allowed us to deliver the margin improvements while continuing to make important investments in all three businesses.
Accelerating the delivery of the targeted benefits of the integration and restructuring programme has been a key objective and we are pleased with the progress made this year through a sustained focus across the Group on executing this programme. By the end of 2016 we had delivered annual benefits of £2.8 billion, (excluding £200 million of currency benefits), almost the full target of the programme a year earlier than originally planned. We are confident in delivering the remaining £200 million of benefits during 2017.
Financial efficiency
We continue to focus on improving our financial efficiency and overall funding costs while protecting our credit profile and, in particular, our short-term target credit ratings. Net finance costs were up slightly, mainly due to currency.
Earnings per share
Total EPS was 18.8p (2015 174.3p). The decline primarily reflected the comparison with the £9.2 billion profit from the sale of our marketed Oncology assets to Novartis in 2015, but also the impact in 2016 of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the sterling value of the Groups HIV and Consumer Healthcare businesses.
The impact on the decline in total EPS was partly offset by the benefit of the improved operating performance and reduced restructuring charges in the year.
Core EPS of 102.4p was up 35% at actual exchange rates and up 12% at constant exchange rates.
17
Contingent consideration
At the end of 2016, GSK had liabilities for contingent consideration payments of £5.9 billion, of which £5.3 billion related to the estimated present value of future payments to Shionogi by ViiV Healthcare. The payments to Shionogi are calculated each quarter based on a high-teens percentage of the revenues of the relevant products, principally dolutegravir, with the discounted fair value of the total future payments reflecting the current expectations of total future sales of those products.
Free cash flow
Net cash inflow from operating activities was £6.5 billion and free cash flow for the Group was £3.1 billion, significantly improved on the small outflow we saw in 2015. This was driven by our improved operating performance, including continued tight control of capital expenditure and restructuring expenditure, as well as the benefit of currency tail winds. We continue to make progress towards our objective of rebuilding the cash generating capacity of the Group post the completion of the restructuring and integration programme.
Net debt
Net debt at the end of 2016 was £13.8 billion, £3.1 billion higher than the net debt at the end of 2015. Currency was a significant factor with adverse translation effects driving £2.2 billion of the increase. The remaining increase of £0.9 billion reflected the impact of dividends paid during the year of £4.9 billion, including the special dividend of £1.0 billion declared in 2015, being only partly offset by disposal proceeds of approximately £1.0 billion and free cash flow of £3.1 billion.
2017 guidance
We expect continued progress in 2017, with all three businesses expected to continue to benefit from recent new product launches and from the investments we made during 2016.
The expectation for 2017 core EPS growth is dependent on a number of factors including, in particular, uncertainties relating to the timing and extent of potential generic competition to Advair in the US.
In the event that no generic version of Advair is introduced to the US market in 2017, the Group expects 2017 core EPS growth of 5-7% at CER. This is based on an expected decline in 2017 in US Advair sales of 15-20%.
In the event of a mid-year introduction of a substitutable generic competitor to Advair in the US, the Group expects full-year 2017 US Advair sales of around £1 billion at CER (US$1.36/£1), with core EPS flat to a slight decline in percentage terms at CER.
We are not able to give guidance for total results as we cannot reliably forecast certain material elements of our total results such as impairments of intangible assets and the future fair value movements on contingent consideration and put options arising from changes in foreign exchange rates, and therefore a reconciliation of the guidance for core results to equivalent guidance for total results is not available without unreasonable effort.
Returns to shareholders
In 2016, we maintained our ordinary dividend at 80p per share, the same level as we paid in 2015. This is in line with the commitment we made to shareholders at the time we closed the Novartis transaction in early 2015 to maintain the dividend as we completed the integration and reshaping of the Group, despite the short-term pressures in free cash flow that the restructuring costs would create.
A fuller review of the financial results is set out below.
Simon Dingemans
Chief Financial Officer
18
Reporting framework
Presentation of Group results
Our Group financial review discusses the operating and financial performance of the Group, cash flows and our financial position and resources. We compare the results for each year primarily with the results of the preceding year.
Total results
Total reported results represent the Groups overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Groups operational performance. As a result, we also report core results, which is a non-IFRS measure.
Core results
Core results exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations; transaction-related accounting adjustments for significant acquisitions, and other items, including disposals of associates, products and businesses, and other operating income other than royalty income, together with the tax effects of all of these items.
These items are excluded from core results either because their impact can be significant or because their exclusion improves comparabilities and consistency of reporting with the majority of our peer companies. This definition of core results aligns the Groups results better with the majority of our peer companies and how they report earnings.
Core results reporting is utilised as one of the bases for internal performance reporting alongside total results, cash flow generation and a number of other metrics. Core results are presented and discussed in this Group financial review as we believe that core results are more representative of the performance of the Groups operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. For the same reasons, the results of our four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines and Consumer Healthcare are reported and measured on the same basis.
Reconciliations between total and core results, including detailed breakdowns of the key non-core items, are set out on pages 14 to 16, and are provided to shareholders to ensure full visibility and transparency as they assess the Groups performance.
We also use a number of other adjusted, non-IFRS, measures to report the performance of our business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and may not be directly comparable with similarly described measures used by other companies. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
Contingent consideration
GSK has recognised a significant liability for contingent consideration (£5,896 million at 31 December 2016 on a fair value discounted basis) of which £5,304 million represented the estimated present value of future amounts payable to Shionogi relating to ViiV Healthcare, discounted at 8.5%. The payments to Shionogi are calculated based on the sales performance over the life of the relevant products, principally dolutegravir, as described on page 58 of the GSK Annual Report 2016, which page is incorporated herein by reference. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with remeasurement charges reflected immediately in other operating income. These charges are adjusted from total results to present core results. GSK will make cash payments in the future to discharge this liability which will not be recorded in the profit and loss account and future earnings.
Changes to segment reporting
The completion of the Novartis transaction on 2 March 2015 changed the balance of the Group and GSK has changed its segment reporting to reflect this. With effect from 1 January 2016, GSK has reported results under four segments: Pharmaceuticals, which includes HIV, Pharmaceuticals R&D, Vaccines and Consumer Healthcare. In addition, a number of minor product reclassifications between the segments have been made. Comparative information has been restated accordingly.
Free cash flow
Free cash flow, which is a non-IFRS measure, is the net cash inflow from operating activities less capital expenditure, interest and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment and dividends received from joint ventures, associated undertakings and equity investments. It is used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. Free cash flow growth is calculated on a reported basis. A reconciliation of net cash inflow from operations to free cash flow is presented on page 71 of the GSK Annual Report 2016, which page is incorporated herein by reference.
Adjusted free cash flow
Adjusted free cash flow, which is a non-IFRS measure, excludes payments made to settle legal disputes. Such payments could fluctuate significantly between reporting periods and removing them allows the trends in free cash flow to be more easily identified by shareholders. A reconciliation of net cash inflow from operations to adjusted free cash flow is presented on page 71 of the GSK Annual Report 2016, which page is incorporated herein by reference.
Working capital conversion cycle
The working capital conversion cycle is calculated as the number of days sales outstanding plus days inventory outstanding, less days purchases outstanding.
CER growth
In order to illustrate underlying performance, it is our practice to discuss the results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% or AER% represents growth at actual exchange rates.
19
Group turnover
Group turnover for the year increased 17% AER and 6% CER to £27,889 million, with Pharmaceuticals up 14% AER 3% CER, Vaccines up 26% AER14% CER and Consumer Healthcare up 19% AER 9%CER, the growth in all three businesses still reflecting the impact of the Novartis transaction which completed on 2 March 2015. Sales of New Pharmaceutical and Vaccine products were £4,453 million, a Sterling increase of £2,465 million.
Group turnover by geographic region
Sales of New Pharmaceutical and Vaccine products were £4,453 million and represented approximately 22% of Pharmaceuticals and Vaccines turnover.
Pharmaceuticals
Pharmaceuticals turnover was £16,104 million, up 14% AER and 3% CER. HIV sales grew 53% AER 37% CER. The Respiratory portfolio returned to growth with sales up 13% AER 2% CER, continuing the transition globally to newer products. Respiratory sales grew 20% AER 7% CER in the US and 16% AER 3% CER in International, but declined 2% AER 10% CER in Europe. Sales of New Pharmaceutical products were £3,861 million, a Sterling increase of £2,148 million, which more than offset the Sterling decline in Seretide/Advair sales of £196 million. Sales of Established products increased 1% AER but declined 8% CER, with declines in all regions, but particularly International, reflecting the loss of exclusivity for Valtrex in Canada, the impact of market reforms and the continued reshaping of the business in China and the impact of biennial price revisions in Japan. The overall impact of pricing to net sales of Pharmaceuticals was around -1%.
US Pharmaceuticals turnover of £4,705 million grew 11% AER but declined 1% CER in 2016. This reflected a 20% AER 7% CER growth in the Respiratory portfolio, partly offset by the impact of generic competition to Avodart , down 58% AER 63% CER to £70 million, and Lovaza , down 54% AER 59% CER to £43 million. Relenza sales were also down 90% AER 91% CER to £7 million following a reallocation of government funding. Sales of new Respiratory products totalled £654 million and the growth of these products exceeded the decline in Advair . Advair sales fell 2% AER13% CER to £1,829 million, representing a 7% volume decline and a 6% negative impact of price. Ventolin sales were up 38% AER 23% CER to £421 million, benefiting from competitor supply constraints early in the year, while Flovent sales were flat AER but declined 11% CER to £378 million, reflecting pricing pressures in the ICS market.
20
Benlysta sales increased 33% AER 18% CER to £277 million with ongoing demand growth.
In Europe, Pharmaceuticals turnover increased 1% AER but declined 8% CER to £2,867 million. Respiratory sales declined 2% AER 10% CER to £1,383 million reflecting the ongoing transition to the new Respiratory portfolio and generic competition to Seretide which declined 18% AER 24% CER (16% volume decline and an 8% negative impact of price) to £835 million. This was partly offset by growth in the new Respiratory products, which recorded sales of £225 million. Established products sales were up 4% AER but down 4% CER to £513 million.
International Pharmaceuticals sales of £4,976 million were up 4% AER but down 5% CER. Sales in Emerging Markets grew 1% AER but declined 4% CER, impacted by the decline in the China business (down 4% AER 12% CER primarily as a result of the ongoing reshaping programme and broader Healthcare reforms including price reductions) but also by recent divestments in the International region, and the limitation of trading in Venezuela. In Japan, Pharmaceutical sales were up 17% AER but down 5% CER to £1,425 million, impacted by biennial price revisions on older products as well as supply interruptions to Avodart early in the year. Respiratory sales in Japan grew 27% AER 3% CER with strong growth of the new Respiratory products, up 100% AER 57% CER to £118 million, more than offsetting the decline in Adoair sales.
Respiratory
Respiratory sales in 2016 increased 13% AER 2% CER to £6,510 million, reflecting the continuing transition of the Respiratory portfolio to newer products. Growth in the new Respiratory products, which recorded combined sales of £1,052 million, including Relvar/Breo Ellipta sales of £620 million, more than offset the decline in Seretide/Advair . Flixotide/Flovent sales grew 2% AER but decreased 8% CER to £637 million and Ventolin sales grew 27% AER 15% CER to £785 million.
In the US, Respiratory sales increased 20% AER 7% CER to £3,306 million (14% volume growth and a 7% negative impact of price). The growth of new Respiratory products more than offset the 2% AER 13% CER decline in Advair (7% volume decline and a 6% negative impact of price). The new Ellipta products recorded combined sales of £583 million, including Breo Ellipta sales of £344 million, with Nucala , the treatment for severe asthma, reporting sales of £71 million. Established Respiratory assets included Ventolin , with sales up 38% AER 23% CER to £421 million, and Flovent , which was flat AER but declined 11% CER to £378 million. Ventolin sales benefited from competitor supply constraints early in the year, while Flovent continued to be impacted by ongoing pricing pressures in the ICS market.
European Respiratory sales were down 2% AER 10% CER to £1,383 million, with Seretide sales down 18% AER 24% CER to £835 million (16% volume decline and an 8% negative impact of price), reflecting continued competition from generics and the transition of the Respiratory portfolio to newer products. The new Respiratory products recorded combined sales of £225 million in 2016, including Relvar Ellipta sales of £140 million.
Respiratory sales in the International region increased 16% AER 3% CER to £1,821 million with Emerging Markets up 13% AER 7% CER and Japan up 27% AER 3% CER. In Emerging Markets, sales of Seretide were up 3% AER but down 3% CER at £476 million, while Ventolin grew 20% AER 13% CER to £219 million. In Japan, Adoair grew 9% AER but declined 12% CER.
Cardiovascular, metabolic and urology
Sales in the category were flat AER down 11% CER to £860 million. The Avodart franchise was down 3% AER 14% CER to £635 million, primarily due to a 58% AER 63% CER decline in the US following the launch of generic competition in Q4 2015. Sales of Eperzan/Tanzeum were £121 million, primarily in the US. Prolia was divested at the end of 2015 and therefore no sales were recorded in 2016, compared with £43 million in 2015.
Immuno-inflammation
Immuno-inflammation sales grew 29% AER 15% CER to £340 million. Sales of Benlysta were £306 million, up 33% AER 19% CER, with sales in the US of £277 million, up 33% CER 18% AER.
Other pharmaceuticals
Sales in other therapy areas decreased 6% AER 14% CER to £2,297 million. Dermatology sales declined 5% AER 12% CER to £393 million, adversely affected by supply constraints, while Augmentin sales grew 7% AER but were flat CER at £563 million. Sales of products for Rare diseases were up 14% AER but flat CER at £423 million, and included sales of Volibris , which were up 13% AER 1% CER to £172 million.
Established products
Established products turnover grew 1% AER but fell 8% CER to £2,541 million, with Valtrex sales down 28% AER 37% CER to £118 million driven by a decline in Canada, down 91% AER 91% CER to £5 million, following the loss of exclusivity. Zeffix sales were down 17% AER 24% CER to £111 million and Lovaza sales in the US fell 54% AER 59% CER to £43 million.
HIV
HIV sales increased 53% AER 37% CER to £3,556 million, with the US up 64% AER 46% CER, Europe up 42% AER 29% CER and International up 34% AER 21% CER. The growth in all three regions was driven by Triumeq and Tivicay .
Triumeq and Tivicay sales were £1,735 million and £953 million, respectively. Epzicom/Kivexa sales declined 19% AER 27% CER to £568 million, and Selzentry sales grew 1% AER but declined 9% CER to £125 million. There were also continued declines in the mature portfolio, mainly driven by generic competition to both Combivir , down 32% AER 38% CER to £23 million, and Lexiva , down 22% AER 26% CER to £51 million.
Vaccines
Vaccines sales grew 26% AER and 14% CER to £4,592 million. Growth benefited from the strong performance of Bexsero across all regions, higher demand for Fluarix/FluLaval in the US and International and a tender award for Menveo in International. Further growth was driven by Synflorix due to market expansion in International and a tender award in Europe. Boostrix sales benefited from higher demand in Europe and International. Growth was partly offset by Infanrix/Pediarix due to supply constraints in International, as well as unfavourable CDC stockpile movements for a number of products across the portfolio.
In the US, sales grew by 27% AER 13% CER to £1,599 million. Growth was driven by market and share growth for Bexsero , Menveo and Boostrix , improved supply and higher demand for Fluarix/FluLaval and competitor supply issues that benefited Infanrix/Pediarix . This growth was partly offset by adverse stockpile movements on Menveo and an unfavourable comparison with the benefit to 2015 from CDC stockpile movements on Infanrix/Pediarix , Boostrix and Rotarix .
21
In Europe, sales grew 30% AER 18% CER to £1,423 million. Growth was driven primarily by Bexsero sales in private market channels in several countries including Spain and Italy, and in the UK following its inclusion in the NHS immunisation programme. Boostrix sales benefited from higher demand and competitor supply issues. Sales increased in Germany driven by improved supply of Hepatitis vaccines and higher demand for Encepur and Rabipur . Sales growth was also helped by a tender award for Synflorix in Poland but Infanrix/Pediarix sales were adversely impacted, mainly in Germany, France and Italy, by a competitors return to the market during the year. Growth was also partly offset by the unfavourable comparison with 2015 when Menveo sales in the UK benefited from a catch-up tender win.
In International, sales grew 21% AER 10% CER to £1,570 million. Growth was driven primarily by Synflorix , due to market expansion in Nigeria, higher demand in Africa and private market demand in Asia. The growth in Menveo sales was driven by a tender award in Argentina and Rotarix sales benefited from higher demand in Brazil and Japan. Further growth in the region was driven by Brazil due to strong demand for Bexsero , Menjugate , and Boostrix . Fluarix/FluLaval sales grew due to higher uptake in Australia. Growth in the region was partly offset by lower sales of Infanrix/Pediarix , due to supply constraints, and lower Hepatitis vaccines sales, due to wholesaler destocking in China following the introduction of new private market distribution regulations.
Consumer Healthcare
The Consumer Healthcare business represents the Consumer Healthcare Joint Venture with Novartis together with the GSK Consumer Healthcare listed businesses in India and Nigeria, which are excluded from the Joint Venture. Results do not include the trading performance of the Nigeria beverages business in Q4 2016 following its sale on 30 September 2016.
Sales grew 19% AER and 9% CER to £7,193 million, benefiting significantly from the inclusion of sales of the former Novartis products for the first time for the first two months of the period. Strong performances were delivered by the power brands within the Oral health and Wellness categories and across all regions. Sales from innovation within the last three years represented approximately 13% of sales, with a particular contribution for Flonase , which was switched to OTC in Q1 2015. Other notable launches in 2016 included Sensodyne True White and Excedrin Gel-tabs in the US.
US sales grew 23% AER 9% CER to £1,761 million. Sensodyne delivered double-digit growth, benefiting from the launch in 2015 of Repair and Protect and the launch of True White in the first quarter of 2016, together with distribution gains for Pronamel and the newly launched Pronamel Strong & Bright variant. Flonase OTC delivered high single-digit growth, with a strong performance in the first half of 2016, driven by new formats, but impacted in the second half by increasing private label competition. Excedrin grew in double-digits, driven by the Gel-tab launch and new digital campaigns, and Tums also delivered double-digit growth, benefiting from supply improvements. This was partly offset by a decline in Aquafresh sales due to increased competitive pressures and a re-alignment of investment behind power brands.
Sales in Europe grew 22% AER 12% CER to £2,191 million, driven primarily by performances within the Wellness and Oral health categories. Voltaren continued to deliver double-digit growth at both AER and CER, driven largely by the 12-hour variant and with strong performances across all key markets. Oral health sales grew in double digits AER and mid single-digits CER, with strong growth in Sensodyne and the Gum health portfolio, as well as 10% AER growth but a flat CER performance in Aquafresh , due to increased competitive pressures. At a market level, sales grew well in Italy, Scandinavia, the UK and Germany, partly offset by a decline in sales in CIS due to the impact on consumer spending of the weaker economic environment.
International sales of £3,241 million grew 15% AER 8% CER. Growth was delivered in many priority markets, primarily through the power brands across the Oral health and Wellness categories. This was partly offset by the impact of the sale of the Nigeria beverages business at the end of Q3 2016 as well as the effect of the restructuring of activity in Venezuela at the end of 2015. Growth of the International region was also affected by the combined impact on the Indian business of the demonetisation implemented in November and a more general slowing of the health food drink category which impacted the performance of the Nutrition category and Horlicks in particular. Elsewhere, strong growth was delivered in the Middle East, Latin America and China. The growth in the Middle East was driven by strong momentum across the power brands, particularly Otrivin , Panadol and Sensodyne . Double-digit performances were delivered in Brazil and Argentina as a result of better pricing and new product launches within Oral health. China delivered double-digit sales growth at AER and high single-digit growth at CER with contributions across the portfolio and with Sensodyne and Voltaren in particular benefiting from e-commerce and retail distribution expansion.
Total results
Cost of sales
Cost of sales as a percentage of turnover was 33.3%, down 3.7 percentage points in Sterling terms and 2.4 percentage points in CER terms compared with 2015. This reflected improved product mix, particularly the impact of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare and lower restructuring costs as well as an increased contribution from integration and restructuring savings in all three businesses.
These benefits were partly offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, as well as continued investments in the supply chain.
Selling, general and administration
SG&A costs were 33.6% of turnover, 5.0 percentage points AER lower than in 2015 and 4.3 percentage points lower on a CER basis. This primarily reflected lower restructuring costs as well as the benefits from the Pharmaceuticals restructuring programme and integration benefits in Vaccines and Consumer Healthcare, partly offset by investment in promotional product support, particularly for new launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
Research and development
R&D expenditure was £3,628 million (13% of turnover), 1.9% AER higher than in 2015 and 5.6% lower on a CER basis. This reflected the benefit from cost reduction programmes in Pharmaceuticals, Consumer Healthcare and Vaccines R&D and lower restructuring costs, partly offset by increased investment, particularly in Pharmaceuticals, reflecting investments in a number of new programmes and the costs of the acquired BMS HIV programme.
The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of phase IIa trials) and Development work (from phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate. Phase IV costs and other administrative expenses are reported in SG&A and are not included in the table below.
22
2016
£m |
2015
£m |
Growth
£% |
Growth
CER% |
|||||||||||||||
Discovery |
848 | 744 | 14 | 6 | ||||||||||||||
Development |
1,275 | 1,136 | 12 | 4 | ||||||||||||||
Facilities and central support functions |
505 | 433 | 17 | 9 | ||||||||||||||
Total Pharmaceuticals |
2,628 | 2,313 | 14 | 5 | ||||||||||||||
Vaccines R&D |
597 | 525 | 14 | 2 | ||||||||||||||
Consumer Healthcare R&D |
243 | 258 | (6) | (12) | ||||||||||||||
Research and development |
3,468 | 3,096 | 12 | 3 | ||||||||||||||
Items reconciling total R&D to core R&D |
160 | 464 | ||||||||||||||||
Research and development
|
|
3,628
|
|
|
3,560
|
|
|
2
|
|
(6)
|
The most significant factor driving Total Pharmaceuticals R&D growth was progression of the ViiV Healthcare HIV portfolio, including programmes acquired from BMS earlier in the year. The increase in Discovery was also driven by progression of the early stage Oncology portfolio and early investment in Bioelectronics. Development growth was primarily due to the start of new Phase III programmes, including HIV, respiratory and anaemia, partly offset by the benefit from R&D cost reduction programmes. The increase in facilities and central support functions costs partly reflected investment in new data warehousing and analytics to transform the way data is harnessed across R&D together with a re-allocation of central support costs.
Other operating income/(expense)
Net other operating expense of £3,405 million (2015 - £7,715 million income) primarily reflected further accounting charges related to remeasurement of the contingent consideration liability related to the former Shionogi-ViiV Healthcare joint venture, along with remeasurement of the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities first recognised in Q1 2016 for the Pfizer and Shionogi put options and preferential dividends in ViiV Healthcare. These remeasurements were driven by the unwinding of the discount applied to these future liabilities as well as updated trading forecasts and changes in the exchange rate assumptions used, updating them to period-end rates, which have increased the estimated total sterling values of GSKs Consumer Healthcare and ViiV Healthcare businesses.
These charges were partly offset by milestone income of £152 million in relation to the disposal of ofatumumab that was completed in 2015 and gains on a number of other divestments made during the year, including the remaining shares held by the Group in Aspen Pharmacare. The net other operating income of £7,715 million in 2015 included the profit on the disposal of the Oncology business to Novartis of £9,228 million.
Operating profit
Total operating profit was £2,598 million in 2016 compared with £10,322 million in 2015 which benefited from the net disposal gains recorded following the disposal of the Oncology business as part of the Novartis transaction.
Operating profit benefited from improved operating leverage driven by sales growth and a more favourable mix across all three businesses, together with lower levels of restructuring costs compared with 2015. However, there were further accounting charges related to remeasurement of the contingent consideration liability related to the former Shionogi-ViiV Healthcare joint venture, along with remeasurement of the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities first recognised in Q1 2016 for the Pfizer and Shionogi put options and preferential dividends in ViiV Healthcare.
Contingent consideration cash payments are made to Shionogi and other companies, which reduce the balance sheet liability and hence are not recorded in the income statement. Total contingent consideration cash payments in 2016 amounted to £431 million (2015 £459 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £417 million (2015 £159 million). In 2015 a milestone payment of £300 million was made to Novartis in relation to the Vaccines acquisition.
Net finance costs
23
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £5 million (2015 £14 million).
Profit before taxation
Taking account of net finance costs and the share of profit of associates, profit before taxation was £1,939 million compared with £10,526 million in 2015.
Taxation
|
2016
|
|
|
2015
|
|
|||
UK current year charge | 241 | 156 | ||||||
Rest of world current year charge | 1,326 | 2,924 | ||||||
Charge in respect of prior periods
|
|
(149
|
)
|
|
(508
|
)
|
||
Total current taxation | 1,418 | 2,572 | ||||||
Total deferred taxation
|
|
(541
|
)
|
|
(418
|
)
|
||
Taxation on total profits
|
|
877
|
|
|
2,154
|
|
A tax charge of £877 million on total profit represented an effective tax rate of 45.2% (2015 20.5%) and reflected the non-deductibility of certain items included within the transaction-related adjustments, particularly the remeasurements of the put options related to ViiV Healthcare and the Consumer Healthcare Joint Venture.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £150 million (2015 (£50) million), including the non-controlling interest allocations of Consumer Healthcare profits of £203 million (2015 £14 million) and the allocation of ViiV Healthcare losses of £83 million (2015 £143 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the year. The allocation also reflected the impact on the contribution of some of the Groups other entities with non-controlling interests primarily as a result of net losses in those entities arising from exchange.
Earnings per share
The total earnings per share was 18.8p, compared with 174.3p in 2015. The decrease primarily reflected the benefit in 2015 from the disposal of the Oncology business to Novartis that closed in March 2015, together with the impact in 2016 of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the Sterling value of the Groups HIV and Consumer Healthcare businesses, partly offset by improved performance and reduced restructuring costs.
Dividends
The Board declared four interim dividends resulting in a total dividend for the year of 80 pence, in line with the dividend declared in 2015.
Items adjusted from total results to present core results
Total results are adjusted for a number of items in order to present core results, as explained above. The items are discussed below.
Intangible asset amortisation and impairment
Intangible asset amortisation was £588 million, compared with £563 million in 2015. Intangible asset impairments of £20 million (2015 £206 million) included impairments of R&D and commercial assets. Both of these charges were non-cash items.
Major restructuring and integration
Major restructuring and integration charges of £970 million have been incurred (2015 £1,891 million), reflecting the phasing of planned restructuring projects following the completion of the Novartis transaction in 2015, as well as reduced charges for Pharmaceuticals restructuring projects as this programme enters its later stages. Cash payments made were £1,077 million (2015 £1,131 million) including the settlement of certain charges accrued in previous quarters.
Charges for the combined restructuring and integration programme to date are £3.7 billion, with cash charges of £2.9 billion and cash payments to date of £2.7 billion. The anticipated total cash charges of the combined programme were expected to be up to £3.65 billion and the non-cash charges up to £1.35 billion. The programme delivered incremental cost savings of £1.4 billion in 2016, including a currency benefit of £0.2 billion, and has now delivered approximately £3.0 billion of annual savings (including the currency benefit). The programme remains on track to deliver the originally targeted total annual savings during 2017. An estimated £300 million of additional cash charges are expected in 2017 along with some residual non-cash charges.
Legal charges
Legal charges of £162 million (2015 £221 million) included the benefit of the settlement of existing matters as well as provisions for ongoing litigation. Cash payments were £233 million compared with £420 million in 2015.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of £3,919 million (2015 £2,238 million). This primarily reflected accounting charges for the remeasurement of the liability and the unwinding of the discounting effects on the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis, the remeasurement and the unwinding of the discounting effects on the contingent consideration relating to the acquisition of the former Shionogi-ViiV Healthcare Joint Venture and the value attributable to the put options and preferential dividends payable to Pfizer and Shionogi.
24
The aggregate impact of unwinding the discount on these future and potential liabilities was £905 million (2015 £757 million), including £464 million on the Consumer Healthcare Joint Venture put option, £334 million on contingent consideration on the former Shionogi-ViiV Healthcare Joint Venture, and £58 million on the ViiV Healthcare put options and preference dividends. The remaining charge of £3,014 million was driven primarily by changes in exchange rate assumptions as well as updates to trading forecasts.
During 2016, GSK and Shionogi made several amendments to the Shareholders Agreement for ViiV Healthcare regarding the Shionogi put option and the GSK call option. The estimated liability for Shionogis put option was initially recognised on GSKs balance sheet at the end of Q1 2016 and de-recognised in December 2016, directly to equity, when it stood at £1,244 million.
Divestments and other items
Divestments and other items included equity investment disposals, including the disposal of the remaining Aspen Pharmacare investment, dividends and impairments, milestone income on ofatumumab, a number of other asset disposals, and certain other adjusting items. Divestments and other items in 2015 included the profit on the disposal of the Oncology business to Novartis.
Core results
We use core results, which is a non-IFRS measure, among other metrics including total results and cash flow generation, to manage the performance of the Group. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. The definition of core results is set out above and reconciliations of total results to core results are presented on pages 14 to 16.
Cost of sales
|
2016
|
|
|
2015
|
|
|||||||||||||||||||
|
£m
|
|
|
% of
turnover
|
|
|
£m
|
|
|
% of
turnover
|
|
|
Growth
£%
|
|
|
Growth
CER%
|
|
|||||||
Cost of sales
|
|
(8,351
|
)
|
|
(29.9
|
)
|
|
(7,520
|
)
|
|
(31.4
|
)
|
|
11
|
|
|
5
|
|
Cost of sales as a percentage of turnover was 29.9%, down 1.5 percentage points in Sterling terms and 0.3 percentage points in CER terms compared with 2015. This reflected improved product mix, particularly the impact of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare, as well as an increased contribution from integration and restructuring savings in all three businesses, partly offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, as well as continued investments in the supply chain.
Selling, general and administration
|
2016
|
|
|
2015
|
|
|||||||||||||||||||
|
£m
|
|
|
% of
turnover
|
|
|
£m
|
|
|
% of
turnover
|
|
|
Growth
£%
|
|
|
Growth
CER%
|
|
|||||||
Selling, general and administration
|
|
(8,697
|
)
|
|
(31.2
|
)
|
|
(7,907
|
)
|
|
(33.1
|
)
|
|
10
|
|
|
2
|
|
SG&A costs were 31.2% of turnover, 1.9 percentage points lower in Sterling terms than in 2015 and 1.2 percentage points lower on a CER basis. This primarily reflected tight control of ongoing costs as well as the benefits from the Pharmaceuticals restructuring programme and integration benefits in Vaccines and Consumer Healthcare, partly offset by investment in promotional product support, particularly for new launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
25
Research and development
2016
|
2015
|
|||||||||||||||||||||||
|
£m
|
|
|
% of
turnover
|
|
|
£m
|
|
|
% of
turnover
|
|
|
Growth
£%
|
|
|
Growth
CER%
|
|
|||||||
Research and development
|
|
(3,468)
|
|
|
(12.4)
|
|
|
(3,096
|
)
|
|
(12.9
|
)
|
|
12
|
|
|
3
|
|
R&D expenditure was £3,468 million (12.4% of turnover), 12% AER higher than in 2015 and 3% higher on a CER basis, reflecting increased investment, particularly in Total Pharmaceuticals. The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of phase IIa trials) and Development work (from phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate. Phase IV costs and other administrative expenses are reported in SG&A and are not included in the table below.
2016 | 2015 | |||||||||||||||||
£m | £m |
|
Growth
£% |
|
|
Growth
CER% |
|
|||||||||||
Discovery |
848 | 744 | 14 | 6 | ||||||||||||||
Development |
1,275 | 1,136 | 12 | 4 | ||||||||||||||
Facilities and central support functions
|
|
505
|
|
|
433
|
|
|
17
|
|
|
9
|
|
||||||
Total Pharmaceuticals |
2,628 | 2,313 | 14 | 5 | ||||||||||||||
Vaccines R&D |
597 | 525 | 14 | 2 | ||||||||||||||
Consumer Healthcare R&D
|
|
243
|
|
|
258
|
|
|
(6
|
)
|
|
(12)
|
|
||||||
Research and development
|
|
3,468
|
|
|
3,096
|
|
|
12
|
|
|
3
|
|
The most significant factor driving Total Pharmaceuticals R&D growth was progression of the ViiV Healthcare HIV portfolio, including programmes acquired from BMS earlier in the year. The increase in Discovery was also driven by progression of the early stage Oncology portfolio and early investment in Bioelectronics. Development growth was primarily due to the start of new Phase III programmes, including HIV, respiratory and anaemia, partly offset by the benefit from R&D cost reduction programmes. The increase in facilities and central support functions costs partly reflected investment in new data warehousing and analytics to transform the way data is harnessed across R&D together with a re-allocation of central support costs.
Royalty income
Royalty income was £398 million (2015 £329 million) primarily reflecting increased royalty income from Gardasil sales as well as the benefit of a catch-up adjustment to prior-year estimates.
Core operating profit
Core operating profit was £7,771 million, up 36% at actual rates and 14% higher in CER terms than in 2015 on a turnover increase of 17% AER 6% CER. The core operating margin of 27.9% was 3.9 percentage points higher in Sterling terms than in 2015 and 1.9 percentage points higher on a CER basis.
This reflected improved operating leverage driven by sales growth and a more favourable mix across all three businesses as well as delivery of restructuring and integration benefits and tight control of ongoing costs, partly offset by continued price pressure, particularly in Respiratory, and supply chain and R&D investments.
Contingent consideration cash payments are made to Shionogi and other companies, which reduce the balance sheet liability and hence are not recorded in the income statement. Total contingent consideration cash payments in 2016 amounted to £431 million (2015 £459 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £417 million (2015 £159 million). In 2015 a milestone payment of £300 million was made to Novartis.
Core operating profit by business
|
2016
|
|
|
2015
(restated)
|
|
|||||||||||||||||||
|
£m
|
|
|
Margin
%
|
|
|
£m
|
|
|
Margin
%
|
|
|
Growth
£%
|
|
|
Growth
CER%
|
|
|||||||
Pharmaceuticals |
7,979 | 49.5 | 6,466 | 45.7 | 23 | 6 | ||||||||||||||||||
Pharmaceuticals R&D |
(2,488) | (2,168) | 15 | 6 | ||||||||||||||||||||
Pharmaceuticals |
5,491 | 34.1 | 4,298 | 30.4 | 28 | 6 | ||||||||||||||||||
Vaccines |
1,454 | 31.7 | 964 | 26.4 | 51 | 38 | ||||||||||||||||||
Consumer Healthcare
|
|
1,116
|
|
|
15.5
|
|
|
684
|
|
|
11.3
|
|
|
63
|
|
|
42
|
|
||||||
8,061 | 28.9 | 5,946 | 24.9 | 36 | 16 | |||||||||||||||||||
Corporate & other unallocated costs
|
|
(290)
|
|
|
(217)
|
|
|
34
|
|
|
58
|
|
||||||||||||
Core operating profit
|
|
7,771
|
|
|
27.9
|
|
|
5,729
|
|
|
23.9
|
|
|
36
|
|
|
14
|
|
26
Pharmaceuticals
Pharmaceuticals operating profit was £5,491 million, 28% AER higher and 6% higher in CER terms than in 2015 on a turnover increase of 14% AER 3% CER. The operating margin of 34.1% was 3.7 percentage points higher in Sterling terms than in 2015 and 1.1 percentage points higher on a CER basis. This reflected a more favourable product mix, primarily driven by the growth in HIV sales, and the cost reduction benefit from the Pharmaceuticals restructuring programme, partly offset by increased investment in new product support, increased investment in R&D in a number of new programmes, the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.
Vaccines
Vaccines operating profit was £1,454 million, 51% AER higher and 38% higher than in 2015 in CER terms on a turnover increase of 26% AER 14% CER. The operating profit margin of 31.7% was 5.3 percentage points higher in Sterling terms than in 2015 and 5.6 percentage points higher on a CER basis. This reflected improved product mix and enhanced operating leverage from strong sales growth, together with restructuring and integration benefits in cost of sales, SG&A and R&D, and higher royalty income. These were partly offset by SG&A investments to support business growth, a number of inventory adjustments and additional supply chain investments.
Consumer Healthcare
Consumer Healthcare operating profit was £1,116 million, 63% AER higher and 42% higher than in 2015 in CER terms on a turnover increase of 19% AER 9% CER. The operating margin of 15.5% was 4.2 percentage points higher in Sterling terms than in 2015 and 3.4 percentage points higher on a CER basis. This reflected improvements in gross margin, reflecting mix benefits from the power brand strategy and better pricing, as well as a strong contribution from integration synergies benefiting both SG&A and R&D as a percentage of sales.
Net finance costs
Net core finance expense was £652 million compared with £636 million in 2015, reflecting the translation effect of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
Share of after tax profits/(losses) and joint ventures
The share of profits of associates and joint ventures was £5 million (2015 £2 million loss).
Core profit before taxation
|
2016
|
|
|
2015
|
|
|||||||||||||||||||
|
£m
|
|
|
% of
turnover
|
|
|
£m
|
|
|
% of
turnover
|
|
|
Growth
£%
|
|
|
Growth
CER%
|
|
|||||||
Core profit before tax |
|
7,124
|
|
|
25.5
|
|
|
5,091
|
|
|
21.3
|
|
|
40
|
|
|
16
|
|
Taxation
Tax on core profit amounted to £1,509 million and represented an effective core tax rate of 21.2% (2015 19.5%). The increase in the effective rate primarily reflected the Groups changing earnings mix. See Taxation on page 178 for further details.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £637 million (2015 £440 million), including the non-controlling interest allocations of Consumer Healthcare profits of £288 million (2015 £137 million) and the allocation of ViiV Healthcare profits, which increased to £324 million (2015 £224 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the year. The allocation also reflected the impact on the contribution of some of the Groups other entities with non-controlling interests primarily as a result of net losses in those entities arising from exchange.
Core earnings per share
Core EPS of 102.4p was up 35% at actual rates and 12% in CER terms compared with a 36% AER 14% CER increase in operating profit, primarily reflecting the increased tax rate compared with 2015 and the greater contribution to growth from businesses in which there are significant non-controlling interests.
27
Financial review 2015
Presentation of Group results
Our Group financial review discusses the operating and financial performance of the Group, cash flows and our financial position and resources. We compare the results for each year primarily with the results of the preceding year.
Total results
Total reported results represent the Groups overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Groups operational performance. As a result, we also report core results, which is a non-IFRS measure.
Core results
Core results exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations; transaction-related accounting adjustments for significant acquisitions, and other items, including disposals of associates, products and businesses, and other operating income other than royalty income, together with the tax effects of all of these items.
These items are excluded from core results either because their impact can be significant or because their exclusion improves comparabilities and consistency of reporting with the majority of our peer companies. This definition of core results aligns the Groups results better with the majority of our peer companies and how they report earnings.
Core results reporting is utilised as one of the bases for internal performance reporting alongside total results, cash flow generation and a number of other metrics. Core results are presented and discussed in this Group financial review as we believe that core results are more representative of the performance of the Groups operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. For the same reasons, the results of our four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines and Consumer Healthcare are reported and measured on the same basis.
Reconciliations between total and core results, including detailed breakdowns of the key non-core items, are set out on pages 14 to 16, and are provided to shareholders to ensure full visibility and transparency as they assess the Groups performance.
We also use a number of other adjusted, non-IFRS, measures to report the performance of our business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and may not be directly comparable with similarly described measures used by other companies. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
CER growth
In order to illustrate underlying performance, it is our practice to discuss the results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% or AER% represents growth at actual exchange rates.
Segment reporting
The Novartis transaction completed on 2 March 2015 and so our reported year to date results include ten months turnover of the former Novartis Vaccines and Consumer Healthcare products and also exclude sales of the former GSK Oncology business from 2 March. Following the completion of the transaction with Novartis, we have reorganised the Group to reflect the greater balance between the Pharmaceuticals, Vaccines and Consumer Healthcare businesses and responsibilities for some parts of these respective businesses have been realigned. We are reporting these three businesses separately with corporate costs reallocated to each accordingly so that the profitability of each business is reflected more accurately. We have restated our segment information consistent with this realignment.
Group turnover
2015 £m
|
2014 £m
|
Growth £%
|
Growth CER%
|
|||||||||||||
Pharmaceuticals |
14,157 | 15,438 | (8 | ) | (7 | ) | ||||||||||
Vaccines |
3,656 | 3,159 | 16 | 19 | ||||||||||||
Consumer Healthcare |
6,038 | 4,322 | 40 | 44 | ||||||||||||
Segment turnover |
23,851 | 22,919 | 4 | 6 | ||||||||||||
Corporate and other unallocated turnover |
72 | 87 | (17 | ) | (9 | ) | ||||||||||
Group turnover |
23,923 | 23,006 | 4 | 6 |
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
Group turnover for 2015 increased 4% AER 6% CER to £23,923 million, with Pharmaceuticals down 8% AER 7% CER, Vaccines up 16% AER 19% CER and Consumer Healthcare up 40% AER 44% CER, reflecting the impact of the Novartis transaction. Sales of New Pharmaceutical and Vaccine products were £1,988 million in the year.
The Corporate and unallocated turnover of £72 million represented sales of several Vaccines and Consumer Healthcare products, which were being held for sale in a number of markets. We were required to dispose of these products in specific markets in order to meet the requirements of the anti-trust approvals for the Novartis transaction. The disposals were completed in August and September 2015.
28
Group turnover by geographic region
2015 £m
|
2014
|
Growth £%
|
Growth CER%
|
|||||||||||||
US |
8,222 | 7,409 | 11 | 3 | ||||||||||||
Europe |
6,450 | 6,292 | 3 | 11 | ||||||||||||
International |
9,251 | 9,305 | (1 | ) | 5 | |||||||||||
|
23,923 |
|
23,006 | 4 | 6 |
Group turnover outside of the US and Europe represented 39% of total Group turnover in 2015 (2014: 40%).
Pharmaceuticals
2015
|
2014
|
Growth £%
|
Growth CER%
|
|||||||||||||
Respiratory |
5,741 | 6,168 | (7 | ) | (7 | ) | ||||||||||
Cardiovascular, metabolic and urology |
858 | 965 | (11 | ) | (9 | ) | ||||||||||
Immuno-inflammation |
263 | 214 | 23 | 16 | ||||||||||||
Other pharmaceuticals |
2,445 | 3,582 | (32 | ) | (29 | ) | ||||||||||
Established Products |
2,528 | 3,011 | (16 | ) | (15 | ) | ||||||||||
HIV |
2,322 | 1,498 | 55 | 54 | ||||||||||||
|
14,157 |
|
15,438 | (8 | ) | (7 | ) |
Pharmaceuticals turnover was £14,157 million, down 8% AER 7% CER, primarily reflecting the disposal of the Oncology business. There was also a 7% decline (AER and CER) in Respiratory sales and a 16% AER 15% CER decline in sales of Established Products. Sales of New Pharmaceutical products were £1,713 million, an increase of £1,284 million.
In the US, Pharmaceuticals reported turnover of £5,534 million, a decline of 1% AER 8% CER in the year, primarily reflecting the Oncology disposal. In addition, the decline reflected a 3% AER 10% CER fall in Respiratory sales and a 25% AER 30% CER fall in Established Products sales. Within Respiratory, Advair sales were down 6% AER13% CER to £1,865 million (4% volume decline and a 9% negative impact of price and mix) and Flovent sales down 13% AER 19% CER to £379 million. These declines were partly offset by sales of the new Respiratory products, Breo Ellipta , Anoro Ellipta , Incruse Ellipta and Arnuity Ellipta , with combined sales of £177 million in the year.
The primary driver of the decline in Established Products was Lovaza , which was down 61% AER 64% CER to £93 million following the launch of generic competition in April 2014. Avodart declined 36% AER 41% CER to £166 million reflecting the launch of generic competition in October 2015. Relenza sales more than doubled to £69 million, partly reflecting US CDC orders, while Benlysta continued its strong growth with sales of £209 million, up 34% AER 24% CER.
In Europe, Pharmaceuticals turnover declined 15% AER 8% CER to £3,556 million, primarily reflecting the impact of the Oncology disposal. In addition, Respiratory sales declined 15% AER 9% CER to £1,415 million with a 24% AER 18% CER decline in Seretide due to increased generic competition and the ongoing transition to the new Ellipta products, which reported total sales of £99 million in the year. Established Products sales were down 18% AER 11% CER to £493 million, reflecting increased generic competition and some capacity constraints to supply of a number of products.
International Pharmaceuticals sales of £5,067 million were down 10% AER 6% CER. Sales in Emerging Markets of £2,963 million declined 12% AER 9% CER. Within Emerging Markets, China was down 12% AER 18% CER, with Respiratory up 8% AER but flat CER and Established Products down 16% AER 21% CER, primarily reflecting significantly increased pricing pressures and the ongoing reshaping of the business, including a number of product disposals. In Japan, Pharmaceutical sales were down 10% AER 5% CER to £1,213 million, primarily reflecting the Oncology disposal. Respiratory sales were flat at AER up 5% CER, primarily driven by Relvar Ellipta , partly offset by lower sales of Relenza , reflecting a weaker and earlier flu season than in 2014, and continued competitive pressures to a number of Established Products.
Respiratory
Respiratory sales in the year declined 7% (AER and CER) to £5,741 million. Seretide /Advair sales were down 13% (AER and CER) to £3,681 million, Flixotide /Flovent sales decreased 11% AER 12% CER to £623 million and Ventolin sales fell 9% AER 7% CER to £620 million. The combined total of all Ellipta product sales was £353 million.
In the US, Respiratory sales declined 3% AER 10% CER to £2,750 million in the year (4% volume growth and a 14% negative impact of price and mix). Sales of Advair were £1,865 million, down 6% AER 13% CER (4% volume decline
29
and a 9% negative impact of price and mix, including the benefit of positive adjustments to payer rebates provisions in the fourth quarter). Flovent sales were down 13% AER19% CER to £379 million and Ventolin sales fell 8% AER 15% CER to £304 million primarily as a result of net negative movements in payer rebates provisions. The new Ellipta products recorded sales of £177 million in the year.
European Respiratory sales were down 15% AER 9% CER to £1,415 million, with Seretide sales down 24% AER 18% CER to £1,014 million (11% volume decline and a 7% negative impact of price and mix), reflecting the expected pressures of increased competition from generics and the transition of the Respiratory portfolio to newer products. Relvar Ellipta recorded sales of £80 million in the year, while Anoro Ellipta recorded sales of £16 million.
Respiratory sales in the International region were down 5% AER but flat CER at £1,576 million with Emerging Markets down 7% AER 1% CER and Japan flat AER but up 5% CER. In Japan, sales of Relvar Ellipta of £56 million, together with strong Avamys and Xyzal sales growth, more than offset an 18% AER 13% CER decline in Adoair sales.
Cardiovascular, metabolic and urology
Sales in the category declined 11% AER 9% CER to £858 million in the year. The Avodart franchise fell 18% AER 15% CER to £657 million, reflecting the patent expiry in the US in October 2015. Sales of Prolia were up 2% AER 12% CER to £43 million. In December 2015, Amgen re-acquired the rights to Prolia from GSK.
Immuno-inflammation
Immuno-inflammation sales grew 23% AER 16% CER to £263 million. Benlysta sales in the year were £230 million, up 33% AER 25% CER. In the US, Benlysta sales were £209 million, up 47% AER 24% CER.
Other pharmaceuticals
Sales in other therapy areas fell to £2,445 million in the year. Augmentin sales were down 8% AER 2% CER at £528 million and Dermatology sales declined 12% AER 9% CER to £412 million, in part adversely affected by supply constraints. Relenza sales were up 27% AER 22% CER to £109 million driven by US CDC orders.
Sales of products for Rare diseases declined 11% AER 6% CER to £371 million, primarily as a result of generic competition to Mepron in the US.
Sales of oncology products were £255 million in the year (2014 £1,202 million) following the disposal of the Oncology business to Novartis on 2 March 2015.
Established Products
Established Products turnover fell 16% AER15% CER to £2,528 million in the year. Sales in the US were down 25% AER 30% CER to £647 million, primarily reflecting a 61% AER 64% CER fall in sales of Lovaza to £93 million.
Europe was down 18% AER 11% CER to £493 million, reflecting increased generic competition to a number of products and some supply constraints. Seroxat sales fell 19% AER 12% CER to £35 million.
International was down 10% AER 8% CER to £1,388 million, primarily reflecting lower sales of Seroxat/Paxil , down 14% AER 10% CER to £143 million, due to generic competition in Japan, and of Zeffix , down 19% AER 23% CER to £125 million. This was partly offset by increased Valtrex sales, up 21% AER 30% CER to £121 million, following the regaining of exclusivity in Canada from late 2014 until October 2015. Sales in China fell 16% AER 21% to £249 million, primarily reflecting significantly increased pricing pressures, together with supply constraints on Zeffix .
HIV
Worldwide HIV sales increased 55% AER 54% CER to £2,322 million. The growth in all three regions was driven primarily by the strong performances of both Triumeq and Tivicay , with sales of £730 million and £588 million respectively in the year.
Epzicom /Kivexa sales declined 9% AER 7% CER to £698 million and Selzentry declined 9% AER 8% CER to £124 million. Combivir and Lexiva sales fell 42% (AER and CER) and 25% (AER and CER), respectively.
Vaccines
2015
|
2014 £m
|
Growth £%
|
Growth CER%
|
|||||||||||||
Bexsero |
115 | | | | ||||||||||||
Infanrix, Pediarix |
733 | 828 | (11 | ) | (9 | ) | ||||||||||
Boostrix |
358 | 317 | 13 | 12 | ||||||||||||
Fluarix, FluLaval |
268 | 215 | 25 | 21 | ||||||||||||
Hepatitis |
540 | 558 | (3 | ) | (4 | ) | ||||||||||
Menveo |
160 | | | | ||||||||||||
Rotarix |
417 | 376 | 11 | 14 | ||||||||||||
Synflorix |
381 | 398 | (4 | ) | 5 | |||||||||||
Other |
684 | 467 | 46 | 57 | ||||||||||||
|
3,656 |
|
3,159 | 16 | 19 |
30
Vaccines sales grew 16% AER 19% CER to £3,656 million with the US up 34% AER 24% CER, Europe up 14% AER 23% CER and International up 4% AER 12% CER. The business benefited from sales of the newly acquired products, primarily the Meningitis portfolio, in Europe and the US. Growth also reflected strong Rotarix , Fluarix /FluLaval , and Boostrix sales in the US. The growth was partly offset by a decline in Infanrix /Pediarix sales due to the return of a competitor to the market in the US, increased competitor activity in Europe and supply constraints in International. Hepatitis A vaccines sales declined due to supply constraints and International was impacted by higher trade inventory of newly acquired vaccines. Cervarix sales declined following the introduction of a new competitor vaccine.
In the US, sales grew 34% AER 24% CER to £1,258 million, primarily reflecting the benefit from the newly acquired products. There were strong performances from Fluarix /FluLaval, as a result of the conversion to the Quadrivalent formulation, Rotarix, benefiting from CDC stockpile replenishments, Boostrix, due to market share gains, and the Meningitis portfolio driven primarily by the launch of Bexsero . This growth was partly offset by an Infanrix /Pediarix sales decline of 10% AER 17% CER, primarily as a result of the return to the market of a competitor vaccine during 2014 combined with lower CDC stockpile purchases than in 2014.
In Europe, sales grew 14% AER 23% CER to £1,097 million. The growth primarily reflected the benefit of the newly acquired Meningitis portfolio with Bexsero performing strongly in several private markets including Italy, Spain, Germany and Portugal as well as in the UK following its inclusion in the NHS immunisation programme. Menveo also delivered a strong sales performance as a result of tender awards in the UK and Italy. Growth was partly offset by sales declines in Infanrix /Pediarix due to supply constraints and increased competitor activity, Hepatitis A vaccines due to supply constraints, and Cervarix following the introduction of a new competitor vaccine. Germany grew strongly with the MMRV portfolio, Boostrix and Infanrix /Pediarix , all up due to better supply and competitor supply shortages.
In International, sales grew by 4% AER12% CER to £1,301 million. The benefit from the newly acquired products was partly offset by declines in the existing products, including lower tender volumes in Latin America, particularly for Synflorix , partly offset by increased market access and demand for Synflorix in Africa and Bangladesh. Cervarix sales decreased in Mexico and South Africa due to lower demand. Infanrix /Pediarix and Hepatitis A vaccines sales were down, reflecting supply constraints. The sales performance of the newly acquired vaccines was adversely impacted by the phasing of shipments and higher trade inventory levels inherited as part of the acquisition.
Consumer Healthcare
2015
|
2014
|
Growth £%
|
Growth CER%
|
|||||||||||||
Wellness |
2,970 | 1,565 | 90 | 95 | ||||||||||||
Oral health |
1,875 | 1,806 | 4 | 8 | ||||||||||||
Nutrition |
684 | 633 | 8 | 7 | ||||||||||||
Skin health |
509 | 318 | 60 | 67 | ||||||||||||
|
6,038 |
|
4,322 | 40 | 44 | |||||||||||
|
2014
|
£%
|
CER%
|
|||||||||||||
US |
1,430 | 851 | 68 | 56 | ||||||||||||
Europe |
1,798 | 1,148 | 57 | 70 | ||||||||||||
International |
2,810 | 2,323 | 21 | 27 | ||||||||||||
|
6,038 |
|
4,322 | 40 | 44 |
The Consumer Healthcare business represents the Consumer Healthcare Joint Venture with Novartis together with the GSK Consumer Healthcare listed businesses in India and Nigeria, which are excluded from the Joint Venture.
Turnover grew 40% AER 44% CER to £6,038 million, benefiting significantly from the sales of the newly-acquired products included in the Joint Venture. There was strong growth in the US following the launch of OTC Flonase , buoyant sales in India driven by Horlicks as well as global specialist Oral health growth, partly due to a recovery from supply disruptions in 2014. Other key 2015 launches included S ensodyne Repair and Protect Whitening in the US and Germany, Voltaren 12 hour and the roll-out of Sensodyne mouthwash.
US sales grew 68% AER 56% CER to £1,430 million, primarily reflecting the benefit of the newly acquired products. In addition, Flonase was a principal growth driver. Oral health sales continued to be driven by Sensodyne , up 11% AER 13% CER, with the launch of Sensodyne Repair and Protect Whitening , supply recovery and distribution gains for
31
Sensodyne Pronamel . A strong performance from Excedrin reflected the launch of the gel tablet format combined with momentum in the tension headache variant. Theraflu also performed well following its re-launch, benefiting from the new warming syrups format and price increases. Nicorette lozenges, Nicorette Mini lozenges and alli returned to the market but Tums was impacted by supply constraints and increased competitive pressure during the year.
Sales in Europe grew 57% AER 70% CER to £1,798 million, primarily reflecting the benefit of the newly acquired products. Growth in the existing portfolio reflected strong performances in Oral health from both Sensodyne and Gum health products following an improved supply position compared with 2014, new advertising in key markets, and the roll out of new Sensodyne variants across the region. In Wellness, pain relief recorded a strong performance, driven by Voltaren which also benefited from new marketing campaigns. The brand recorded its highest market shares in many of the major European markets, including Germany, Italy, Poland and France.
International sales of £2,810 million grew 21% AER 27% CER, primarily reflecting the benefit of the newly acquired products. Oral health sales grew strongly across the region with double-digit growth on Sensodyne and Denture care products. In Wellness, sales growth was held back by the impact of the excess channel inventories in parts of the acquired consumer businesses, most notably China, Russia and Middle East, together with generic competition which impacted Panadol Osteo in Australia, and economic and political uncertainties in Venezuela. India led the growth amongst the priority markets, reporting double-digit performances from Eno , Sensodyne and Horlicks , driven by distribution gains and new marketing campaigns and the re-launch of the improved chocolate flavoured Horlicks . Sales growth in Brazil was held back as the business transitioned to new product formulations in the sun care business.
Total results
The total results of the Group are set out below.
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
% of
|
£m
|
% of
|
£%
|
CER%
|
|||||||||||||||||||
Turnover |
23,923 | 100 | 23,006 | 100 | 4 | 6 | ||||||||||||||||||
Cost of sales |
(8,853 | ) | (37.0 | ) | (7,323 | ) | (31.8 | ) | 21 | 24 | ||||||||||||||
Selling, general and administration |
(9,232 | ) | (38.6 | ) | (8,246 | ) | (35.8 | ) | 12 | 13 | ||||||||||||||
Research and development |
(3,560 | ) | (14.9 | ) | (3,450 | ) | (15.0 | ) | 3 | 2 | ||||||||||||||
Royalty income |
329 | 1.4 | 310 | 1.3 | 6 | 8 | ||||||||||||||||||
Other operating income |
7,715 | 32.2 | (700 | ) | (3.1 | ) | >100 | >100 | ||||||||||||||||
Operating profit |
10,322 | 43.1 | 3,597 | 15.6 | >100 | >100 | ||||||||||||||||||
Net finance costs |
(653 | ) | (659 | ) | ||||||||||||||||||||
Profit on disposal of interest in associates |
843 | | ||||||||||||||||||||||
Share of after tax profits of associates and joint ventures |
14 | 30 | ||||||||||||||||||||||
Profit before taxation |
10,526 | 2,968 | >100 | >100 | ||||||||||||||||||||
Taxation |
(2,154 | ) | (137 | ) | ||||||||||||||||||||
Total profit after taxation for the year |
8,372 | 2,831 | >100 | >100 | ||||||||||||||||||||
Total profit attributable to shareholders |
8,422 | 2,756 | ||||||||||||||||||||||
Earnings per share (p) |
174.3 | 57.3 | >100 | >100 | ||||||||||||||||||||
Earnings per ADS (US$) |
5.33 | 1.89 |
Cost of sales
Cost of sales as a percentage of turnover was 37.0%, 5.2 percentage points AER higher than in 2014 and 5.4 percentage points higher on a CER basis. The increase reflected the disposal of our higher margin Oncology business and the acquisition of the lower margin Vaccines and Consumer Healthcare businesses from Novartis. In addition, there were adverse price movements, particularly in US Pharmaceuticals, and increased investments in Vaccines to improve the reliability and capacity of the supply chain, together with increased intangible asset amortisation and impairment charges and higher integration and restructuring costs. This was partly offset by an improved product mix, particularly as a result of the growth in HIV sales, and the benefits of the Groups ongoing cost reduction programmes.
Selling, general and administration
SG&A costs as a percentage of sales were 38.6%, 2.8 percentage points AER higher than in 2014 and 2.3 percentage points higher on a CER basis. This increase primarily reflected the impacts of the Novartis transaction in 2015 and the
32
£219 million credit in SG&A in 2014 from a release of reserves following simplification of our entity structure, together with higher integration and restructuring costs and increased promotional product support, particularly for new launches in Respiratory, Consumer Healthcare, Vaccines and HIV. This was partly offset by the benefits of the Pharmaceuticals cost reduction programme, synergies in Vaccines and Consumer Healthcare and lower legal charges.
Research and development
R&D expenditure increased 3% AER 2% CER to £3,560 million (14.9% of turnover) compared with £3,450 million (15.0% of turnover) in 2014. The benefits of the cost reduction programmes in Pharmaceuticals, Vaccines and Consumer Healthcare R&D were more than offset by higher integration and restructuring costs.
Other operating income
Net other operating income of £7,715 million (2014 £700 million expense) included the profits on the disposals of the Oncology business of £9,228 million and ofatumumab of £200 million. This was partly offset by a further increase in the liability for the contingent consideration for the acquisition of the former Shionogi-ViiV Healthcare joint venture of £1,874 million (2014 £768 million) following the improved sales performance of Tivicay and Triumeq . The liability of £3,409 million at 31 December 2015 represents the present value of expected future payments to Shionogi.
Operating profit
Total operating profit was £10,322 million compared with £3,597 million in 2014. The increase primarily reflected the profits on disposal of the Oncology business to Novartis and several equity investment and other asset disposals. This was partly offset by increased integration and restructuring costs, the adverse impact on margins of the disposal of the higher margin Oncology business and acquisition of the lower margin Vaccines and Consumer Healthcare businesses from Novartis and the increase in the contingent consideration liability payable on the acquisition of the former Shionogi-ViiV Healthcare joint venture.
Intangible asset amortisation decreased to £563 million from £575 million in 2014. Intangible asset impairments of £206 million (2014: £150 million) included impairments of several R&D and commercial assets. Both of these charges were non-cash items.
Major restructuring charges accrued in the year were £1,891 million (2014 £750 million) and reflected the acceleration of a number of integration projects following completion of the Novartis transaction, as well as further charges as part of the Pharmaceuticals restructuring programme. Cash payments made in the year were £1,131 million (2014 £566 million). The programme has delivered approximately £1 billion of incremental benefits in 2015 compared with 2014.
Charges to date for the combined restructuring and integration programme are £2.7 billion. The total cash charges of the combined programme are expected to be approximately £3.65 billion and the non-cash charges up to £1.35 billion. By the end of 2015, the programme had delivered approximately £1.6 billion of annual savings and remained on track to deliver £3 billion of annual savings in total. The programme is expected to be largely complete by the end of 2017.
Legal charges of £221 million (2014 £548 million) included the settlement of a number of existing matters and litigation costs. The charge in 2014 included the £301 million fine payable to the Chinese government. Cash payments were £420 million (2014 £702 million).
Acquisition-related adjustments resulted in a net charge of £2,238 million (2014 £843 million). This included remeasurements of the liability and the unwinding of the discounting effects on the contingent consideration for the acquisition of the former Shionogi-ViiV Healthcare joint venture of £1,874 million (2014 £768 million); the contingent consideration related to the acquisition of the former Novartis Vaccines business of £91 million, net of hedging gains (2014 £nil); and the Consumer Healthcare Joint Venture put option of £83 million (2014 £nil).
Disposals and other items resulted in a net credit of £9,712 million (2014 £131 million charge). This included the profit on disposal of the Oncology business to Novartis of £9,228 million and the profit on disposal of ofatumumab, together with equity investment and other asset disposals, equity investment impairments reflecting current market valuations, one-off required regulatory charges in R&D and certain other adjusting items.
Net finance costs
33
Profit on disposal of interest in associates
The profit on disposal of associates was £843 million (2014 £nil). This arose from the disposal of half of our investment in Aspen Pharmacare and the remeasurement of the remaining holding to market value on its reclassification to other investments.
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £14 million (2014 £30 million profit), including a £16 million gain, being our share of the profit on a disposal of an investment recognised by one of the associates. In 2014, the share of profits of associates principally arose on our holding in Aspen Pharmacare.
Profit before taxation
Taking account of net finance costs, the profit on disposal of interest in associates and the share of profits of associates, profit before taxation was £10,526 million compared with £2,968 million in 2014.
Taxation
2015
|
2014
|
|||||||
UK current year charge |
156 | 221 | ||||||
Rest of world current year charge |
2,924 | 1,092 | ||||||
Charge in respect of prior periods |
(508 | ) | (571 | ) | ||||
Total current taxation |
2,572 | 742 | ||||||
Total deferred taxation |
(418 | ) | (605 | ) | ||||
Taxation on total profits
|
|
2,154
|
|
|
137
|
|
The charge for taxation on total profits amounted to £2,154 million and represented a total effective tax rate of 20.5% (2014 4.6%). In 2015 GSK made payments of £111 million in UK Corporation tax. In January 2016 GSK made further payments of £100 million in relation to UK Corporation tax. These amounts are for Corporation tax only and do not include various other business taxes borne by GSK each year.
Earnings per share
Total EPS was 174.3p, compared with 57.3p in 2014, the increase primarily reflecting the profits on disposal of the Oncology business and the Aspen Pharmacare shares, partly offset by the increase in the liability for the contingent consideration due on the acquisition of the former Shionogi-ViiV Healthcare joint venture and accelerated charges for major restructuring expenditure.
Dividends
The Board declared four interim dividends resulting in a total dividend for the year of 80 pence, in line with the dividend for 2014. In addition, the Board has declared a special dividend of 20 pence to be paid out of the proceeds of the disposals of the Oncology business and other assets. See Note 16 to the Financial statements, Dividends.
Core results
We use core results, among other metrics including Total results and cash flow generation, to manage the performance of the Group. The definition of core results is set out above and reconciliations of total results to core results are presented on pages 14 to 16.
Cost of sales
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
% of
|
£m
|
% of
|
£%
|
CER%
|
|||||||||||||||||||
Cost of sales |
(7,520 | ) | (31.4 | ) | (6,535 | ) | (28.4 | ) | 15 | 18 |
Cost of sales as a percentage of turnover was 31.4%, 3.0 percentage points AER higher than in 2014, primarily reflecting the impact of the Novartis transaction. In addition, this reflected adverse price movements, particularly in US Pharmaceuticals, and increased investments in Vaccines to improve the reliability and capacity of the supply chain. This was partly offset by an improved product mix, particularly as a result of the growth in HIV sales, and the benefits of our ongoing cost reduction programmes.
34
Selling, general and administration
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
% of
|
£m
|
% of
|
£%
|
CER%
|
|||||||||||||||||||
Selling, general and administration |
(7,907 | ) | (33.1 | ) | (7,074 | ) | (30.7 | ) | 12 | 12 |
SG&A costs as a percentage of sales were 33.1%, 2.4 percentage points higher on an AER basis than in 2014 and 2.0 percentage points higher on a CER basis, primarily reflecting the impact of the Novartis transaction. In addition, the increase reflected the impact of the £219 million credit in SG&A in 2014 from a release of reserves following simplification of our entity structure. Declines in SG&A costs in Global Pharmaceuticals, including the benefits of the Pharmaceuticals cost reduction programme, and synergies in Vaccines and Consumer Healthcare, were largely offset by promotional product support, particularly for new launches in Respiratory, Consumer Healthcare, Vaccines and HIV.
Research and development
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
% of
|
£m
|
% of
|
£%
|
CER%
|
|||||||||||||||||||
Research and development |
(3,096 | ) | (12.9 | ) | (3,113 | ) | (13.5 | ) | (1 | ) | (2 | ) |
R&D expenditure declined 1% AER 2% CER to £3,096 million (12.9% of turnover) compared with £3,113 million (13.5% of turnover) in 2014, reflecting the benefit of cost reduction programmes in Pharmaceuticals, Vaccines and Consumer Healthcare R&D.
The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of phase IIa trials) and Development work (from phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate. Phase IV costs and other administrative expenses are reported in SG&A and are not included in the table below.
The table below analyses core R&D expenditure by these categories:
The proportion of Pharmaceuticals R&D investment made in the late-stage portfolio decreased from 52% of Pharmaceuticals R&D costs in 2014 to 49% in 2015, reflecting the completion of a number of late-stage programmes.
Royalty income
Royalty income was £329 million (2014 £310 million).
Core operating profit by business
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
Margin%
|
£m
|
Margin%
|
£%
|
CER%
|
|||||||||||||||||||
Pharmaceuticals |
6,466 | 45.7 | 7,405 | 48.0 | (13 | ) | (12 | ) | ||||||||||||||||
Pharmaceuticals R&D |
(2,168 | ) | (2,326 | ) | (7 | ) | (10 | ) | ||||||||||||||||
Pharmaceuticals |
4,298 | 30.4 | 5,079 | 32.9 | (15 | ) | (12 | ) | ||||||||||||||||
Vaccines |
964 | 26.4 | 997 | 31.6 | (3 | ) | (10 | ) | ||||||||||||||||
Consumer Healthcare |
684 | 11.3 | 496 | 11.5 | 38 | 65 | ||||||||||||||||||
|
5,946 |
|
24.9 | 6,572 | 28.7 | (10 | ) | (6 | ) | |||||||||||||||
Corporate & other unallocated costs |
(217 | ) | 22 | >100 | >100 | |||||||||||||||||||
Core operating profit |
5,729 | 23.9 | 6,594 | 28.7 | (13 | ) | (9 | ) |
35
Core operating profit was £5,729 million, 13 % AER 9% CER lower than in 2014 on a turnover increase of 4% AER 6% CER. The core operating margin of 23.9% was 4.8 percentage points AER lower than in 2014. Excluding the adverse impact of currency movements, particularly from the Euro and Emerging Markets currencies, the core operating margin was 4.1 percentage points lower on a CER basis. This decline primarily reflected the impact of the Novartis transaction, resulting from the disposal of the higher margin Oncology business and the acquisition of the lower margin and different cost structures of the Vaccines and Consumer Healthcare businesses from Novartis.
This decline also reflected a £219 million credit in SG&A in 2014 from a release of reserves following simplification of the Groups entity structure and its trading arrangements. The remaining margin decline reflected the balance between the continued impact of the decline in sales of Seretide /Advair , including contracting and other price reductions, lower sales of Established Products, as well as the investments required behind multiple new launches in Pharmaceuticals, Vaccines and Consumer Healthcare, as we transition our product portfolio, offset by the savings released by our restructuring and integration programmes and the benefits of an improved product mix, particularly from the growth in HIV sales.
Net finance costs
Net finance expense was £636 million compared with £646 million in 2014.
Share of after tax losses of associates and joint ventures
The share of losses of associates and joint ventures was £2 million (2014 £30 million profit). In March 2015, we reduced our shareholding in our significant associate, Aspen Pharmacare Holdings Limited, from 12.4% to 6.2% of the issued share capital. As a result, we no longer account for Aspen as an associate.
Core profit before taxation
2015
|
2014
|
Growth
|
||||||||||||||||||||||
£m
|
% of
|
£m
|
% of
|
£%
|
CER%
|
|||||||||||||||||||
Core profit before tax |
5,091 | 21.3 | 5,978 | 26.0 | (15 | ) | (10 | ) |
Taxation
Tax on core profit amounted to £993 million and represented an effective core tax rate of 19.5% (2014 19.6%), reflecting the resolution of a number of items that benefited the year.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £440 million (2014 £222 million), including the non-controlling interest allocations of Consumer Healthcare segment profits of £205 million (2014 £60 million) and the allocation of ViiV Healthcare profits, which increased to £224 million (2014 £132 million).
Core earnings per share
Core EPS of 75.7p declined 21% AER 15% CER compared with a 13% AER 9% CER decline in operating profit, primarily reflecting the greater contributions to growth from businesses in which there are significant non-controlling interests.
36
Financial position and resources
Property, plant and equipment
Our business is science-based, technology-intensive and highly regulated by governmental authorities. We allocate significant financial resources to the renewal and maintenance of our property, plant and equipment to minimise risks of interruption of production and to achieve compliance with regulatory standards. A number of our processes use chemicals and hazardous materials.
The total cost of our property, plant and equipment at 31 December 2015 was £20,750 million, with a net book value of £9,668 million. Of this, land and buildings represented £4,117 million, plant and equipment £2,987 million and assets in construction £2,564 million. In 2015, we invested £2,134 million in new property, plant and equipment. This was mainly related to a large number of projects for the renewal, improvement and expansion of facilities at various worldwide sites. Property is mainly held freehold. New investment is financed from our liquid resources. At 31 December 2015, we had contractual commitments for future capital expenditure of £659 million and operating lease commitments of £789 million. We believe that our facilities are adequate for our current needs.
We observe stringent procedures and use specialist skills to manage environmental risks from our activities.
Goodwill
Goodwill increased during the year to £5,162 million at 31 December 2015, from £3,724 million. The increase reflected the goodwill arising from the acquired Novartis Vaccines business and the creation of the Consumer Healthcare Joint Venture.
Other intangible assets
Other intangible assets include the cost of intangibles acquired from third parties and computer software. The net book value of other intangible assets as at 31 December 2015 was £16,672 million (2014 £8,320 million). The increase in 2015 reflected the impact of acquiring the Vaccines business (£2,680 million), and the creation of the Consumer Healthcare Joint Venture (£6,003 million), capitalised development costs of £217 million, partly offset by the amortisation and impairment of existing intangibles of £738 million and £217 million, respectively.
Investments in associates and joint ventures
We held investments in associates and joint ventures, with a carrying value at 31 December 2015 of £207 million (2014 £340 million). The market value at 31 December 2015 was £267 million (2014 £1,388 million). The largest of these investments was in Theravance Inc. (now Innoviva Inc.) which had a book value at 31 December 2015 of £112 million. The market value at 31 December 2015 was £229 million. Until 1 September 2015, Theravance Inc. was accounted for as an equity investment as it was considered that the Group could not exert significant influence over the company until that point.
Other investments
We held other investments with a carrying value at 31 December 2015 of £1,255 million (2014 £1,114 million). The most significant of these investments was in Aspen Pharmacare Holdings Limited which had a book value at 31 December 2015 of £383 million. Previously, the investment in Aspen was treated as an associate but in March 2015 we sold half of our holding in Aspen and as a result were no longer able to exert significant influence over the company; the investment has been reported within Other investments since that date. The other investments include equity stakes in companies with which we have research collaborations, which provide access to biotechnology developments of potential interest and interests in companies that arise from business divestments.
Derivative financial instruments: assets
We had current derivative financial instruments held at fair value of £125 million (2014 £146 million). The majority of this amount related to foreign exchange contracts both designated and not designated as accounting hedges.
Inventories
Inventory of £4,716 million increased from £4,231 million in 2014. The increase primarily re?ected the impact of the Novartis acquisition, partly offset by exchange movements.
Trade and other receivables
Trade and other receivables of £5,615 million increased from 2014 impacted by the Novartis acquisition, partly offset by exchange movements.
Derivative financial instruments: liabilities
We held current derivative financial instruments at fair value of £153 million (2014 £404 million, current: £9 million, non-current). This primarily related to foreign exchange contracts both designated and non-designated (inter-company loans and trade receivables) as accounting hedges.
Trade and other payables
Trade and other payables amounting to £9,191 million increased from £7,958 million in 2014, re?ecting the effect of the Novartis acquisition and an increase in accruals for customer returns and rebates.
Provisions
We carried deferred tax provisions and other short-term and non-current provisions of £3,286 million at 31 December 2015 (2014 £2,035 million) of which £352 million (2014 £520 million) related to legal and other disputes and £816 million (2014 £527 million) related to the Major Restructuring provision. Provision has been made for legal and other disputes, indemnified disposal liabilities, employee related liabilities and the costs of restructuring programmes to the extent that at the balance sheet date a legal or constructive obligation existed and could be reliably estimated.
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Pensions and other post-employment benefits
We account for pension and other post-employment arrangements in accordance with IAS 19. The deficits, net of surpluses before allowing for deferred taxation were £1,584 million (2014 £1,689 million) on pension arrangements and £1,387 million (2014 £1,397 million) on unfunded post-employment liabilities. The decreases in the deficits were predominantly driven by higher discount rates that we used to discount the value of the liabilities, partly offset by an increase in the UK inflation rate together with net obligations acquired as a result of the Novartis transaction.
In December 2010, the UK scheme purchased an insurance contract that will guarantee payment of specified pensioner liabilities. This contract was valued at £755 million at 31 December 2015.
Other non-current liabilities
Other non-current liabilities of £10,656 million at 31 December 2015 (2014 £2,401 million) included £3,549 million (2014 £1,619 million) of contingent consideration payable, of which £3,110 million (2014 £1,579 million) was in respect of the acquisition in 2012 of the former Shionogi-ViiV Healthcare joint venture, and £398 million was payable to Novartis in relation to the Vaccines acquisition during 2015. In addition, £6,287 million related to the present value of the estimated amount payable by us in the event of full exercise of Novartis right to require us to acquire its 36.5% shareholding in the Consumer Healthcare Joint Venture.
Net debt
At 31 December 2015, net debt was £10.7 billion, compared with £14.4 billion at 31 December 2014, comprising gross debt of £16.6 billion and cash and liquid investments of £5.9 billion. The decrease in net debt primarily reflected the impact of the Novartis transaction in which we sold our Oncology business for net cash proceeds of £10.0 billion and paid £3.4 billion, net of cash acquired, to purchase the Novartis Vaccines business.
The first tax payments on the Novartis transaction amounting to £1,071 million have been made. In addition, we sold part of our shareholding in Aspen for cash proceeds of £564 million and paid dividends to shareholders of £3,874 million. Net debt also reflected an exchange loss on the translation of cash held by the Groups Venezuelan subsidiaries.
Because of the continuing political and economic uncertainties in Venezuela, at 31 December 2015, we changed the exchange rate used to translate our subsidiaries in Venezuela. Up to that point, we applied one of the official rates available of VEF 6.3/US$1. At 31 December 2015, this was changed to VEF 199.6/US$1 (VEF 293.4/£1). This change had no significant impact on the Group income statement, but gave rise to an exchange loss on translation of the cash held by the Venezuelan subsidiaries of £94 million.
At 31 December 2015, our cash and liquid investments were held as follows:
2015
|
2014
|
|||||||
Bank balances and deposits |
3,767 | 3,529 | ||||||
US Treasury and Treasury repo only money market funds |
624 | 811 | ||||||
Liquidity funds |
1,439 | | ||||||
Government securities |
75 | 67 | ||||||
|
5,905 |
|
4,407 |
Cash and liquid investments of £4.2 billion were held centrally at 31 December 2015.
Total equity
At 31 December 2015, total equity had increased from £4,936 million at 31 December 2014 to £8,878 million. The increase arose from the impact of both operating profits and business and asset disposal profits, partly offset by the remeasurement of the ViiV Healthcare contingent consideration and the dividends paid in the year.
Cash generation and conversion
The net cash inflow from operating activities for the year was £2,569 million (2014 £5,176 million). The decrease primarily resulted from the initial impact of the Novartis transaction, reflecting the disposal of GSKs higher margin Oncology business and the impact of acquiring the lower margin Vaccines and Consumer Healthcare businesses as well as lower operating profits, primarily in Pharmaceuticals, and the impact of negative currency movements in the year. In addition, the cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability recognised in operating cash flows increased by £117 million in 2015. The total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability in 2015 were £159 million, of which £121 million was recognised in cash flows from operating activities and £38 million was recognised in purchases of businesses within investing cash flows.
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted to £1,901 million (2014 - £1,751 million) and disposals realised £10,554 million (2014 £594 million). Cash payments to acquire equity investments of £82 million (2014 £83 million) were made in the year and sales of equity investments realised £357 million (2014 £205 million).
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5.B | Liquidity and capital resources |
The information set forth under the headings:
| Cash generation and conversion on page 71; |
| Financial position and resources on pages 72 to 75; and |
| Treasury policies on page 77 and 78 |
of the GSK Annual Report 2016 is incorporated herein by reference.
5.C | Research and development, patents and licenses, etc. |
The information set forth under the headings:
| Technological and Scientific advances on page 10; |
| Deliver within Pharmaceuticals on pages 24 to 26, Vaccines on page 32 and Consumer Healthcare on page 38; |
| Pharmaceuticals and Vaccines product development pipeline on pages 247 to 249; |
| Pharmaceutical products, competition and intellectual property on pages 250 to 251; |
| Vaccines products, competition and intellectual property on page 251; and |
| Consumer Healthcare products and competition on page 252 |
of the GSK Annual Report 2016 is incorporated herein by reference.
5.D | Trend information |
The information set forth under the heading Financial Review 2016 in Item 5.A of this annual report on Form 20-F is incorporated herein by reference.
5.E | Off-balance sheet arrangements |
Not applicable.
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5.F | Tabular disclosure of contractual obligations |
The information set forth under the heading:
| Contractual obligations and commitments on page 75 |
of the GSK Annual Report 2016 is incorporated herein by reference.
Item 6. | Directors, Senior Management and Employees |
6.A | Directors and senior management |
The information set forth under the headings:
| Our Board on pages 82 to 85; and |
| Our Corporate Executive Team on pages 86 to 87 |
of the GSK Annual Report 2016 is incorporated herein by reference.
6.B | Compensation |
The information set forth under the heading:
| Remuneration report on pages 112 to 136. With respect to pro-forma growth rates included on page 119, the Novartis transaction completed on 2 March 2015 and so GSKs reported results include the results of the former Novartis Vaccines and Consumer Healthcare businesses and exclude the results of the former GSK Oncology business, both from 2 March 2015. For the Vaccines and Consumer Healthcare segments, pro-forma growth rates are calculated comparing reported turnover and core operating profits for the year ended December 2016 with the turnover and operating profit for the year ended December 2015 adjusted to include the two months of sales of the former Novartis Vaccines and Consumer Healthcare products, respectively. For the Pharmaceuticals segment, the turnover and operating profit for the year ended December 2015 is adjusted to exclude the two months of sales of the former GSK Oncology business for January and February 2015; and |
| Remuneration policy summary and report on pages 137-146 which includes the key changes from the 2014 remuneration policy and outlines the proposed 2017 remuneration policy |
of the GSK Annual Report 2016 is incorporated herein by reference.
6.C | Board practices |
The information set forth under the heading:
| Corporate governance on pages 88 to 110; |
| Governance on page 124; and |
| Donations to political organisations and political expenditure on page 271 |
of the GSK Annual Report 2016 is incorporated herein by reference.
40
6.D | Employees |
The information set forth under the headings:
| Performance and engagement on page 48; |
| Note 9 Employee costs on pages 174 to 175; |
| Note 28 Pensions and other post-employment benefits on pages 189 to 196; and |
| Five year record, Number of employees on page 246. |
of the GSK Annual Report 2016 is incorporated herein by reference.
6.E | Share ownership |
The information set forth under the headings:
| Note 42 Employee share schemes on pages 223 to 224; |
| Total remuneration for 2016 on pages 116 to 117; |
| Value earned from Long Term Incentive awards on page 121; |
| Update on performance of ongoing LTI awards on page 122; and |
| Directors interests in shares on pages 127 to 133 |
of the GSK Annual Report 2016 is incorporated herein by reference.
Item 7. | Major Shareholders and Related Party Transactions |
7.A | Major shareholders |
The information set forth under the headings:
| Change of control and essential contracts on page 110; |
| Share capital and control on pages 263 to 264; and |
| Analysis of shareholdings at 31 December 2016 on page 264 |
of the GSK Annual Report 2016 is incorporated herein by reference.
7.B | Related party transactions |
The information set forth under the heading:
| Note 35 Related party transactions on page 203 |
of the GSK Annual Report 2016 is incorporated herein by reference.
7.C | Interests of experts and counsel |
Not applicable.
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Item 8. | Financial Information |
8.A | Consolidated Statements and Other Financial Information: |
See item 18 below.
In addition, the information set forth under the headings:
| Note 46 Legal proceedings on pages 226 to 231; and |
| Dividends on page 265 |
of the GSK Annual Report 2016 is incorporated herein by reference.
8.B | Significant Changes |
The information set forth under the heading Note 44 Post balance sheet events on page 224 and Note 46 Legal proceedings on pages 226 to 231 of the GSK Annual Report 2016 is incorporated herein by reference.
Item 9. | The Offer and Listing |
9.A | Offer and listing details |
The information set forth under the headings:
| Market capitalisation on page 263; |
| Share price on page 263; and |
| Nature of trading market on page 264 |
of the GSK Annual Report 2016 is incorporated herein by reference.
9.B | Plan of distribution |
Not applicable.
9.C | Markets |
The information set forth under the headings:
| Nature of trading market on page 264 |
of the GSK Annual Report 2016 is incorporated herein by reference.
9.D | Selling shareholders |
Not applicable.
9.E | Dilution |
Not applicable.
9.F | Expenses of the issue |
Not applicable.
Item 10. | Additional Information |
10.A | Share Capital |
Not applicable.
10.B | Articles of Association of GlaxoSmithKline plc |
The following is a summary of the principal provisions of the companys Articles of Association (the Articles). Shareholders should not rely on this summary, but should instead refer to the current Articles which are filed with the Registrar of Companies in the UK and can be viewed on the companys website. The Articles contain the fundamental provisions of the companys constitution, and the rules for the internal management and control of the company. The company has no statement of objects in its Articles and accordingly its objects are unrestricted in accordance with the provisions of the Companies Act 2006.
(a) Voting
All resolutions put to the vote at general meetings will be decided by poll. On a poll, every shareholder who is present in person or by proxy shall have one vote for every Ordinary Share of which he or she is the holder. In the case of
42
joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and seniority shall be determined by the order in which the names stand on the register. Unless the Directors otherwise decide, the right to attend a general meeting and voting rights may not be exercised by a shareholder who has not paid to the company all calls and other sums then payable by him or her in respect of his or her Ordinary Shares. The right to attend a general meeting and voting rights may not be exercised by a shareholder who is subject to an order under Section 794 of the Companies Act 2006 because he or she has failed to provide the company with information concerning his or her interests in Ordinary Shares within the prescribed period, as required by Section 793 of the Companies Act 2006.
(b) Transfer of Ordinary Shares
Any shareholder may transfer his or her Ordinary Shares which are in certificated form by an instrument of transfer in any usual form or in any other form which the Directors may approve. Such instrument must be properly signed and stamped or certified (or otherwise shown to the satisfaction of the Directors as being exempt from stamp duty) and lodged with the company together with the relevant share certificate(s) and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer.
Any member may transfer title to his or her uncertificated Ordinary Shares by means of a relevant system, such as CREST.
The transferor of a share is deemed to remain the holder until the transferees name is entered on the register. The Directors may decline to register any transfer of any Ordinary Share which is not fully paid.
Registration of a transfer of uncertificated Ordinary Shares may be refused in the circumstances set out in the uncertificated securities rules, and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated Ordinary Share is to be transferred exceeds four.
The Articles contain no other restrictions on the transfer of fully paid certificated Ordinary Shares provided: (i) the instrument of transfer is duly stamped or certified or otherwise shown to the satisfaction of the Directors to be exempt from stamp duty and is accompanied by the relevant share certificate and such other evidence of the right to transfer as the Directors may reasonably require; (ii) the transfer, if to joint transferees, is in favour of not more than four transferees; (iii) the instrument of transfer is in respect of only one class of shares; and (iv) the holder of the Ordinary Shares is not subject to an order under Section 794 of the Companies Act 2006. Notice of refusal to register a transfer must be sent to the transferee within two months of the instrument of transfer being lodged. The Directors may decline to register a transfer of Ordinary Shares by a person holding 0.25 per cent. or more of the existing Ordinary Shares if such person is subject to an order under Section 794 Companies Act 2006, after failure to provide the company with information concerning interests in those Ordinary Shares required to be provided under Section 793 of the Companies Act 2006, unless the transfer is carried out pursuant to an arms length sale.
Provisions in the Articles will not apply to uncertificated Ordinary Shares to the extent that they are inconsistent with:
(i) | the holding of Ordinary Shares in uncertificated form; |
(ii) | the transfer of title to Ordinary Shares by means of a system such as CREST; and |
(iii) | any provisions of the relevant regulations. |
(c) Dividends and distribution of assets on liquidation
The profits of the company which are available for distribution and permitted by law to be distributed and which the company may by ordinary resolution from time to time declare, upon the recommendation of the Directors to distribute by way of dividend, in respect of any accounting reference period shall be distributed by way of dividend among holders of Ordinary Shares.
If in their opinion the companys financial position justifies such payments, the Directors may, as far as any applicable legislation allows, pay interim dividends on shares of any class of such amounts and in respect of such periods as they think fit. Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide, all dividends will be declared, apportioned and paid pro rata according to the amounts paid up on the shares during any portion of the period in respect of which the dividend is paid. As the company has only one class of Ordinary Shares, the holders of such Ordinary Shares will be entitled to participate in any surplus assets in a winding- up in proportion to their shareholdings.
(d) Variation of rights and changes in capital
Subject to the provisions of any statute (including any orders, regulations or other subordinate legislation made under it) from time to time in force concerning companies in so far as it applies to the company (the Companies Acts), the rights attached to any class of shares may be varied with the written consent of the holders of three-quarters in nominal value of the issued shares of that class (excluding any shares of that class held as treasury shares) or with the
43
sanction of a special resolution passed at a separate meeting of the holders of shares of that class. At every such separate meeting, the provisions of the Articles relating to general meetings shall apply, except the necessary quorum shall be at least two persons holding or representing as proxy at least one-third in nominal value of the issued shares of the relevant class(excluding any shares of that class held as treasury shares) (but provided that at any adjourned meeting any holder of shares of the relevant class present in person or by proxy shall be a quorum).
The rights conferred upon the holders of any Ordinary Shares shall not, unless otherwise expressly provided in the rights attaching to those Ordinary Shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.
(e) Unclaimed dividends
All dividends or other sums payable on or in respect of any Ordinary Shares which remain unclaimed may be invested or otherwise made use of by the Directors for the benefit of the company until claimed. Unless the Directors decide otherwise, any dividend or other sums payable on or in respect of any Ordinary Shares unclaimed after a period of 12 years from the date when declared or became due for payment will be forfeited and revert to the company. The company may stop sending dividend cheques or warrants by post, or employ such other means of payment in respect of any Ordinary Shares, if at least two consecutive payments have remained uncashed or are returned undelivered or if one payment has remained uncashed or is returned undelivered and the company cannot establish a new address for the holder after making reasonable enquiries; however, in either case, the company must resume sending cheques or warrants or employ such other means of payment if the holder or any person entitled to the Ordinary Shares by transmission requests the resumption in writing.
(f) Untraced shareholders
The company may sell any certificated Shares in the company after advertising its intention and waiting for three months if the Ordinary Shares have been in issue for at least ten years and during that period at least three dividends have become payable on them and have not been claimed and, so far as any Director is aware, the company has not received any communication from the holder of the Ordinary Shares or any person entitled to them by transmission. Upon any such sale, the company will become indebted to the former holder of the Ordinary Shares or the person entitled to them by transmission for an amount equal to the net proceeds of sale unless forfeited.
(g) Limitations on rights of non-resident or foreign shareholders
There are no limitations imposed by the Articles on the rights of non-resident or foreign shareholders except that there is no requirement for the company to serve notices on shareholders outside the United Kingdom and the United States, if no postal address in the United States or United Kingdom has been provided to the company.
(h) General meetings of shareholders
The Articles rely on the Companies Act 2006 provisions dealing with the calling of general meeting. The company is required by the Companies Act 2006 to hold an annual general meeting each year. General meetings of shareholders may be called as necessary by the Directors and must be called promptly upon receipt of a requisition from shareholders. Under the Companies Act 2006, an annual general meeting must be called by notice of at least 21 clear days. A general meeting other than an annual general meeting may be called on not less than 14 clear days notice provided a special resolution reducing the notice period to 14 clear days has been passed at the immediately preceding annual general meeting or a general meeting held since that annual general meeting.
(i) Conflicts of interest
The Directors may, subject to the provisions of the Articles, authorise any matter which would otherwise involve a Director breaching his or her duty under the Companies Acts to avoid conflicts of interest (each a Conflict). A Director seeking authorisation in respect of a Conflict shall declare to the other Directors the nature and extent of his or her Conflict as soon as is reasonably practicable and shall provide the other Directors with such details of the matter as are necessary to decide how to address the Conflict. The board may resolve to authorise the relevant Director in relation to any matter the subject of a Conflict, save that the relevant Director and any other Director with a similar interest shall not count towards the quorum nor vote on any resolution giving such authority, and, if the other Directors so decide, shall be excluded from any meeting of the Directors while the Conflict is under consideration.
(j) Other Conflicts of Interest
Subject to the provisions of the Companies Acts, and provided the nature and extent of a Directors interest has been declared to the Directors, a Director may:
(i) | be party to, or otherwise interested in, any contract with the company, or in which the company has a direct or indirect interest; |
44
(ii) | hold any other office or place of profit with the company (except that of auditor) in conjunction with his office of director for such period and upon such terms, including remuneration, as the Directors may decide; |
(iii) | act by himself or through a firm with which he is associated in a professional capacity for the company or any other company in which the company may be interested (otherwise than as auditor); |
(iv) | be or become a director of, or employed by, or otherwise be interested in any holding company or subsidiary company of the company or any other company in which the company may be interested; and |
(v) | be or become a director of any other company in which the company does not have an interest and which cannot reasonably be regarded as giving rise to a conflict of interest at the time of his appointment as director of that other company. |
No contract in which a Director is interested shall be liable to be avoided, and any Director who is so interested is not liable to account to the company or its shareholders for any benefit realised by the contract by reason of the Director holding that office or of the fiduciary relationship thereby established. However, no Director may vote on, or be counted in the quorum, in relation to any resolution of the board relating specifically to his or her own appointment (including remuneration) or the terms of his or her termination of appointment or relating to any contract in which he or she has an interest (subject to certain exceptions).
Subject to the Companies Acts, the company may by ordinary resolution suspend or relax to any extent the provisions relating to directors interests or restrictions on voting or ratify any transaction not duly authorised by reason of a contravention of such provisions.
(k) Directors remuneration
Each of the Directors will be paid a fee at such rate as may from time to time be determined by the Directors, but the total fees paid to all of the directors for acting as directors (including amounts paid to any director who acts as chairman or is chairman of, or serves on any committee of the board of directors but excluding any amounts paid under any other provision of the Articles) shall not exceed the higher of:
(i) | £3 million a year; and |
(ii) | any higher amount as the company may by ordinary resolution decide. Such fees may be satisfied in cash or in shares or any other non-cash form. Any Director who is appointed to any executive office, acts as Chairman, acts as senior independent director, acts as a scientific/medical expert on the board, is Chairman of, or serves on any committee of the Directors or performs any other services which the Directors consider to extend beyond the ordinary services of a Director shall be entitled to receive such remuneration (whether by way of salary, commission or otherwise) as the Directors may decide. Each Director may be paid reasonable travelling, hotel and other incidental expenses he or she incurs in attending and returning from meetings of the Directors or committees of the Directors, or general meetings of the company, or otherwise incurred in connection with the performance of his or her duties for the company. |
(l) Pensions and gratuities for Directors
The Directors or any committee authorised by the Directors may provide benefits by the payment of gratuities, pensions or insurance or in any other manner for any Director or former Director or their relations, connected persons or dependants, but no benefits (except those provided for by the Articles) may be granted to or in respect of a Director or former Director who has not been employed by or held an executive office or place of profit under the company or any of its subsidiary undertakings or their respective predecessors in business without the approval of an ordinary resolution of the company.
(m) Borrowing powers
Subject to the provisions of the Companies Act 2006, the Directors may exercise all the companys powers to borrow money; to mortgage or charge all or any of the companys undertaking, property (present and future), and uncalled capital; to issue debentures and other securities; and to give security either outright or as collateral security for any debt, liability or obligation of the company or of any third party.
(n) Retirement and removal of Directors
A Director is subject to re-election at every annual general meeting of the company if he or she:
(i) | held office at the time of the two previous annual general meetings and did not retire by rotation at either of them; |
45
(ii) | has held office, other than employment or executive office, for a continuous period of nine years or more; or |
(iii) | he or she has been appointed by the Directors since the last annual general meeting. |
In addition to any power of removal conferred by the Companies Acts the company may by special resolution remove any Director before the expiration of his or her period of office. No Director is required to retire by reason of his or her age, nor do any special formalities apply to the appointment or re-election of any Director who is over any age limit. No shareholding qualification for Directors shall be required.
(o) Vacation of office
The office of a director shall be vacated if:
(i) | he resigns or offers to resign and the board resolves to accept such offer; |
(ii) | his resignation is requested by all of the other directors and all of the other directors are not less than three in number; |
(iii) | he is or has been suffering from mental or physical ill health and the board resolves that his office be vacated; |
(iv) | he is absent without permission of the board from meetings of the board (whether or not an alternate director appointed by him attends) for six consecutive months and the board resolves that his office is vacated; |
(v) | he becomes bankrupt or compounds with his creditors generally; |
(vi) | he is prohibited by law from being a director; or |
(vii) | he is removed from office pursuant to the Articles or the Companies Acts. |
(p) Share rights
Subject to any rights attached to existing shares, shares may be issued with such rights and restrictions as the company may by ordinary resolution decide, or (if there is no such resolution or so far as it does not make specific provision) as the board may decide. Such rights and restrictions shall apply as if they were set out in the Articles. Redeemable shares may be issued, subject to any rights attached to existing shares. The board may determine the terms, conditions and manner of redemption of any redeemable share so issued. Such terms and conditions shall apply to the relevant shares as if they were set out in the Articles. Subject to the articles, any resolution passed by the shareholders and other shareholders rights, the Board may decide how to deal with any shares in the company.
10.C | Material contracts |
On April 22, 2014, GSK and Novartis AG (Novartis) entered into a three-part, inter-conditional transaction (the Transaction), pursuant to which they executed an implementation agreement (as subsequently amended, the Implementation Agreement), a contribution agreement relating to a consumer healthcare joint venture (as subsequently amended, the Contribution Agreement), a share and business sale agreement relating to the vaccines business of Novartis (as subsequently amended, the Vaccines SAPA), a sale and purchase agreement relating to the oncology business of GSK (as subsequently amended, the Oncology SAPA), a put option deed relating to the influenza vaccines business of Novartis (as subsequently amended, the Put Option Deed) and a shareholders agreement (the Shareholders Agreement, and, together with the Implementation Agreement, the Contribution Agreement, the Vaccines SAPA, the Oncology SAPA and the Put Option Deed, the Transaction Contracts).
Under the Vaccines SAPA, GSK purchased Novartis vaccines business (excluding Novartis influenza vaccines business). The purchase price for the business is up to US$7,055,000,000 plus royalties. The US$7,055,000,000 consists of US$5,255,000,000 upfront and up to US$1,800,000,000 in milestone payments.
Under the Oncology SAPA, GSK sold or licensed, and Novartis purchased or licensed, certain assets, rights and liabilities relating to GSKs oncology business. Novartis acquired GSKs oncology products for an aggregate cash consideration of US$16,000,000,000. Under the terms of the transaction, Novartis also has preferred partner rights over GSKs current and future oncology research and development pipeline, excluding oncology vaccines, for a period of 12.5 years following the closing of the Transaction.
46
Under the Contribution Agreement, GSK contributed its consumer healthcare business and Novartis contributed its over-the-counter business into a newly-created joint venture company, which operates under the GSK Consumer Healthcare name. GSK owns a 63.5% share of the joint venture. Pursuant to the Shareholders Agreement entered into by GSK and Novartis at the closing of the Transaction, GSK has seven of eleven seats on the joint ventures board of directors, and Novartis has customary minority rights and exit rights at a pre-defined, market-based pricing mechanism.
GSKs shareholders approved the Transaction on December 18, 2014. The Transaction closed on March 2, 2015.
10.D | Exchange controls |
The information set forth under the heading:
| Exchange controls and other limitations affecting security holders on page 263 |
of the GSK Annual Report 2016 is incorporated herein by reference.
10.E | Taxation |
The information set forth under the heading:
| Tax information for shareholders on page 266 |
of the GSK Annual Report 2016 is incorporated herein by reference.
10.F | Dividends and paying agents |
Not applicable.
10.G | Statement by experts |
Not applicable.
10.H | Documents on display |
The information set forth under the heading:
| Documents on display on page 266 |
of the GSK Annual Report 2016 is incorporated herein by reference.
10.I | Subsidiary information |
Not applicable.
Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
The information set forth under the headings:
| Treasury policies on page 77 and 78; and |
| Note 42 Financial instruments and related disclosures on pages 212 to 222 |
of the GSK Annual Report 2016 is incorporated herein by reference.
Item 12. | Description of Securities Other than Equity Securities |
12.A | Debt Securities |
Not applicable.
12.B | Warrants and Rights |
Not applicable.
12.C | Other Securities |
Not applicable.
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12.D | American Depositary Shares |
Fees and charges payable by ADR holders
The Bank of New York serves as the depositary (the Depositary) for GSKs American Depositary Receipt (ADR) programme. On April 6, 2015, GSK and the Depositary amended and restated the deposit agreement (the Deposit Agreement) between GSK, the Depositary and owners and holders of ADRs. Pursuant to the Deposit Agreement, ADR holders may be required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid. In particular, the Depositary, under the terms of the Deposit Agreement, shall charge (i) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the delivery and surrender of American Depositary Shares, (ii) a fee of $0.05 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to this Deposit Agreement, (iii) a fee for the distribution of securities other than cash or shares and (iv) a fee of $0.05 or less per American Depositary Share (or portion thereof) per annum for depositary services. In addition, the following charges shall be incurred by any party depositing or withdrawing Shares or surrendering ADRs or to whom American Depositary Shares are issued: (i) taxes and other governmental charges, (ii) such registration fees as may from time to time be in effect, (iii) certain cable, telex and facsimile transmission expenses, (iv) such expenses as are incurred by the Depositary in the conversion of foreign currency and (v) any other charges payable by the Depositary.
The Depositary may (i) withhold dividends or other distributions or sell any or all of the shares underlying the ADRs in order to satisfy any tax or governmental charge, (ii) deduct from any cash distribution any tax payable thereon or the cost of any currency conversion and (iii) collect any of its fees or charges by deduction from any cash distribution payable to ADR holders that are obligated to pay those fees or charges.
Direct and indirect payments by the Depositary
GSK receives payments from the Depositary in the form of (i) the reimbursement of expenses in connection with the
administration, servicing and maintenance of the ADR programme, (ii) a portion of the fees collected by the Depositary for the issuance and cancellation of American Depositary Shares and (iii) a portion of any cash dividend fees and/or special
dividend fees. In 2016, the Depositary made payments to GSK of approximately $7.1 million, of which approximately $6.0 million were related to expenses reimbursed and fees collected in connection with services provided in 2015.
Under certain circumstances, including removal of the Depositary or termination of the ADR programme by GSK, GSK is required to repay certain amounts paid to GSK and to compensate the Depositary for payments made or services provided on behalf of GSK.
Item 13. | Defaults, Dividend Arrearages and Delinquencies |
Not applicable.
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable.
Item 15. | Controls and Procedures |
The information set forth under the heading:
| Accountability Internal control framework on pages 105 to 106 |
of the GSK Annual Report 2016 is incorporated herein by reference.
US law and regulation
A number of provisions of US law and regulation apply to the company because our shares are quoted on the New York Stock Exchange (the NYSE) in the form of American Depositary Shares.
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NYSE rules
In general, the NYSE rules permit the company to follow UK corporate governance practices instead of those applied in the USA, provided that we explain any significant variations. This explanation is contained in Item 16.G of this Form 20-F. NYSE rules that came into effect in 2005 require us to file annual and interim written affirmations concerning the Audit & Risk Committee and our statement on significant differences in corporate governance.
Sarbanes-Oxley Act of 2002
Following a number of corporate and accounting scandals in the USA, Congress passed the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley is a wide ranging piece of legislation concerned largely with financial reporting and corporate governance.
As recommended by the SEC, the company has established a Disclosure Committee. The Committee reports to the CEO, the CFO and to the Audit & Risk Committee. It is chaired by the Company Secretary and the members consist of senior managers from finance, legal, corporate communications and investor relations.
External legal counsel, the external auditors and internal experts are invited to attend its meetings periodically. It has responsibility for considering the materiality of information and, on a timely basis, determining the disclosure of that information. It has responsibility for the timely filing of reports with the SEC and the formal review of the GSK Annual Report 2016 and Form 20-F. In 2016 the Committee met 18 times.
Sarbanes-Oxley requires that this annual report on Form 20-F contain a statement as to whether a member of our Audit & Risk Committee (ARC) is an audit committee financial expert as defined by Sarbanes-Oxley. For a summary regarding the Boards judgment on this matter, please refer to Item 16.A below and to pages 97 and 270 of the GSK Annual Report 2016. Additional disclosure requirements arise under section 302 and section 404 of Sarbanes-Oxley in respect of disclosure controls and procedures and internal control over financial reporting.
Section 302: Corporate responsibility for financial reports
Sarbanes-Oxley also introduced a requirement for the CEO and the CFO to complete formal certifications, confirming that:
| they have each reviewed the GSK Annual Report 2016 and Form 20-F; |
| based on their knowledge, the GSK Annual Report 2016 and Form 20-F contain no material misstatements or omissions; |
| based on their knowledge, the financial statements and other financial information fairly present, in all material respects, the financial condition, results of operations and cash flows as of the dates, and for the periods, presented in the GSK Annual Report 2016 and Form 20-F; |
| they are responsible for establishing and maintaining disclosure controls and procedures that ensure that material information is made known to them, and have evaluated the effectiveness of these controls and procedures as at the year-end, the results of such evaluation being contained in the GSK Annual Report 2016 and Form 20-F; |
| they are responsible for establishing and maintaining internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| they have disclosed in the GSK Annual Report 2016 and Form 20-F any changes in internal controls over financial reporting during the period covered by the GSK Annual Report 2016 and Form 20-F that have materially affected, or are reasonably likely to affect materially, the companys internal control over financial reporting; and |
| they have disclosed, based on their most recent evaluation of internal control over financial reporting, to the external auditors and the ARC, all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to affect adversely the companys ability to record, process, summarise and report financial information, and any fraud (regardless of materiality) involving persons that have a significant role in the companys internal control over financial reporting. |
The Group has carried out an evaluation under the supervision and with the participation of its management, including the CEO and CFO, of the effectiveness of the design and operation of the Groups disclosure controls and procedures as at 31 December 2016.
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There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on the Groups evaluation, the CEO and CFO have concluded that, as at December 31, 2016, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that the Group files and submits under the US Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported as and when required and that it is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.
The CEO and CFO completed these certifications on March 17, 2017.
Section 404: Managements annual report on internal control over financial reporting.
In accordance with the requirements of section 404 of Sarbanes-Oxley, the following report is provided by management in respect of the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act of 1934):
| management is responsible for establishing and maintaining adequate internal control over financial reporting for the Group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS; |
| management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission; |
| management has assessed the effectiveness of internal control over financial reporting, as at 31 December 2016 and has concluded that such internal control over financial reporting was effective. In addition, there have been no changes in the Groups internal control over financial reporting during 2016 that have materially affected, or are reasonably likely to affect materially, the Groups internal control over financial reporting; and |
| PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Group for the year ended December 31, 2016, has also assessed the effectiveness of the Groups internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report can be found in Item 18 below. |
Item 16. | [Reserved] |
Item 16.A | Audit committee financial expert |
The information set forth under the heading:
| Membership, within the Audit & Risk Committee Report, on page 97; and |
| Sarbanes-Oxley Act of 2002 on page 270 |
of the GSK Annual Report 2016 is incorporated herein by reference.
Item 16.B | Code of Ethics |
The information set forth under the heading:
| Code of Conduct and reporting lines on page 104 |
of the GSK Annual Report 2016 is incorporated herein by reference.
No waivers were granted from a provision of our code of ethics to an officer or person described in Item 16.B(a) that relates to one or more of the items set forth in Item 16.B(b) in 2016.
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Item 16.C | Principal Accountant Fees and Services |
16C.(a) | Audit Fees |
The information set forth in the table under the heading Fees payable to the companys auditor and its associates in the rows named Audit of parent company and consolidated financial statements, Audit of the companys subsidiaries and Attestation under s.404 of Sarbanes-Oxley Act 2002 on page 174 of the GSK Annual Report 2016 is incorporated herein by reference.
16C.(b) | Audit-Related Fees |
The information set forth in the table under the heading Fees payable to the companys auditor and its associates in the row named Other assurance services on page 174 of the GSK Annual Report 2016 is incorporated herein by reference. The other assurance services provided by the auditor relate to agreed upon procedures and other assurance services outside of statutory audit requirements.
16C.(c) | Tax Fees |
The information set forth in the table under the heading Fees payable to the companys auditor and its associates in the rows named Taxation compliance and Taxation advice on page 174 of the GSK Annual Report 2016 is incorporated herein by reference.
16C.(d) | All Other Fees |
The information set forth in the table under the heading Fees payable to the companys auditor and its associates in the row named All other services on page 174 of the GSK Annual Report 2016 is incorporated herein by reference. All other services provided by the auditor primarily related to advisory services for the year-ended 31 December 2016.
16C.(e) | The information set forth under the heading Non-audit services on page 104 of the GSK Annual Report 2016 is incorporated herein by reference. |
16C.(f) | Not applicable. |
Item 16.D | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
Item 16.E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Not applicable.
Item 16.F | Change in Registrants Certifying Accountant |
Not applicable.
Item 16.G | Corporate Governance |
Comparison of New York Stock Exchange Corporate Governance Standards and GlaxoSmithKline plcs corporate governance practice.
On November 4, 2003, the New York Stock Exchange (the NYSE) adopted new corporate governance standards. The application of the NYSEs standards is restricted for foreign companies, recognising that they have to comply with domestic requirements. As a foreign private issuer, GlaxoSmithKline plc (GlaxoSmithKline or the Company) must comply with the following NYSE standards:
1. | the Company must satisfy the audit committee requirements of the Securities and Exchange Commission (the SEC); |
2. | the Chief Executive Officer (the CEO) must promptly notify the NYSE in writing after any executive officer of the Company becomes aware of any non-compliance with any applicable provisions of the NYSEs corporate governance standards; |
3. | the Company must submit an annual affirmation to the NYSE affirming GlaxoSmithKlines compliance with applicable NYSE corporate governance standards, and submit interim affirmations to the NYSE notifying it of specified changes to the audit committee or a change to the status of the Company as a foreign private issuer; and |
4. | the Company must provide a brief description of any significant differences between its corporate governance practices and those followed by US companies under the NYSE listing standards. |
As a Company listed on the London Stock Exchange, GlaxoSmithKline is required to comply with the UK Listing Authoritys Listing Rules (the Listing Rules) and to report non-compliance with the UK Corporate Governance Code (the UK Code).
The table below discloses differences between GlaxoSmithKlines current domestic corporate governance practices, which are based on the UK Code, and the NYSE corporate governance standards, applicable to US companies.
NYSE Corporate Governance Standards |
Description of differences between GlaxoSmithKlines governance practice and the NYSE Corporate Governance Standards |
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Director Independence (303A.01 of NYSE Manual) | ||||
1. | Listed companies must have a majority of independent directors (as defined in Rule 10A-3 under the U.S Securities Exchange Act of 1934, as amended (the Exchange Act)). |
GlaxoSmithKline complies with the equivalent domestic requirements contained in the UK Code which was issued in September 2014.
The UK Code provides that the board of directors of GlaxoSmithKline (the Board) and its committees should have the appropriate balance of skills, experience, independence and |
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In addition, a director is not independent if:
(i) The director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been within the last three years, an executive officer, of the listed company.
(ii) The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
(iii) (A) The director is a current partner or employee of a firm that is the listed companys internal or external auditor; (B) the director has an immediate family member who is a current partner of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and personally works on the listed companys audit; or (D) the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on the listed companys audit within that time.
(iv) The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the listed companys present executive officers at the same time serves or served on that companys compensation committee.
(v) The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other companys consolidated gross revenues.
(For the purposes of these standards executive officer is defined to have the meaning specified for the term officer in Rule 16a-1(f) under Exchange Act). |
The Board considers all its Non-Executive Directors to be independent in character and judgment and has concluded that all its Non-Executive Directors are independent within the meaning of the UK Code. The Chairman satisfied the independence criteria on appointment in accordance with the UK Code (A.3.1).
GlaxoSmithKline complied with the UK Code requirement that all Directors should be subject to annual election or re-election by shareholders (B.7) at its Annual General Meeting in 2016, and intends to comply with this requirement at its 2017 Annual General Meeting.
The UK Code also provides that the Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual Directors (B.6). Evaluation of the Board should consider the balance of skills, experience, independence and knowledge of the Company on the Board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness (B.6). GlaxoSmithKline has complied with this requirement. In addition, the evaluation of the Board should be externally facilitated at least every three years and a statement should be made available of whether an external facilitator has any other connection with the Company and the external facilitator should be identified in the annual report (B.6.2). The Company conducted an externally facilitated evaluation in 2014. Internally facilitated evaluations were conducted in 2015 and 2016. The Company will conduct an externally facilitated evaluation in 2017.
The UK Code provides that all Directors should receive an induction on joining the Board and should regularly update and refresh their skills and knowledge (B.4). The Chairman should regularly review and agree with each Director their training and development needs (B.4.2). |
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Executive Sessions (303A.03 of the NYSE Manual) | Meetings | |||
3. | To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management. |
GlaxoSmithKline complies with the equivalent domestic requirements set out in the UK Code, which requires that the Chairman of GlaxoSmithKline should hold meetings with the Non-Executive Directors without executives present. The Non-Executive Directors, led by the Senior Independent Director, also meet at least annually without the Chairman present to appraise the Chairmans performance (A.4.2).
The UK Code provides that the Chairman should promote a culture of openness and debate by facilitating the effective contribution of Non-Executive Directors, in particular, and ensuring constructive relations between Executive and Non-Executive Directors (A.3). In addition, the Chairman is responsible for ensuring that all Directors are made aware of shareholders concerns (E.1). |
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Nominating / Corporate Governance Committee (303A.04 of the NYSE Manual) | Nominations Committee | |||
4. |
(a) Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.
(b) The nominating/corporate governance committee must have a written charter that addresses:
(i) the committees purpose and responsibilities which, at minimum, must be to: identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance guidelines applicable to the corporation; and oversee the evaluation of the board and management; and
(ii) an annual performance evaluation of the committee. |
GlaxoSmithKline complies with the corresponding domestic requirements set out in the UK Code, which requires that GlaxoSmithKline should have a Nominations Committee that is comprised of a majority of independent Non-Executive Directors (B.2.1).
GlaxoSmithKlines Nominations Committee has written terms of reference in accordance with the UK Code. The terms of reference are available on the Companys website and explain the Nominations Committees role and the authority delegated to it by the Board (B.2.1). The Nominations Committee reviews the structure, size, diversity (including gender diversity), and composition of the Board and leads the process for the appointment of members to the Board and the Corporate Executive Team (the CET), and makes recommendations to the Board as appropriate. The Committee also monitors the planning of succession for the Board and Senior Management (B.2).
In compliance with the UK Code, the terms and conditions of appointment of Non-Executive Directors are available for inspection (B.3.2). |
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The UK Code requires that a separate section in the Companys Annual Report describe the work of the Nominations Committee in discharging its duties, including the process it has used in relation to Board appointments (B.2.4). An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director. Where an external search consultancy has been used, it should be identified in the report and a statement should be made as to whether it has any other connection with the company (B.2.4). This section should include a description of the boards policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives (B.2.4). GlaxoSmithKline has complied with this requirement.
As described above, there is an annual Board evaluation exercise, which also includes evaluation of the Boards committees and individual Directors (B.6).
The Board is responsible for regularly reviewing its corporate governance standards and practices. The Company Secretary oversees corporate governance matters for the Group. The Company Secretary is responsible for advising the Board through the Chairman on all corporate governance matters. Domestic requirements do not mandate that GlaxoSmithKline establish a distinct corporate governance committee. |
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Compensation Committee (303A.05 of the NYSE Manual) | Remuneration Committee | |||
5. |
(a) Listed companies must have a compensation committee composed entirely of independent directors. Compensation committee members must satisfy the additional independence requirements specific to compensation committee membership set forth in Section 2(a)(ii) in the Section titled Independence Tests above.
(b) The compensation committee must have a written charter that addresses:
(i) the committees purpose and responsibilities which, at a minimum, must be to have direct responsibility to:
(A) review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEOs performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the CEOs compensation level based on this evaluation; |
GlaxoSmithKline complies with the equivalent domestic requirements set out in the UK Code, which requires that GlaxoSmithKline should have a Remuneration Committee that is comprised of at least three independent Non-Executive Directors (D.2.1).
GlaxoSmithKlines Remuneration Committee has written terms of reference in accordance with the UK Code. The terms of reference are available on the Companys website and explain the Remunerations Committees role and the authority delegated to it by the Board (D.2.1). The Remuneration Committee determines the terms of service and remuneration of the Executive Directors and members of the CET and, with the assistance of external independent advisers, it evaluates and makes recommendations to the Board on overall executive remuneration policy (the Chairman and the CEO are responsible for evaluating and making recommendations to the Board on the remuneration of Non-Executive Directors). Where remuneration consultants are appointed, they should be identified in the annual report and a statement should be made as to whether they have any other connection with the company (D.2.1). |
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(B) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and
(C) prepare the disclosure required by item
(ii) an annual performance evaluation of the compensation committee.
(iii) The rights and responsibilities of the compensation committee set forth in Section 303A.05(c).
(c) (i) The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser.
(ii) The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel or other adviser retained by the compensation committee.
(iii) The listed company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to a compensation consultant, independent legal counsel or any other adviser retained by the compensation committee.
(iv) The compensation committee may select a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration, all factors relevant to that persons independence from management, including the following:
(A) The provision of other services to the listed company by the person that employs the compensation consultant, legal counsel or other adviser;
(B) The amount of fees received from the listed company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
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The UK Code provides that the Remuneration Committee:
(a) should take care to recognise and manage conflicts of interest when receiving views from Executive Directors or senior management, or consulting the Chief Executive about its proposals (D.2) and should have delegated responsibility for setting remuneration for all Executive Directors and the Chairman, including pension rights and any compensation payments (D.2.2);
(b) should recommend and monitor the level and structure of remuneration for senior management (D.2.2);
(c) should consider what compensation commitments (including pension contributions and all other elements) the directors terms of appointment would entail in the event of early termination (D.1.4.);
(d) should invite shareholders specifically to approve all new long-term incentive schemes and significant changes to existing schemes (D.2.4.);
(e) should judge where to position the Company relative to other companies and should be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases (D.1); and
(f) should consider whether the Directors should be eligible for annual bonuses and benefits under long-term incentive schemes and determine an appropriate balance between fixed and performance-related immediate and deferred remuneration bearing in mind that performance-related elements of Executive Directors remuneration should be designed to promote the long-term success of the Company and be transparent, stretching and rigorously applied (D.1, D.1.1 and Schedule A). Incentive schemes should include provisions that would enable the Company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so (D.1.1).
The UK Code requires that payouts under incentive schemes should be subject to challenging performance criteria, including non-financial performance criteria where appropriate and remuneration incentives should be compatible with the Companys risk policies and systems (Schedule A). In addition, remuneration of Non-Executive Directors should not include share options or other performance-related elements (D.1.3).
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(C) The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
(D) Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
(E) Any stock of the listed company owned by the compensation consultant, legal counsel or other adviser; and
(F) Any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the listed company. |
As described above, there is an annual Board evaluation exercise, which also includes evaluation of the Boards committees (B.6). |
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Audit Committee (303A.06 and 303A.07 of the NYSE Manual) | Audit & Risk Committee | |||
6. | Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. |
GlaxoSmithKline complies with equivalent domestic requirements set out in the UK Code, which requires that GlaxoSmithKline has an Audit & Risk Committee that is comprised of at least three independent Non-Executive Directors (C.3.1). The Company considers all members of the Audit & Risk Committee are independent. The Board has also satisfied itself, in line with the UK Code, that at least one member of the Audit & Risk Committee has recent and relevant financial experience.
The UK Code requires the Audit & Risk Committee to:
(a) monitor the integrity of the financial statements of the Company and any formal announcements relating to the Companys financial performance, reviewing significant financial reporting judgments contained in them (C.3.2);
(b) review the Companys internal financial controls and internal control and risk management systems (C.3.2);
(c) monitor and review the effectiveness of the Companys internal audit function (C.3.2);
(d) make recommendations to the Board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor (C.3.2); |
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(e) review and monitor the external auditors independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements (C.3.2);
(f) develop and implement policy on the engagement of external auditors to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm, and to report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken (C.3.2);
(g) report to the Board on how it has discharged its responsibilities; and
(h) review arrangements by which the staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters (C.3.5).
GlaxoSmithKlines Audit & Risk Committee meets the requirements of Rule 10A-3 in that:
each member of the Audit & Risk Committee is deemed to be independent in accordance with the Securities Exchange Act of 1934, as amended, and applicable NYSE and UK requirements;
the Audit & Risk Committee, amongst other things, is responsible for recommending the appointment, compensation, maintenance of independence and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, and each such accounting firm must report directly to the Audit & Risk Committee;
the Audit & Risk Committee has established a procedure for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;
the Audit & Risk Committee has the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties; and
GlaxoSmithKline must provide appropriate funding for the Audit & Risk Committee.
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(iii) the duties and responsibilities of the audit committee which, at a minimum, must include those set out in Rule 10A-3(b)(2), (3), (4) and (5) of the Exchange Act as well as to:
(A) at least annually, obtain and review a report by the independent auditor describing: the firms internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the auditors independence) all relationships between the independent auditor and the listed company;
(B) meet to review and discuss the listed companys annual audited financial statements and quarterly financial statements with management and the independent auditor, including reviewing the listed companys specific disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations;
(C) discuss the listed companys earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;
(D) discuss policies with respect to risk assessment and risk management;
(E) meet separately, periodically, with management, with internal auditors (or other personnel responsible for the internal audit function) and with independent auditors;
(F) review with the independent auditor any audit problems or difficulties and managements response;
(G) set clear hiring policies for employees or former employees of the independent auditors; and
(H) report regularly to the board of directors.
(c) Each listed company must have an internal audit function. |
The report should include:
the significant issues that the committee considered in relation to the financial statements, and how these issues were addressed (C.3.8);
an explanation of how it has assessed the effectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor, and information on the length of tenure of the current audit firm and when a tender was last conducted (C.3.8); and
if the external auditor provides non-audit services, an explanation of how auditor objectivity and independence are safeguarded (C.3.8).
Please see section 6 above for a description of the main role and responsibilities of the Audit & Risk Committee.
In accordance with the UK Code (C.3.6), the audit committee monitor and review the effectiveness of GlaxoSmithKlines internal audit function. |
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Shareholder Approval of Equity Compensation Plans (303A.08 of the NYSE Manual) | ||||
8. | Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans. | GlaxoSmithKline complies with corresponding domestic requirements in the Listing Rules, which mandate that the Company must seek shareholder approval for employee share schemes (D.2.4 and Listing Rule 9.4). Please see section 5(d) above. | ||
Corporate Governance Guidelines (303A.09 of the NYSE Manual) | ||||
9. | Listed companies must adopt and disclose corporate governance guidelines. | GlaxoSmithKline complies with corresponding domestic requirements in the Listing Rules and the UK Code, which require that GlaxoSmithKline include an explanation in its Annual Report of how it complies with the principles of the UK Code and that it confirm that it complies with the UK Codes provisions or, where it does not, provide an explanation of how and why it does not comply (Listing Rule 9.8.6). In addition, GlaxoSmithKline is required to make certain mandatory corporate governance statements in the Directors Report in accordance with the UK Listing Authoritys Disclosure Guidance and Transparency Rules, DTR 7, which was issued by the UK Financial Conduct Authority to implement the eighth Company Law Directive; GlaxoSmithKline has complied with these requirements in its 2016 Annual Report. | ||
Code of Business Conduct and Ethics (303A.10 of the NYSE Manual) | Code of Conduct | |||
10. | Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. | GlaxoSmithKlines Code of Conduct for all employees, including the CEO, CFO and other senior financial officers, is available on the Companys website. | ||
Foreign Private Issuer Disclosure (303A.11 of the NYSE Manual) | ||||
11. |
Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards.
Listed foreign private issuers are required to provide this disclosure in the English language and in their annual reports filed on Form 20-F. |
GlaxoSmithKline fulfils this requirement by publishing this document.
GlaxoSmithKline fulfils this requirement by including this disclosure in its annual report on Form 20-F. |
||
12. | Certification Requirements (303A.12 of the NYSE Manual) | |||
Each listed company and its CEO must file certain annual and interim certifications regarding compliance with the corporate governance requirements and certain other matters (although foreign private issuers are only required to comply with a subset of these requirements). | GlaxoSmithKline fulfils this requirement by filing the required certifications each year. |
Item 16.H | Mine Safety Disclosure |
Not applicable.
Item 17 | Financial Statements |
Not applicable.
61
Item 18 | Financial Statements |
The information set forth under the headings:
| Consolidated income statement on page 158; |
| Consolidated statement of comprehensive income on page 158; |
| Consolidated balance sheet on page 159; |
| Consolidated statement of changes in equity on page 160; |
| Consolidated cash flow statement on page 161; and |
| Notes to the financial statements on pages 162 to 231 |
of the GSK Annual Report 2016 is incorporated herein by reference.
62
Report on Form 20-F
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of GlaxoSmithKline plc
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated cash flow statements, consolidated statements of comprehensive income and consolidated statements of changes in equity present fairly, in all material respects, the financial position of GlaxoSmithKline plc and its subsidiaries at 31 December 2016 and 31 December 2015 and the results of their operations and their cash flows for each of the three years in the period ended 31 December 2016 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting at 31 December 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements annual report on internal control over financial reporting included in item 15 of this 20-F. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London, United Kingdom
17 March 2017
63
Item 19 | Exhibits |
1.1 | Memorandum and Articles of Association of the Registrant as in effect on the date hereof. | |
2.1 | Amended and Restated Deposit Agreement among the Registrant and The Bank of New York Mellon, as Depositary, and the owners and holders from time to time of the American Depositary Shares issued thereunder, including the form of American Depositary Receipt, is incorporated by reference to the post-effective amendment to the Registration Statement on Form F-6 (No. 333-148017) filed with the Commission on March 30, 2015. | |
4.1 | Service Agreement between SmithKline Beecham Corporation and Moncef Slaoui is incorporated by reference to Exhibit 4.4 to the Registrants Annual Report on Form 20-F filed with the Commission on February 29, 2008. | |
4.2 | Amended and Restated Service Agreement between GlaxoSmithKline LLC (formerly known as SmithKline Beecham Corporation) and Moncef Slaoui dated December 21, 2010 is incorporated by reference to Exhibit 4.3 to the Registrants Annual Report on Form 20-F filed with the Commission on March 4, 2011. | |
4.3 | UK Service Agreement between GlaxoSmithKline Services Unlimited and Sir Andrew Witty is incorporated by reference to Exhibit 4.5 to the Registrants Annual Report on Form 20-F filed with the Commission on February 29, 2008. | |
4.4 | UK Service Agreement between GlaxoSmithKline Services Unlimited and Sir Andrew Witty dated June 18, 2008 is incorporated by reference to Exhibit 4.4 to the Registrants Annual Report on Form 20-F filed with the Commission on March 4, 2009. | |
4.5 | Amendment to UK Service Agreement between GlaxoSmithKline Services Unlimited and Sir Andrew Witty dated February 4, 2010 is incorporated by reference to Exhibit 4.5 to the Registrants Annual Report on Form 20-F filed with the Commission on March 1, 2010. | |
4.6 | UK Service Agreement between GlaxoSmithKline Services Unlimited and Simon Dingemans dated September 8, 2010 is incorporated by reference to Exhibit 4.7 to the Registrants Annual Report on Form 20-F filed with the Commission on March 4, 2011. | |
4.7 | UK Service Agreement between GlaxoSmithKline Services Unlimited and Emma N Walmsley dated December 20, 2016. | |
4.8 | UK Service Agreement between GlaxoSmithKline Services Unlimited and Patrick John Thompson Vallance dated December 19, 2016. | |
4.9 | Contribution Agreement relating to the Consumer Healthcare Joint Venture made on April 22, 2014, as amended and restated on May 29, 2014 and as further amended and restated on March 1, 2015, between Novartis AG, GlaxoSmithKline plc and GlaxoSmithKline Consumer Healthcare Holdings Limited (formerly known as Leo Constellation Limited) is incorporated by reference to Exhibit 4.8 of the Registrants Annual Report on Form 20-F filed with the Commission on March 18, 2016. Confidential portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. | |
4.10 | Share and Business Sale Agreement relating to the Vaccines Group made on April 22, 2014, as amended and restated on May 29, 2014, as amended on October 9, 2014, and as further amended and restated on March 1, 2015, between Novartis AG and GlaxoSmithKline plc is incorporated by reference to Exhibit 4.9 of the Registrants Annual Report on Form 20-F filed with the Commission on March 18, 2016 . Confidential portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. | |
4.11 | Sale and Purchase Agreement relating to the Oncology Business made on April 22, 2014, as amended and restated on May 29, 2014, and as further amended and restated on November 21, 2014 and March 1, 2015, between GlaxoSmithKline plc and Novartis AG is incorporated by reference to Exhibit 4.10 of the Registrants Annual Report on Form 20-F filed with the Commission on March 18, 2016 . Confidential portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. | |
4.12 | Shareholders Agreement relating to GlaxoSmithKline Consumer Healthcare Holdings Limited made on March 2, 2015, among Setfirst Limited, Novartis Holding AG, Novartis Finance Corporation, GlaxoSmithKline plc, Novartis AG and GlaxoSmithKline Consumer Healthcare Holdings Limited is incorporated by reference to Exhibit 4.12 of the Registrants Annual Report on Form 20-F filed with the Commission on March 18, 2016 . Confidential portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. | |
8.1 | A list of the Registrants principal subsidiaries is incorporated by reference to the information set forth under Group Companies on pages 272 to 282 of the GSK Annual Report 2016 included as Exhibit 15.2. |
64
12.1 | Certification Required by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 Sir Andrew Witty. | |
12.2 | Certification Required by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 Simon Dingemans. | |
13.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | |
15.1 | Consent of PricewaterhouseCoopers LLP. | |
15.2* | GSK Annual Report 2016. |
* | Certain of the information included within Exhibit 15.2, which is provided pursuant to Rule 12b-23(a)(3) of the Securities Exchange Act of 1934, as amended, is incorporated by reference in this Form 20-F, as specified elsewhere in this Form 20-F. With the exception of the items and pages so specified, the GSK Annual Report 2016 is not deemed to be filed as part of this Form 20-F. |
65
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
GlaxoSmithKline plc | ||||||
March 17, 2017 | By: |
/s/ Simon Dingemans |
||||
Simon Dingemans | ||||||
Chief Financial Officer |
66
Exhibit 1.1
Company No. 3888792
ARTICLES OF ASSOCIATION
(As adopted by Special Resolution passed on 6 May 2010 and amended by Special Resolutions passed on 5 May 2011, 3 May 2012, 1 May 2013, 7 May 2014, 7 May 2015 and 5 May 2016)
OF
GlaxoSmithKline plc
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
SPECIAL RESOLUTIONS
GlaxoSmithKline plc
Passed: 6 May 2010
At the TENTH ANNUAL GENERAL MEETING of the Company held on Thursday 6 th May 2010, the following resolutions were duly passed as SPECIAL RESOLUTIONS:-
12 | Disapplication of pre-emption rights (Special resolution) |
THAT subject to Resolution 11 being passed, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by Resolution 11 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited:
(a) | to the allotment of equity securities in connection with an offer or issue of equity securities (but in the case of the authority granted under paragraph (b) of Resolution 11, by way of a rights issue only): |
(i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii)to holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | in the case of the authority granted under paragraph (a) of Resolution 11 and/or in the case of any transfer of treasury shares which is treated as an allotment of equity securities under section 560(3) of the Act, to the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £64,893,333. |
and shall expire at the end of the next Annual General Meeting of the company to be held in 2011 (or, if earlier, at the close of business on 30th June 2011) save that the company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.
13 | Purchase of own shares by the company (Special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary shares of 25p each provided that:
(a) | the maximum number of Ordinary shares hereby authorised to be purchased is 519,146,669; |
(b) | the minimum price which may be paid for each Ordinary share is 25p; |
(c) | the maximum price which may be paid for each Ordinary share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary shares for the five business days immediately preceding the day on which the Ordinary share is contracted to be purchased and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | the authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next Annual General Meeting of the company to be held in 2011 or, if earlier, on 30th June 2011 (provided that the company may enter into a contract for the purchase of Ordinary shares before the expiry of this authority which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary shares pursuant to any such contract under this authority). |
15 | Reduced notice of a general meeting other than an Annual General Meeting (Special resolution) |
THAT a general meeting of the company other than an Annual General Meeting may be called on not less than 14 clear days notice.
16 | Adopt new Articles of Association (Special resolution) |
THAT:
(a) | the Articles of Association of the company be amended by deleting all the provisions of the companys Memorandum of Association which, by virtue of section 28 of the Act, are to be treated as provisions of the companys Articles of Association; and |
(b) | the Articles of Association produced to the meeting, and initialled by the Chairman for the purpose of identification, be adopted as the Articles of Association of the company in substitution for, and to the exclusion of, all existing Articles of Association of the company. |
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
SPECIAL RESOLUTIONS
GlaxoSmithKline plc
Passed: 5 May 2011
At the ELEVENTH ANNUAL GENERAL MEETING of the Company held on Thursday 5 th May 2011, the following resolutions were duly passed as SPECIAL RESOLUTIONS:-
22 | Disapplication of pre-emption rights (Special resolution) |
THAT subject to Resolution 21 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by Resolution 21 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited:
(a) | to the allotment of equity securities in connection with an offer or issue of equity securities: |
(i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii) to holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | to the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £64,845,990. |
and shall expire at the end of the next Annual General Meeting of the company to be held in 2012 (or, if earlier, at the close of business on 30th June 2012) save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.
23 | Purchase of own shares by the company (Special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary shares of 25 pence each provided that:
(a) | the maximum number of Ordinary shares hereby authorised to be purchased is 518,767,924; |
(b) | the minimum price which may be paid for each Ordinary share is 25 pence; |
(c) | the maximum price, exclusive of expenses, which may be paid for each Ordinary share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary shares for the five business days immediately preceding the day on which the Ordinary share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | the authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next Annual General Meeting of the company to be held in 2012 or, if earlier, on 30th June 2012 (provided that the company may, before such expiry, enter into a contract for the purchase of Ordinary shares, which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary shares pursuant to any such contract under this authority). |
25 | Reduced notice of a general meeting other than an Annual General Meeting (Special resolution) |
THAT a general meeting of the company other than an Annual General Meeting may be called on not less than 14 clear days notice.
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
RESOLUTIONS
GlaxoSmithKline plc
Passed: 3 May 2012
At the TWEFLTH ANNUAL GENERAL MEETING of the Company held on Thursday 3 May 2012, the following resolutions were duly passed as SPECIAL RESOLUTIONS:-
21 | Disapplication of pre-emption rights (special resolution) |
THAT subject to resolution 20 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by resolution 20 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited to:
(a) | the allotment of equity securities in connection with an offer or issue of equity securities to: |
(i) Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii) holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to Treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of, any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £63,109,370. |
and shall expire at the end of the next AGM of the company to be held in 2013 or, if earlier, at the close of business on 28 June 2013, save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.
22 | Purchase of own shares by the company (special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary Shares of 25 pence each provided that the:
(a) | maximum number of Ordinary Shares hereby authorised to be purchased is 504,874,967; |
(b) | minimum price, exclusive of expenses, which may be paid for each Ordinary Share is 25 pence; |
(c) | maximum price, exclusive of expenses, which may be paid for each Ordinary Share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary Shares for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next AGM of the company to be held in 2013 or, if earlier, at the close of business on 28 June 2013, save that the company may, before such expiry, enter into a contract for the purchase of Ordinary Shares which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary Shares pursuant to any such contract as if this authority had not expired. |
24 | Reduced notice of a general meeting other than an Annual General Meeting (special resolution) |
THAT a general meeting of the company other than an Annual General Meeting may be called on not less than 14 clear days notice.
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
RESOLUTIONS
GlaxoSmithKline plc
Passed: 1 May 2013
At the THIRNTEENTH ANNUAL GENERAL MEETING of the Company held on Wednesday 1 May 2013, the following resolutions were duly passed as SPECIAL RESOLUTIONS:-
22 | Disapplication of pre-emption rights (special resolution) |
THAT subject to resolution 21 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by resolution 21 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited to:
(a) | the allotment of equity securities in connection with an offer or issue of equity securities to: |
(i) Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii) holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to Treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of, any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £61,330,345. |
and shall expire at the end of the next AGM of the company to be held in 2014 or, if earlier, at the close of business on 30 June 2014, save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.
23 | Purchase of own shares by the company (special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary Shares of 25 pence each provided that the:
(a) | maximum number of Ordinary Shares hereby authorised to be purchased is 490,642,760; |
(b) | minimum price, exclusive of expenses, which may be paid for each Ordinary Share is 25 pence; |
(c) | maximum price, exclusive of expenses, which may be paid for each Ordinary Share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary Shares for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next AGM of the company to be held in 2014 or, if earlier, at the close of business on 30 June 2014, save that the company may, before such expiry, enter into a contract for the purchase of Ordinary Shares which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary Shares pursuant to any such contract as if this authority had not expired. |
25 | Reduced notice of a general meeting other than an Annual General Meeting (special resolution) |
THAT a general meeting of the company other than an Annual General Meeting may be called on not less than 14 clear days notice.
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
RESOLUTIONS
GlaxoSmithKline plc
Passed: 7 May 2014
At the FOURTEENTH ANNUAL GENERAL MEETING of the Company held on Wednesday 7 May 2014, the following special resolutions were duly passed under special business:-
22 | Disapplication of pre-emption rights (special resolution) |
THAT subject to resolution 21 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by resolution 21 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited to:
(a) | the allotment of equity securities in connection with an offer or issue of equity securities to: |
(i) Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii) holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to Treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of, any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £60,728,484, |
and shall expire at the end of the next AGM of the company to be held in 2015 or, if earlier, at the close of business on 30 June 2015, save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.
23 | Purchase of own shares by the company (special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary Shares of 25 pence each provided that the:
(a) | maximum number of Ordinary Shares hereby authorised to be purchased is 485,827,872; |
(b) | minimum price, exclusive of expenses, which may be paid for each Ordinary Share is 25 pence; |
(c) | maximum price, exclusive of expenses, which may be paid for each Ordinary Share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary Shares for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
( d) | authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next AGM of the company to be held in 2015 or, if earlier, at the close of business on 30 June 2015, save that the company may, before such expiry, enter into a contract for the purchase of Ordinary Shares which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary Shares pursuant to any such contract as if this authority had not expired. |
25 | Reduced notice of a general meeting other than an Annual General Meeting (special resolution) |
THAT a general meeting of the company other than an Annual General Meeting may be called on not less than 14 clear days notice.
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
RESOLUTIONS
GlaxoSmithKline plc
Passed: 7 May 2015
At the FIFTEENTH ANNUAL GENERAL MEETING of the Company held on Thursday 7 May 2015, the following resolutions were duly passed under special business:-
18 | Donations to political organisations and political expenditure (ordinary resolution) |
THAT, in accordance with sections 366 and 367 of the Companies Act 2006 (the Act) the company is, and all companies that are, at any time during the period for which this resolution has effect, subsidiaries of the company as defined in the Act, are authorised in aggregate to:
(a) | make political donations, as defined in section 364 of the Act, to political parties and/or independent electoral candidates, as defined in section 363 of the Act, not exceeding £50,000 in total; |
(b) | make political donations to political organisations other than political parties, as defined in section 363 of the Act, not exceeding £50,000 in total; and |
(c) | incur political expenditure, as defined in section 365 of the Act, not exceeding £50,000 in total, |
in each case during the period beginning with the date of passing this resolution and ending at the end of the next AGM of the company to be held in 2016 or, if earlier, at the close of business on 30 June 2016. In any event, the aggregate amount of political donations and political expenditure made or incurred under this authority shall not exceed £100,000.
19 | Authority to allot shares (ordinary resolution) |
THAT the Directors be and are hereby generally and unconditionally authorised, in accordance with section 551 of the Act, in substitution for all subsisting authorities, to exercise all powers of the company to allot shares in the company and to grant rights to subscribe for or convert any security into shares in the company up to an aggregate nominal amount of £405,360,976 which authority shall expire at the end of the next AGM of the company to be held in 2016 or, if earlier, at the close of business on 30 June 2016 (unless previously revoked or varied by the company in general meeting) save that under such authority the company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or rights to subscribe for or convert any security into shares to be granted after such expiry and the Directors may allot shares or grant rights to subscribe for or convert any security into shares in pursuance of such an offer or agreement as if the relevant authority conferred hereby had not expired.
20 | Disapplication of pre-emption rights (special resolution) |
THAT subject to resolution 19 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by resolution 19 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited to:
(a) | the allotment of equity securities in connection with an offer or issue of equity securities to: |
(i) | Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and |
(ii) | holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary, |
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to Treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of, any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £60,810,227, and shall expire at the end of the next AGM of the company to be held in 2016 or, if earlier, at the close of business on 30 June 2016, save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the relevant authority conferred hereby had not expired. |
21 | Purchase of own shares by the company (special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary Shares of 25 pence each provided that the:
(a) | maximum number of Ordinary Shares hereby authorised to be purchased is 486,481,816; |
(b) | minimum price, exclusive of expenses, which may be paid for each Ordinary Share is 25 pence; |
(c) | maximum price, exclusive of expenses, which may be paid for each Ordinary Share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary Shares for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next AGM of the company to be held in 2016 or, if earlier, at the close of business on 30 June 2016, save that the company may, before such expiry, enter into a contract for the purchase of Ordinary Shares which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary Shares pursuant to any such contract as if this authority had not expired. |
22 | Exemption from statement of the name of the senior statutory auditor in published copies of the auditors reports (ordinary resolution) |
(a) | THAT: |
in accordance with section 506 of the Act, the name of the person who signs the auditors reports to the companys members on the annual accounts and auditable reports of the company for the year ending 31 December 2015 as senior statutory auditor (as defined in section 504 of the Act) for and on behalf of the companys auditors, should not be stated in published copies of the reports (such publication being as defined in section 505 of the Act) and the copy of the reports to be delivered to the Registrar of Companies under Chapter 10 of Part 15 of the Act; and
(b) | the company considers on reasonable grounds that statement of the name of the senior statutory auditor would create or be likely to create a serious risk that the senior statutory auditor, or any other person, would be subject to violence or intimidation. |
23 | Reduced notice of a general meeting other than an AGM (special resolution) |
THAT a general meeting of the company other than an AGM may be called on not less than 14 clear days notice.
24 | Approval of the adoption of the GlaxoSmithKline Share Value Plan (ordinary resolution) |
THAT the adoption of the GlaxoSmithKline Share Value Plan (the Plan), the principal features of which are summarised in the explanatory notes to this Notice and the rules of which have been signed for the purposes of identification by the Chairman, be and is hereby approved, and the Directors are hereby authorised to:
(a) | do whatever may be necessary or expedient to carry the Plan into effect, including making such modifications to the Plan as they may consider appropriate to take account of the requirements of the Financial Conduct Authority and best practice; and |
(b) | establish further plans for the benefit of employees outside the UK, based on the Plan but modified to take account of local tax, exchange control or securities laws provided that any Ordinary Shares of the company made available under such further plans are treated as counting against the limits on individual participation, and overall participation contained in the Plan. |
Company No. 3888792
The Companies Acts 1948 to 2006
COMPANY LIMITED BY SHARES
RESOLUTIONS
GlaxoSmithKline plc (the Company)
Passed: 5 May 2016
At the SIXTEENTH ANNUAL GENERAL MEETING of the Company held on Thursday 5 May 2016, the following special resolutions were duly passed under special business:-
18 | Disapplication of pre-emption rights (special resolution) |
THAT subject to resolution 17 being passed, in substitution for all subsisting authorities, the Directors be and are hereby empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority conferred on the Directors by resolution 18 and/or where such allotment constitutes an allotment of equity securities under section 560(3) of the Act, free of the restrictions in section 561(1) of the Act, provided that this power shall be limited to:
(a) | the allotment of equity securities in connection with an offer or issue of equity securities to: |
(i) Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
(ii) holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary,
but so that the Directors may impose any limits or make such exclusions or other arrangements as they consider expedient in relation to Treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems under the laws of, or the requirements of, any relevant regulatory body or stock exchange, in any territory, or any matter whatsoever; and
(b) | the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £121,759,464, and shall expire at the end of the next AGM of the company to be held in 2017 or, if earlier, at the close of business on 30 June 2017, save that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the relevant authority conferred hereby had not expired. |
19 | Purchase of own shares by the company (special resolution) |
THAT the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of its own Ordinary Shares of 25 pence each provided that the:
(a) | maximum number of Ordinary Shares hereby authorised to be purchased is 487,037,856; |
(b) | minimum price, exclusive of expenses, which may be paid for each Ordinary Share is 25 pence; |
(c) | maximum price, exclusive of expenses, which may be paid for each Ordinary Share shall be the higher of (i) an amount equal to 5% above the average market value for the companys Ordinary Shares for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Official List at the time the purchase is carried out; and |
(d) | authority conferred by this resolution shall, unless renewed prior to such time, expire at the end of the next AGM of the company to be held in 2017 or, if earlier, at the close of business on 30 June 2017, save that the company may, before such expiry, enter into a contract for the purchase of Ordinary Shares which would or might be completed wholly or partly after such expiry and the company may purchase Ordinary Shares pursuant to any such contract as if this authority had not expired. |
21 | Reduced notice of a general meeting other than an AGM (special resolution) |
THAT a general meeting of the company other than an AGM may be called on not less than 14 working days notice.
Company No. 3888792
ARTICLES OF ASSOCIATION
(As adopted by Special Resolution passed on 6 May 2010 and amended by Special Resolutions passed on 5 May 2011, 3 May 2012, 1 May 2013, 7 May 2014, 7 May 2015 and 5 May 2016)
OF
GLAXOSMITHKLINE PLC
CONTENTS
Page | ||||||
1. |
Exclusion of Model Articles |
1 | ||||
2. |
Definitions |
1 | ||||
3. |
Limited Liability |
3 | ||||
4. |
Change of Name |
3 | ||||
5. |
Rights Attached to Shares |
3 | ||||
6. |
Redeemable Shares |
3 | ||||
7. |
Variation of Rights |
3 | ||||
8. |
Pari Passu Issues |
4 | ||||
9. |
Shares |
4 | ||||
10. |
Payment of Commission |
4 | ||||
11. |
Trusts Not Recognised |
4 | ||||
12. |
Suspension of Rights Where Non-Disclosure of Interest |
4 | ||||
13. |
Uncertificated Shares |
7 | ||||
14. |
Right to Share Certificates |
8 | ||||
15. |
Replacement of Share Certificates |
9 | ||||
16. |
Share Certificates Sent at Holders Risk |
9 | ||||
17. |
Execution of Share Certificates |
9 | ||||
18. |
Companys Lien on Shares Not Fully Paid |
9 | ||||
19. |
Enforcing Lien by Sale |
9 | ||||
20. |
Application of Proceeds of Sale |
10 | ||||
21. |
Calls |
10 | ||||
22. |
Timing of Calls |
10 | ||||
23. |
Liability of Joint Holders |
10 |
24. |
Interest Due on Non-Payment |
10 | ||||
25. |
Sums Due on Allotment Treated as Calls |
11 | ||||
26. |
Power to Differentiate |
11 | ||||
27. |
Payment of Calls in Advance |
11 | ||||
28. |
Notice if Call or Instalment Not Paid |
11 | ||||
29. |
Form of Notice |
11 | ||||
30. |
Forfeiture for Non-Compliance with Notice |
11 | ||||
31. |
Notice after Forfeiture |
12 | ||||
32. |
Sale of Forfeited Shares |
12 | ||||
33. |
Arrears to be Paid Notwithstanding Forfeiture |
12 | ||||
34. |
Statutory Declaration as to Forfeiture |
12 | ||||
35. |
Transfer |
12 | ||||
36. |
Signing of Transfer |
13 | ||||
37. |
Rights to Decline Registration of Partly Paid Shares |
13 | ||||
38. |
Other Rights to Decline Registration |
13 | ||||
39. |
No Fee for Registration |
14 | ||||
40. |
Untraced Shareholders |
14 | ||||
41. |
Transmission on Death |
15 | ||||
42. |
Entry of Transmission in Register |
15 | ||||
43. |
Election of Person Entitled by Transmission |
15 | ||||
44. |
Rights of Person Entitled by Transmission |
16 | ||||
45. |
Sub-division |
16 | ||||
46. |
Fractions |
16 | ||||
47. |
Omission or Non-Receipt of Notice |
17 | ||||
48. |
Postponement of General Meetings |
17 |
49. |
Resolutions of members at Annual General Meetings |
17 | ||||
50. |
Quorum |
18 | ||||
51. |
Procedure if Quorum Not Present |
18 | ||||
52. |
Security Arrangements |
18 | ||||
53. |
Confidential Information |
19 | ||||
54. |
Chairman of General Meeting |
19 | ||||
55. |
Orderly Conduct |
19 | ||||
56. |
Entitlement to Attend and Speak |
20 | ||||
57. |
Adjournments |
20 | ||||
58. |
Notice of Adjournment |
20 | ||||
59. |
Amendments to Resolutions |
20 | ||||
60. |
Amendments Ruled Out of Order |
21 | ||||
61. |
Votes of Members |
21 | ||||
62. |
Method of Voting |
21 | ||||
63. |
Votes of Joint Holders |
21 | ||||
64. |
Voting on Behalf of Incapable Member |
21 | ||||
65. |
No Right to Vote where Sums Overdue on Shares |
22 | ||||
66. |
Objections or Errors in Voting |
22 | ||||
67. |
Meaning of Approved Depositary |
22 | ||||
68. |
Appointment of Approved Depositaries |
23 | ||||
69. |
Register of Approved Depositaries |
23 | ||||
70. |
Approved Depositaries Attendance at General Meetings |
23 | ||||
71. |
Proxies of Appointed Depositaries |
23 | ||||
72. |
Identifying Appointed Proxies |
24 | ||||
73. |
Appointment of Proxies |
24 |
74. |
Receipt of Proxies |
24 | ||||
75. |
Maximum Validity of Proxy |
26 | ||||
76. |
Form of Proxy |
26 | ||||
77. |
Cancellation of Proxys Authority |
26 | ||||
78. |
Separate General Meetings |
26 | ||||
79. |
Number of Directors |
26 | ||||
80. |
Directors Shareholding Qualification |
27 | ||||
81. |
Power of Company to Appoint Directors |
27 | ||||
82. |
Power of Board to Appoint Directors |
27 | ||||
83. |
Retirement of Directors by Rotation |
27 | ||||
84. |
Filling Vacancies |
27 | ||||
85. |
Power of Removal by Special Resolution |
27 | ||||
86. |
Persons Eligible as Directors |
27 | ||||
87. |
Position of Retiring Directors |
28 | ||||
88. |
Vacation of Office by Directors |
28 | ||||
89. |
Alternate Directors |
29 | ||||
90. |
Executive Directors |
30 | ||||
91. |
Directors Fees |
30 | ||||
92. |
Additional Remuneration |
31 | ||||
93. |
Expenses |
31 | ||||
94. |
Pensions and Gratuities for Directors |
32 | ||||
95. |
Conflicts of interest requiring board authorisation |
32 | ||||
96. |
Other conflicts of interest |
33 | ||||
97. |
Benefits |
34 | ||||
98. |
Quorum and voting requirements |
34 |
99. |
General |
36 | ||||
100. |
General Powers of Company Vested in Board |
36 | ||||
101. |
Borrowing Powers |
37 | ||||
102. |
Agents |
37 | ||||
103. |
Delegation to Individual Directors |
38 | ||||
104. |
Registers |
38 | ||||
105. |
Provision for Employees |
38 | ||||
106. |
Board Meetings |
38 | ||||
107. |
Notice of Board Meetings |
38 | ||||
108. |
Quorum |
39 | ||||
109. |
Directors below Minimum through Vacancies |
39 | ||||
110. |
Appointment of Chairman |
39 | ||||
111. |
Competence of Meetings |
39 | ||||
112. |
Voting |
39 | ||||
113. |
Delegation to Committees |
39 | ||||
114. |
Participation in Meetings |
40 | ||||
115. |
Resolution in Writing |
40 | ||||
116. |
Validity of Acts of Board or Committee |
40 | ||||
117. |
Use of Seals |
41 | ||||
118. |
Declaration of Dividends by Company |
41 | ||||
119. |
Payment of Interim and Fixed Dividends by Board |
41 | ||||
120. |
Calculation and Currency of Dividends |
41 | ||||
121. |
Amounts Due on Shares may be Deducted from Dividends |
42 | ||||
122. |
No Interest on Dividends |
42 | ||||
123. |
Payment Procedure |
42 |
124. |
Uncashed Dividends |
43 | ||||
125. |
Forfeiture of Unclaimed Dividends |
43 | ||||
126. |
Dividends Not in Cash |
43 | ||||
127. |
Scrip Dividends and Dividend Plans Generally |
43 | ||||
128. |
Power to Capitalise Reserves and Funds |
46 | ||||
129. |
Settlement of Difficulties in Distribution |
46 | ||||
130. |
Power to Choose Any Record Date |
46 | ||||
131. |
Inspection of Records |
47 | ||||
132. |
Summary Financial Statements |
47 | ||||
133. |
Method of Service |
47 | ||||
134. |
Record Date for Service |
48 | ||||
135. |
Members Resident Abroad or on Branch Registers |
48 | ||||
136. |
Service of Notice on Person Entitled by Transmission |
49 | ||||
137. |
Deemed Delivery |
49 | ||||
138. |
Notice When Post Not Available |
50 | ||||
139. |
Presumptions Where Documents Destroyed |
50 | ||||
140. |
Indemnity of Directors |
51 |
ARTICLES OF ASSOCIATION
of
GLAXOSMITHKLINE PLC
(adopted by Special Resolution passed on 6 May 2010)
Interpretation
1. | Exclusion of Model Articles |
No articles set out in any statute, or in any statutory instrument or other subordinate legislation made under any statute, concerning companies shall apply as the articles of the company.
2. | Definitions |
In these articles unless the context otherwise requires:
address includes a number or address used for the purposes of sending or receiving documents or information by electronic means;
these articles means these articles of association as altered from time to time and the expression this article shall be construed accordingly;
associated company means any company (i) which is the companys holding company or (ii) in which the company or its holding company or any of the predecessors of the company or of such holding company has any interest whether direct or indirect or (iii) which is in any way allied to or associated with the company or its holding company or any of the predecessors of the company or of such holding company, of (iv) which is a subsidiary undertaking or any other associated company;
the auditors means the auditors from time to time of the company or, in the case of joint auditors, any one of them;
the Bank of England base rate means the base lending rate most recently set by the Monetary Policy Committee of the Bank of England in connection with its responsibilities under Part 2 of the Bank of England Act 1998;
the board means the board of directors from time to time of the company or the directors present at a meeting of the directors at which a quorum is present;
1
certificated share means a share which is not an uncertificated share and references in these articles to a share being held in certificated form shall be construed accordingly;
clear days in relation to the period of a notice means that period excluding the day when the notice is served or deemed to be served and the day for which it is given or on which it is to take effect;
the Companies Acts means every statute (including any orders, regulations or other subordinate legislation made under it) from time to time in force concerning companies in so far as it applies to the company;
the holder in relation to any shares means the person whose name is entered in the register as the holder of those shares;
the office means the registered office from time to time of the company;
paid up means paid up or credited as paid up;
participating class means a class of shares title to which is permitted by an Operator to be transferred by means of a relevant system;
person entitled by transmission means a person whose entitlement to a share in consequence of the death or bankruptcy of a member or of any other event giving rise to its transmission by operation of law has been noted in the register;
the register means the register of members of the company;
seal means any common or official seal that the company may be permitted to have under the Companies Acts;
the secretary means the secretary, or (if there are joint secretaries) any one of the joint secretaries, of the company and includes an assistant or deputy secretary and any person appointed by the board to perform any of the duties of the secretary;
the uncertificated securities rules means any provision of the Companies Acts relating to the holding, evidencing of title to, or transfer of uncertificated shares and any legislation, rules or other arrangements made under or by virtue of such provision;
uncertificated share means a share of a class which is at the relevant time a participating class, title to which is recorded on the register as being held in uncertificated form and references in these articles to a share being held in uncertificated form shall be construed accordingly;
United Kingdom means Great Britain and Northern Ireland;
references to a document being signed or to signature include references to its being executed under hand or under seal or by any other method and, in the case of a communication in electronic form, such references are to its being authenticated as specified by the Companies Acts;
2
references to writing include references to any method of representing or reproducing words in a legible and non-transitory form whether sent or supplied in electronic form or otherwise;
words or expressions to which a particular meaning is given by the Companies Acts in force when these articles or any part of these articles are adopted bear (if not inconsistent with the subject matter or context) the same meaning in these articles or that part (as the case may be) save that the word company shall include any body corporate; and
references to a meeting shall not be taken as requiring more than one person to be present if any quorum requirement can be satisfied by one person.
Headings are included only for convenience and shall not affect meaning.
3. | Limited Liability |
The liability of members of the company is limited to the amount, if any, unpaid on the shares in the company held by them.
4. | Change of Name |
The company may change its name by resolution of the board.
Share Capital
5. | Rights Attached to Shares |
Subject to any rights attached to existing shares, any share may be issued with or have attached to it such rights and restrictions as the company may by ordinary resolution decide or, if no such resolution has been passed or so far as the resolution does not make specific provision, as the board may decide. Such rights and restrictions shall apply to the relevant shares as if the same were set out in these articles.
6. | Redeemable Shares |
Subject to any rights attached to existing shares, any share may be issued which is to be redeemed, or is liable to be redeemed at the option of the company or the holder. The board may determine the terms, conditions and manner of redemption of any redeemable share so issued. Such terms and conditions shall apply to the relevant shares as if the same were set out in these articles.
7. | Variation of Rights |
Subject to the provisions of the Companies Acts, all or any of the rights attached to any existing class of shares may from time to time (whether or not the company is being wound up) be varied either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class (excluding any shares of that class held as treasury shares) or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. All the provisions of these articles as to general meetings of the company shall, with any necessary modifications,
3
apply to any such separate general meeting, but so that the necessary quorum shall be two persons entitled to vote and holding or representing by proxy not less than one-third in nominal value of the issued shares of the class (excluding any shares of that class held as treasury shares), (but so that at any adjourned meeting one holder entitled to vote and present in person or by proxy (whatever the number of shares held by him) shall be a quorum). The foregoing provisions of this article shall apply to the variation of the special rights attached to some only of the shares of any class as if each group of shares of the class differently treated formed a separate class and their special rights were to be varied.
8. | Pari Passu Issues |
The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.
9. | Shares |
Subject to the provisions of these articles and to any resolution passed by the company and without prejudice to any rights attached to existing shares, the board may offer, allot, grant options over or otherwise deal with or dispose of shares in the company to such persons, at such times and for such consideration and upon such terms as the board may decide.
10. | Payment of Commission |
The company may in connection with the issue of any shares or the sale for cash of treasury shares exercise all powers of paying commission and brokerage conferred or permitted by the Companies Acts. Any such commission or brokerage may be satisfied by the payment of cash or by the allotment of fully or partly-paid shares or other securities or partly in one way and partly in the other.
11. | Trusts Not Recognised |
Except as ordered by a court of competent jurisdiction or as required by law, no person shall be recognised by the company as holding any share upon any trust and the company shall not be bound by or required in any way to recognise (even when having notice of it) any interest in any share or (except only as by these articles or by law otherwise provided) any other right in respect of any share other than an absolute right to the whole of the share in the holder.
12. | Suspension of Rights Where Non-Disclosure of Interest |
(A) |
Where the holder of any shares in the company, or any other person appearing to be interested in those shares, fails to comply within the relevant period with any statutory notice in respect of those shares or, in purported compliance with such a notice, has made a statement which is false or inadequate in a material particular, the company may give the holder of those shares a further notice (a restriction notice ) to the effect that from the service of the restriction notice those shares will be subject to some or all of the relevant restrictions, and from service of the |
4
restriction notice those shares shall, notwithstanding any other provision of these articles, be subject to those relevant restrictions accordingly. For the purpose of enforcing the relevant restriction referred to in sub-paragraph (iii) of the definition of relevant restrictions, the board may give notice to the relevant member requiring the member to change the relevant shares held in uncertificated form to certificated form by the time stated in the notice and to keep them in certificated form for as long as the board requires. The notice may also state that the member may not change any of the relevant shares held in certificated form to uncertificated form. If the member does not comply with the notice, the board may authorise any person to instruct the Operator to change the relevant shares held in uncertificated form to certificated form. |
(B) | If after the service of a restriction notice in respect of any shares the board is satisfied that all information required by any statutory notice relating to those shares or any of them from their holder or any other person appearing to be interested in the shares the subject of the restriction notice has been supplied, the company shall, within seven days, cancel the restriction notice. The company may at any time at its discretion cancel any restriction notice or exclude any shares from it. The company shall cancel a restriction notice within seven days after receipt of a notice in writing that the relevant shares have been transferred pursuant to an arms length sale. |
(C) | Where any restriction notice is cancelled or ceases to have effect in relation to any shares, any moneys relating to those shares which were withheld by reason of that notice shall be paid without interest to the person who would but for the notice have been entitled to them or as he may direct. |
(D) | Any new shares in the company issued in right of any shares subject to a restriction notice shall also be subject to the restriction notice, and the board may make any right to an allotment of the new shares subject to restrictions corresponding to those which will apply to those shares by reason of the restriction notice when such shares are issued. |
(E) | Any holder of shares on whom a restriction notice has been served may at any time request the company to give in writing the reason why the restriction notice has been served, or why it remains uncancelled, and within 14 days of receipt of such a notice the company shall give that information accordingly. |
(F) | Where a person appearing to be interested in shares has been served with a statutory notice and the shares in which he appears to be interested are held by an Approved Depositary, this article applies only to those shares which are held by the Approved Depositary in which that person appears to be interested and not (so far as that persons apparent interest is concerned) to any other shares held by the Approved Depositary. |
(G) | Where a member who is an Approved Depositary has been served with a statutory notice, the obligations of that member will be limited to disclosing to the company information relating to any person who appears to be interested in the shares held by it which has been recorded by it in accordance with the arrangement under which it was appointed as an Approved Depositary. |
5
(H) | If a statutory notice is given by the company to a person appearing to be interested in any share, a copy shall at the same time be given to the holder, but the failure or omission to do so or the non-receipt of the copy by the holder shall not invalidate such notice. |
(I) | This article is in addition to, and shall not in any way prejudice or affect, the statutory rights of the company arising from any failure by any person to give any information required by a statutory notice within the time specified in it. For the purpose of this article a statutory notice need not specify the relevant period, and may require any information to be given before the expiry of the relevant period. |
(J) | In this article: |
a sale is an arms length sale if the board is satisfied that it is a bona fide sale of the whole of the beneficial ownership of the shares to a party unconnected with the holder or with any person appearing to be interested in such shares and shall include a sale made by way of or in pursuance of acceptance of a takeover offer and a sale made through a recognised investment exchange or any other stock exchange outside the United Kingdom. For this purpose an associate (within the definition of that expression in any statute relating to insolvency in force at the date of adoption of this article) shall be included amongst the persons who are connected with the holder or any person appearing to be interested in such shares;
person appearing to be interested in any shares shall mean any person named in a response to a statutory notice or otherwise notified to the company by a member as being so interested or shown in any register or record kept by the company under the Companies Acts as so interested or, taking into account a response or failure to respond in the light of the response to any other statutory notice and any other relevant information in the possession of the company, any person whom the company knows or has reasonable cause to believe is or may be so interested;
person with a 0.25 per cent. interest means a person who holds, or is shown in any register or record kept by the company under the Companies Acts as having an interest in, shares in the company which comprise in total at least 0.25 per cent. in number or nominal value of the shares of the company (calculated exclusive of any shares held as treasury shares), or of any class of such shares (calculated exclusive of any shares of that class held as treasury shares), in issue at the date of service of the restriction notice;
relevant period means a period of 14 days following service of a statutory notice;
relevant restrictions mean in the case of a restriction notice served on a person with a 0.25 per cent. interest that:
(i) | the shares shall not confer on the holder any right to attend or vote either personally or by proxy at any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company or to exercise any other right conferred by membership in relation to general meetings; |
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(ii) | the board may withhold payment of all or any part of any dividends or other moneys payable in respect of the shares and the holder shall not be entitled to receive shares in lieu of dividend; |
(iii) | the board may decline to register a transfer of any of the shares which are certificated shares, unless such a transfer is pursuant to an arms length sale, |
and in any other case mean only the restriction specified in sub-paragraph (i) of this definition; and
statutory notice means a notice served by the company under the Companies Acts requiring particulars of interests in shares or of the identity of persons interested in shares.
13. | Uncertificated Shares |
(A) | Pursuant and subject to the uncertificated securities rules, the board may permit title to shares of any class to be evidenced otherwise than by a certificate and title to shares of such a class to be transferred by means of a relevant system and may make arrangements for a class of shares (if all shares of that class are in all respects identical) to become a participating class. Title to shares of a particular class may only be evidenced otherwise than by a certificate where that class of shares is at the relevant time a participating class. The board may also, subject to compliance with the uncertificated securities rules, determine at any time that title to any class of shares may from a date specified by the board no longer be evidenced otherwise than by a certificate or that title to such a class shall cease to be transferred by means of any particular relevant system. |
(B) | In relation to a class of shares which is a participating class and for so long as it remains a participating class, no provision of these articles shall apply or have effect to the extent that it is inconsistent in any respect with: |
(i) | the holding of shares of that class in uncertificated form; |
(ii) | the transfer of title to shares of that class by means of a relevant system; and |
(iii) | any provision of the uncertificated securities rules, |
and, without prejudice to the generality of this article, no provision of these articles shall apply or have effect to the extent that it is in any respect inconsistent with the maintenance, keeping or entering up by the Operator, so long as that is permitted or required by the uncertificated securities rules, of an Operator register of securities in respect of that class of shares in uncertificated form.
(C) | Shares of a class which is at the relevant time a participating class may be changed from uncertificated to certificated form, and from certificated to uncertificated form, in accordance with and subject as provided in the uncertificated securities rules. |
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(D) | If, under these articles or the Companies Acts, the company is entitled to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of or otherwise enforce a lien over an uncertificated share, then, subject to these articles and the Companies Acts, such entitlement shall include the right of the board to: |
(i) | require the holder of that uncertificated share by notice in writing to change that share from uncertificated to certificated form within such period as may be specified in the notice and keep it as a certificated share for as long as the board requires; |
(ii) | appoint any person to take such other steps, by instruction given by means of a relevant system or otherwise, in the name of the holder of such share as may be required to effect the transfer of such share and such steps shall be as effective as they had been taken by the registered holder of that share; and |
(iii) | take such other action that the board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that share or otherwise to enforce a lien in respect of that share. |
(E) | Unless the board otherwise determines, shares which a member holds in uncertificated form shall be treated as separate holdings from any shares which that member holds in certificated form. However shares held in uncertificated form shall not be treated as forming a class which is separate from certificated shares with the same rights. |
(F) | Unless the board otherwise determines or the uncertificated securities rules otherwise require, any shares issued or created out of or in respect of any uncertificated shares shall be uncertificated shares and any shares issued or created out of or in respect of any certificated shares shall be certificated shares. |
(G) | The company shall be entitled to assume that the entries on any record of securities maintained by it in accordance with the uncertificated securities rules and regularly reconciled with the relevant Operator register of securities are a complete and accurate reproduction of the particulars entered in the Operator register of securities and shall accordingly not be liable in respect of any act or thing done or omitted to be done by or on behalf of the company in reliance on such assumption; in particular, any provision of these articles which requires or envisages that action will be taken in reliance on information contained in the register shall be construed to permit that action to be taken in reliance on information contained in any relevant record of securities (as so maintained and reconciled). |
14. | Right to Share Certificates |
Every person (except a person to whom the company is not by law required to issue a certificate) whose name is entered in the register as a holder of any certificated shares shall be entitled, without payment, to receive within the time limits prescribed by the Companies Acts (or, if earlier, within any prescribed time limit or within a time specified when the shares were issued) one certificate for all those shares of any one class. In the case of a certificated share held jointly by several persons, the company shall not be
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bound to issue more than one certificate and delivery of a certificate to one of several joint holders shall be sufficient delivery to all. A member who transfers some but not all of the shares comprised in a certificate shall be entitled to a certificate for the balance without charge to the extent the balance is to be held in certificated form.
15. | Replacement of Share Certificates |
If a share certificate is defaced, worn out, lost or destroyed, it may be replaced on such terms (if any) as to evidence and indemnity as the board may decide and, where it is defaced or worn out, after delivery of the old certificate to the company. Any two or more certificates representing shares of any one class held by any member shall at his request be cancelled and a single new certificate for such shares issued in lieu. Any certificate representing shares of any one class held by any member may at his request be cancelled and two or more certificates for such shares may be issued instead. The board may require the payment of any exceptional out-of-pocket expenses of the company incurred in connection with the issue of any certificates under this article. Any one of two or more joint holders may request replacement certificates under this article.
16. | Share Certificates Sent at Holders Risk |
Every share certificate sent in accordance with these articles will be sent at the risk of the member or other person entitled to the certificate. The company will not be responsible for any share certificate lost or delayed in the course of delivery.
17. | Execution of Share Certificates |
Every share certificate shall be executed under a seal or in such other manner as the board, having regard to the terms of issue and any listing requirements, may authorise and shall specify the number and class of the shares to which it relates and the amount or respective amounts paid up on the shares. The board may by resolution decide, either generally or in any particular case or cases, that any signatures on any share certificates need not be autographic but may be applied to the certificates by some mechanical or other means or may be printed on them or that the certificates need not be signed by any person.
Lien
18. | Companys Lien on Shares Not Fully Paid |
The company shall have a first and paramount lien on every share (not being a fully paid share) for all amounts payable to the company (whether presently or not) in respect of that share. The companys lien on a share shall extend to every amount payable in respect of it. The board may at any time either generally or in any particular case waive any lien that has arisen or declare any share to be wholly or in part exempt from the provisions of this article.
19. | Enforcing Lien by Sale |
The company may sell, in such manner as the board may decide, any share on which the company has a lien if a sum in respect of which the lien exists is presently payable and is
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not paid within 14 clear days after a notice has been served on the holder of the share or the person who is entitled by transmission to the share, demanding payment and stating that if the notice is not complied with the share may be sold. For giving effect to the sale the board may authorise some person to sign an instrument of transfer of the share sold to or in accordance with the directions of the purchaser. The transferee shall not be bound to see to the application of the purchase money, nor shall his title to the share be affected by any irregularity or invalidity in relation to the sale.
20. | Application of Proceeds of Sale |
The net proceeds, after payment of the costs, of the sale by the company of any share on which it has a lien shall be applied in or towards payment or discharge of the debt or liability in respect of which the lien exists so far as it is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale and upon surrender, if required by the company, for cancellation of the certificate for the share sold) be paid to the person who was entitled to the share at the time of the sale.
Calls on Shares
21. | Calls |
Subject to the terms of issue, the board may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal amount of the shares or by way of premium) and not payable on a date fixed by or in accordance with the terms of issue, and each member shall (subject to the company serving upon him at least 14 clear days notice specifying when and where payment is to be made) pay to the company as required by the notice the amount called on his shares. A call may be made payable by instalments. A call may be revoked or postponed, in whole or in part, as the board may decide. A person upon whom a call is made shall remain liable jointly and severally with the successors in title to his shares for all calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was made.
22. | Timing of Calls |
A call shall be deemed to have been made at the time when the resolution of the board authorising the call was passed.
23. | Liability of Joint Holders |
The joint holders of a share shall be jointly and severally liable to pay all calls in respect of the share.
24. | Interest Due on Non-Payment |
If a call remains unpaid after it has become due and payable, the person from whom it is due and payable shall pay interest on the amount unpaid from the day it is due and payable to the time of actual payment at such rate (not exceeding the Bank of England base rate by more than five percentage points) as the board may decide, and all expenses
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that have been incurred by the company by reason of such non-payment, but the board shall be at liberty in any case or cases to waive payment of the interest or expenses wholly or in part.
25. | Sums Due on Allotment Treated as Calls |
Any amount which becomes payable in respect of a share on allotment or on any other date fixed by or in accordance with the terms of issue, whether in respect of the nominal amount of the share or by way of premium or as an instalment of a call, shall be deemed to be a call and, if it is not paid, all the provisions of these articles shall apply as if the sum had become due and payable by virtue of a call.
26. | Power to Differentiate |
The board may on or before the issue of shares differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment.
27. | Payment of Calls in Advance |
The board may, if it thinks fit, receive from any member who is willing to advance them all or any part of the moneys uncalled and unpaid upon any shares held by him and on all or any of the moneys so advanced may (until they would, but for the advance, become presently payable) pay interest at such rate (not exceeding the Bank of England base rate by more than five percentage points, unless the company by ordinary resolution shall otherwise direct) as the board may decide.
Forfeiture of Shares
28. | Notice if Call or Instalment Not Paid |
If any call or instalment of a call remains unpaid on any share after the day appointed for payment, the board may at any time serve a notice on the holder requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued and any expenses incurred by the company by reason of such non-payment.
29. | Form of Notice |
The notice shall name a further day (not being less than 14 clear days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made and shall state that in the event of non-payment on or before the day and at the place appointed, the shares in respect of which the call has been made or instalment is payable will be liable to be forfeited.
30. | Forfeiture for Non-Compliance with Notice |
If the notice is not complied with, any share in respect of which it was given may, at any time before payment of all calls or instalments and interest and expenses due in respect of it have been made, be forfeited by a resolution of the board to that effect and the forfeiture shall include all dividends declared and other moneys payable in respect of the forfeited shares and not paid before the forfeiture. The board may accept the surrender of any
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share liable to be forfeited and, in that event, references in these articles to forfeiture shall include surrender.
31. | Notice after Forfeiture |
When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share but no forfeiture shall be invalidated by any omission or neglect to give notice.
32. | Sale of Forfeited Shares |
Until cancelled in accordance with the requirements of the Companies Acts, a forfeited share shall be deemed to be the property of the company and may be sold or otherwise disposed of either to the person who was, before forfeiture, the holder or to any other person upon such terms and in such manner as the board shall decide. The board may for the purposes of the disposal authorise some person to sign an instrument of transfer to the designated transferee. The company may receive the consideration (if any) given for the share on its disposal. At any time before a sale or disposition the forfeiture may be cancelled by the board on such terms as the board may decide.
33. | Arrears to be Paid Notwithstanding Forfeiture |
A person whose shares have been forfeited shall cease to be a member in respect of them and shall surrender to the company for cancellation the certificate for the forfeited shares but shall remain liable to pay to the company all moneys which at the date of the forfeiture were payable by him to the company in respect of those shares with interest thereon at such rate (not exceeding the Bank of England base rate by more than five percentage points) as the board may decide from the date of forfeiture until payment, and the company may enforce payment without being under any obligation to make any allowance for the value of the shares forfeited or for any consideration received on their disposal.
34. | Statutory Declaration as to Forfeiture |
A statutory declaration that the declarant is a director of the company or the secretary and that a share has been forfeited on a specified date shall be conclusive evidence of the facts stated in it as against all persons claiming to be entitled to the share. The declaration shall (subject to the signing of an instrument of transfer if necessary) constitute a good title to the share and the person to whom the share is sold or otherwise disposed of shall not be bound to see to the application of the purchase money (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, sale or disposal.
Transfer of Shares
35. | Transfer |
(A) | Subject to such of the restrictions of these articles as may be applicable: |
(i) |
any member may transfer all or any of his uncertificated shares by means of a relevant system in such manner provided for, and subject as provided in, |
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the uncertificated securities rules, and accordingly no provision of these articles shall apply in respect of an uncertificated share to the extent that it requires or contemplates the effecting of a transfer by an instrument in writing or the production of a certificate for the share to be transferred; and |
(ii) | any member may transfer all or any of his certificated shares by an instrument of transfer in any usual form or in any other form which the board may approve. |
(B) | The transferor of a share shall be deemed to remain the holder of the share concerned until the name of the transferee is entered in the register in respect of it. |
36. | Signing of Transfer |
The instrument of transfer of a certificated share shall be signed by or on behalf of the transferor and (in the case of a partly paid share) the transferee. All instruments of transfer, when registered, may be retained by the company.
37. | Rights to Decline Registration of Partly Paid Shares |
The board can decline to register any transfer of any share which is not a fully paid share.
38. | Other Rights to Decline Registration |
(A) | Registration of a transfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules, and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four. |
(B) | The board may decline to register any transfer of a certificated share unless: |
(i) | the instrument of transfer is duly stamped or duly certified or otherwise shown to the satisfaction of the board to be exempt from stamp duty and is left at the office or such other place as the board may from time to time determine accompanied (save in the case of a transfer by a person to whom the company is not required by law to issue a certificate and to whom a certificate has not been issued) by the certificate for the share to which it relates and such other evidence as the board may reasonably require to show the right of the person signing the instrument of transfer to make the transfer and, if the instrument of transfer is signed by some other person on his behalf, the authority of that person so to do; |
(ii) | the instrument of transfer is in respect of only one class of share; and |
(iii) | in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four. |
(C) |
For all purposes of these articles relating to the registration of transfers of shares, the renunciation of the allotment of any shares by the allottee in favour of some |
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other person shall be deemed to be a transfer and the board shall have the same powers of refusing to give effect to such a renunciation as if it were a transfer. |
39. | No Fee for Registration |
No fee shall be charged by the company for registering any transfer, document or instruction relating to or affecting the title to any share or for making any other entry in the register.
40. | Untraced Shareholders |
(A) | The company may sell any certificated shares in the company on behalf of the holder of, or person entitled by transmission to, the shares at the best price reasonably obtainable at the time of sale if: |
(i) | the shares have been in issue either in certificated or uncertificated form throughout the qualifying period and at least three cash dividends have become payable on the shares during the qualifying period; |
(ii) | no cash dividend payable on the shares has either been claimed by presentation to the paying bank of the relevant cheque or warrant or been satisfied by the transfer of funds to a bank account designated by the holder of, or person entitled by transmission to, the shares or by the transfer of funds by means of a relevant system at any time during the relevant period; |
(iii) | so far as any director of the company at the end of the relevant period is then aware, the company has not at any time during the relevant period received any communication from the holder of, or person entitled by transmission to, the shares; and |
(iv) | the company has caused two advertisements to be published, one in a newspaper with a national circulation and the other in a newspaper circulating in the area in which the last known postal address of the holder of, or person entitled by transmission to, the shares or the postal address at which service of notices may be effected under these articles is located, giving notice of its intention to sell the shares and a period of three months has elapsed from the date of publication of the advertisements or of the last of the two advertisements to be published if they are published on different dates. |
(B) | The company shall also be entitled to sell at the best price reasonably obtainable at the time of sale any additional certificated shares in the company issued either in certificated or uncertificated form during the qualifying period in right of any share to which paragraph (A) of this article applies (or in right of any share so issued), if the criteria in paragraph (A)(ii) to (iv) are satisfied in relation to the additional shares. |
(C) |
To give effect to any sale of shares pursuant to this article the board may authorise some person to transfer the shares in question and an instrument of transfer signed by that person shall be as effective as if it had been signed by the holder of, or person entitled by transmission to, the shares. The purchaser shall not be bound to |
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see to the application of the purchase moneys nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net proceeds of sale shall belong to the company and, upon their receipt, the company shall become indebted to the former holder of, or person entitled by transmission to, the shares for an amount equal to the net proceeds unless and until forfeited under this article. No trust shall be created in respect of the debt and no interest shall be payable in respect of it and the company shall not be required to account for any moneys earned from the net proceeds which may be employed in the business of the company or as it thinks fit. If no valid claim for the money has been received by the company during a period of six years from the date on which the relevant shares were sold by the company under this article, the money will be forfeited and will belong to the company. |
(D) | For the purpose of this article: |
the qualifying period means the period of 10 years immediately preceding the date of publication of the advertisements referred to in paragraph (A)(iv) above or of the first of the two advertisements to be published if they are published on different dates; and
the relevant period means the period beginning at the commencement of the qualifying period and ending on the date when all the requirements of paragraphs (A)(i) to (iv) above have been satisfied.
Transmission of Shares
41. | Transmission on Death |
If a member dies, the survivor or survivors, where he was a joint holder, and his personal representatives, where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the company as having any title to his shares; but nothing contained in these articles shall release the estate of a deceased holder from any liability in respect of any share held by him solely or jointly with other persons.
42. | Entry of Transmission in Register |
Where the entitlement of a person to a certificated share in consequence of the death or bankruptcy of a member or of any other event giving rise to its transmission by operation of law is proved to the satisfaction of the board, the board shall within two months after proof cause the entitlement of that person to be noted in the register.
43. | Election of Person Entitled by Transmission |
Any person entitled by transmission to a share may, subject as provided elsewhere in these articles, elect either to become the holder of the share or to have some person nominated by him registered as the holder. If he elects to be registered himself he shall give notice to the company to that effect. If he elects to have another person registered and the share is a certificated share, he shall sign an instrument of transfer of the share to that person. If he elects to have himself or another person registered and the share is an uncertificated share, he shall take any action the board may require (including, without
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limitation, the signing of any document and the giving of any instruction by means of a relevant system) to enable himself or that person to be registered as the holder of the share. The board may at any time require the person to elect either to be registered himself or to transfer the share and if the requirements are not complied with within 60 days of being issued the board may withhold payment of all dividends and other moneys payable in respect of the share until the requirements have been complied with. All the provisions of these articles relating to the transfer of, and registration of transfers of, shares shall apply to the notice or transfer as if the death or bankruptcy of the member or other event giving rise to the transmission had not occurred and the notice or transfer was given or signed by the member.
44. | Rights of Person Entitled by Transmission |
Where a person becomes entitled by transmission to a share, the rights of the holder in relation to that share shall cease, but the person entitled by transmission to the share may give a good discharge for any dividends or other moneys payable in respect of it and shall have the same rights in relation to the share as he would have had if he were the holder of it save that, until he becomes the holder, he shall not be entitled in respect of the share (except with the authority of the board) to receive notice of, or to attend or vote at, any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company or to exercise any other right conferred by membership in relation to general meetings.
Alteration of Share Capital
45. | Sub-division |
Any resolution authorising the company to sub-divide its shares or any of them may determine that, as between the shares resulting from the sub-division, any of them may have any preference or advantage or be subject to any restriction as compared with the others.
46. | Fractions |
Whenever as a result of a consolidation, consolidation and sub-division or sub-division of shares any holders would become entitled to fractions of a share, the board may deal with the fractions as it thinks fit including by ignoring fractions altogether or by aggregating and selling them or by dealing with them in some other way. For the purposes of effecting any such sale, the board may arrange for the shares representing the fractions to be entered in the register as certificated shares. The board may sell shares representing fractions to any person, including the company and may authorise some person to transfer or deliver the shares to, or in accordance with the directions of, the purchaser. The person to whom any shares are transferred or delivered shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in, or invalidity of, the proceedings relating to the sale.
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Notice of General Meetings
47. | Omission or Non-Receipt of Notice |
(A) | The accidental omission to give any notice of a meeting or the accidental omission to send or supply any document or other information relating to any meeting to, or the non-receipt (even if the company becomes aware of such non-receipt) of any such notice, document or other information by, any person entitled to receive the notice, document or other information shall not invalidate the proceedings at that meeting. |
(B) | A member present in person or by proxy at a meeting shall be deemed to have received proper notice of that meeting and, where applicable, of the purpose of that meeting. |
48. | Postponement of General Meetings |
If the board, in its absolute discretion, considers that it is impractical or undesirable for any reason to hold a general meeting on the date or at the time or place specified in the notice calling the general meeting, it may postpone or move the general meeting to another date, time and/or place. The board shall take reasonable steps to ensure that notice of the date, time and place of the rearranged meeting is given to any member trying to attend the meeting at the original time and place. Notice of the date, time and place of the rearranged meeting shall, if practicable, also be placed in: (i) at least two national newspapers in the United Kingdom, and (ii) The Wall Street Journal and/or such other newspaper published in the United States as the directors consider to be appropriate. Notice of the business to be transacted at such rearranged meeting shall not be required. If a meeting is rearranged in this way, the appointment of a proxy will be valid if it is received as required by these articles not less than 48 hours before the time appointed for holding the rearranged meeting. The board may also postpone or move the rearranged meeting under this article.
49. | Resolutions of members at Annual General Meetings |
(A) | If, on or before, 31st January in any year any members shall, in accordance with the Companies Acts, require the company, in relation to the Annual General Meeting to be held in that year, to give notice of a resolution which may properly be moved or require the company to circulate a statement in acceptable form, the company shall circulate that resolution or statement with the notice of the Annual General Meeting without cost to the requisitionists. |
(B) | If any such requisition is made in accordance with the Companies Acts after 31st January in any year and prior to the Annual General Meeting to be held in that year, the company shall require that the requisitionists deposit or tender a sum sufficient to meet the Companys reasonable expenses in complying with such requisition in accordance with the Companies Acts. |
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Proceedings at General Meetings
50. | Quorum |
(A) | No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the choice or appointment of a chairman of the meeting which shall not be treated as part of the business of the meeting. Save as otherwise provided by these articles, two members present in person or by proxy and entitled to vote shall be a quorum for all purposes. A shareholder which is a company is to be considered present if it is represented by a duly authorised representative. |
(B) | If the directors so determine, any or all members (or their proxies) may participate in a general meeting by means of a conference telephone, video teleconference equipment or any communication equipment which allows all persons participating in the meeting to speak to and hear each other. A person so participating shall be deemed to be present in person at the meeting and shall be entitled to vote or be counted in a quorum accordingly. A meeting which takes place by conference telephone, video teleconference or other such communication equipment will be treated as taking place at the place where the chairman is. |
51. | Procedure if Quorum Not Present |
If within five minutes (or such longer time not exceeding one hour as the chairman of the meeting may decide to wait) after the time appointed for the commencement of the meeting a quorum is not present, or if during the meeting a quorum ceases to be present, the meeting:
(i) | if convened by or upon the requisition of members, shall be dissolved; and |
(ii) | in any other case, it shall stand adjourned to such other day (being not less than ten days later, excluding the day on which the meeting is adjourned and the day for which it is reconvened) and at such other time or place as the chairman of the meeting may decide. At any adjourned meeting one member present in person or by proxy and entitled to vote (whatever the number of shares held by him) shall be a quorum and any notice of an adjourned meeting shall state that one member present in person or by proxy and entitled to vote (whatever the number of shares held by him) shall be a quorum. |
52. | Security Arrangements |
(A) | The directors or the secretary may take any action and may put in place any arrangements both before and during any meeting that they/he consider appropriate for: |
(i) | the safety of people attending a meeting; |
(ii) | proper and orderly conduct of a meeting; or |
(iii) | the meeting to reflect the wishes of the majority. |
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(B) | This includes the power to refuse entry to, or eject from meetings, any person who fails to comply with any arrangements made or any person who in the opinion of the directors or the secretary is acting in a manner that threatens the safety of people attending the meeting and/or the proper and orderly conduct at a meeting. |
(C) | The board may direct that persons wishing to attend any general meeting should submit to such searches or other security arrangements or restrictions (including, without limitation, a requirement that such persons refrain from taking electronic equipment into a general meeting) as the board shall consider appropriate in the circumstances and the board shall be entitled in its absolute discretion to, or to authorise some one or more persons who shall include a director or the secretary or the chairman of the meeting to, refuse entry to, or to eject from, such general meeting any person who fails to submit to such searches or otherwise to comply with such security arrangements or restrictions. |
53. | Confidential Information |
No shareholder at any general meeting is entitled to require disclosure of or any information about any detail of the companys trading, or any matter that is or may be in the nature of a trade secret, commercial secret or secret process, or that may relate to the conduct of the business of the company, if the directors decide it would be inexpedient in the interests of the company to make that information public.
54. | Chairman of General Meeting |
The chairman (if any) of the board or, in his absence, the deputy chairman (if any) shall preside as chairman at every general meeting. If more than one deputy chairman is present they shall agree amongst themselves who is to take the chair or, if they cannot agree, the deputy chairman who has been in office as a director longest shall take the chair. If there is no chairman or deputy chairman, or if at any meeting neither the chairman nor any deputy chairman is present within five minutes after the time appointed for the commencement of the meeting, or if neither the chairman nor any deputy chairman is willing to act as chairman, the directors present shall choose one of their number to act, or if one director only is present he shall preside as chairman of the meeting if willing to act. If no director is present, or if each of the directors present declines to take the chair, the persons present and entitled to vote shall appoint one of their number to be chairman of the meeting. Nothing in these articles shall restrict or exclude any of the powers or rights of a chairman of a meeting which are given by law.
55. | Orderly Conduct |
(A) | The chairman of the meeting shall take such action or give directions for such action to be taken as he thinks fit to promote the orderly conduct of the business of the meeting. The chairmans decision on points of order, matters of procedure or arising incidentally from the business of the meeting shall be final as shall be his determination as to whether any point or matter is of such a nature. |
(B) |
The directors may arrange for any people who they consider cannot be seated in the main meeting room, where the chairman will be, to attend and take part in a general meeting in an overflow room or rooms. Any overflow room will have a live |
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video link from the main room, and a two-way sound link. The notice of the meeting does not have to give details of any arrangements under this Article. The directors may decide how to divide people between the main room and any overflow room. If any overflow room is used, the meeting will be treated as being held, and taking place, in the main room. |
56. | Entitlement to Attend and Speak |
Each director shall be entitled to attend and speak at any general meeting of the company. The chairman of the meeting may invite any person to attend and speak at any general meeting of the company where he considers that this will assist in the deliberations of the meeting.
57. | Adjournments |
The chairman of the meeting may at any time without the consent of the meeting adjourn any meeting (whether or not it has commenced or a quorum is present) either sine die or to another time or place where it appears to him that (a) the members entitled to vote and wishing to attend cannot be conveniently accommodated in the place appointed for the meeting (b) the conduct of persons present prevents or is likely to prevent the orderly continuation of business or (c) an adjournment is otherwise necessary so that the business of the meeting may be properly conducted. In addition, the chairman of the meeting may at any time with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting) adjourn the meeting either sine die or to another time or place. When a meeting is adjourned sine die the time and place for the adjourned meeting shall be fixed by the board. No business shall be transacted at any adjourned meeting except business which might properly have been transacted at the meeting had the adjournment not taken place. Any meeting may be adjourned more than once.
58. | Notice of Adjournment |
If the continuation of an adjourned meeting is to take place three months or more after it was adjourned or if business is to be transacted at an adjourned meeting the general nature of which was not stated in the notice of the original meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided in this article, it shall not be necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting.
Amendments
59. | Amendments to Resolutions |
In the case of a resolution duly proposed as a special resolution no amendment thereto (other than an amendment to correct a patent error) may be considered or voted upon and in the case of a resolution duly proposed as an ordinary resolution no amendment thereto (other than an amendment to correct a patent error) may be considered or voted upon unless either at least two working days prior to the date appointed for holding the meeting or adjourned meeting at which such ordinary resolution is to be proposed notice in writing of the terms of the amendment and intention to move the same has been received by the company at its office or the chairman of the meeting in his absolute discretion decides that
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it may be considered or voted upon. With the consent of the chairman of the meeting, an amendment may be withdrawn by its proposer before it is put to the vote.
60. | Amendments Ruled Out of Order |
If an amendment shall be proposed to any resolution under consideration but shall be ruled out of order by the chairman of the meeting the proceedings on the substantive resolution shall not be invalidated by any error in such ruling.
Voting
61. | Votes of Members |
Subject to any special terms as to voting upon which any shares may be issued or may at the relevant time be held and to any other provisions of these articles, members shall be entitled to vote at a general meeting as provided in the Companies Acts.
62. | Method of Voting |
At any general meeting a resolution put to the vote of the meeting shall be decided on a poll, which shall be taken in such manner as the chairman of the meeting shall direct, including by means of electronic vote casters. The result of the vote shall be deemed to be the resolution of the meeting at which the vote was demanded. A vote to elect the chairman of the meeting or to adjourn the meeting must be taken immediately at the meeting. Any other vote may be taken at any other time (within 30 days of the meeting) and place determined by the chairman. The chairman can appoint scrutineers (who need not be shareholders) and set a day, time and place for the result of the poll to be declared.
63. | Votes of Joint Holders |
In the case of joint holders of a share the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
64. | Voting on Behalf of Incapable Member |
A member in respect of whom an order has been made by any competent court or official on the ground that he is or may be suffering from a mental disorder or is otherwise incapable of managing his affairs may vote at any general meeting of the company and may exercise any other right conferred by membership in relation to general meetings by or through any person authorised in such circumstances to do so on his behalf (and that person may vote by proxy), provided that evidence to the satisfaction of the board of the authority of the person claiming to exercise the right to vote or such other right has been received by the company not later than the last time at which appointments of proxy should have been received in order to be valid for use at that meeting or on the holding of that poll.
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65. | No Right to Vote where Sums Overdue on Shares |
No member shall, unless the board otherwise decides, be entitled in respect of any share held by him to attend or vote (either personally or by proxy) at any general meeting of the company or to exercise any other right conferred by membership in relation to general meetings unless all calls or other sums presently payable by him in respect of that share have been paid.
66. | Objections or Errors in Voting |
If:
(i) | any objection shall be raised to the qualification of any voter, or |
(ii) | any votes have been counted which ought not to have been counted or which might have been rejected, or |
(iii) | any votes are not counted which ought to have been counted, |
the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless it is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be conclusive.
Approved Depositaries
67. | Meaning of Approved Depositary |
(A) | In these articles, unless the context otherwise requires, Approved Depositary means a person approved by the board and appointed: |
(i) | to hold the companys shares or any rights or interests in any of the companys shares; and |
(ii) | to issue securities, documents of title or other documents which evidence that the holder of them owns or is entitled to receive the shares, rights or interests held by the Approved Depository, |
and shall include a nominee acting for a person appointed to do these things.
(B) | The trustees of any scheme or arrangements for or principally for the benefit of employees of the company and its associated companies will be deemed to be an Approved Depositary for the purposes of these articles unless the board resolves otherwise. |
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(C) | References in these articles to an Approved Depositary or to shares held by it refer only to an Approved Depositary and to its shares held in its capacity as an Approved Depositary. |
68. | Appointment of Approved Depositaries |
Subject to these articles and to applicable law, an Approved Depositary may appoint as its proxy or proxies in relation to any ordinary shares which it holds, anyone it thinks fit and may determine the manner and terms of any such appointment. Each appointment must state the number and class of shares to which it relates and the total number of shares of each class in respect of which appointments exist at any one time, which must not exceed the total number of shares of each such class registered in the name of the Approved Depositary or its nominee (the Depositary Shares ) at that time.
69. | Register of Approved Depositaries |
The Approved Depositary must keep a register (the Proxy Register ) of each person it has appointed as a proxy under Article 71 (an Appointed Proxy ) and the number of Depositary Shares (his Appointed Number ) to which the appointment relates. The directors will determine the requisite information to be recorded in the Proxy Register relating to each Appointed Proxy.
Any person authorised by the company may inspect the Proxy Register during usual business hours and the Approved Depositary will give such person any information which he requests as to the contents of the Proxy Register.
70. | Approved Depositaries Attendance at General Meetings |
(A) | An Appointed Proxy may only attend a general meeting if he provides the company with written evidence of his appointment as such. This must be in a form agreed between the directors and the Approved Depositary. |
(B) | Subject to applicable law and to these articles, and so long as the Approved Depositary or a nominee of the Approved Depositary holds at least his Appointed Number of shares, an Appointed Proxy is entitled to attend a general meeting which holders of that class of shares are entitled to attend, and he is entitled to the same rights, and subject to the same obligations, in relation to his Appointed Number of Depositary Shares as if he had been validly appointed in accordance with Articles 73 to 77 by the registered holder of these shares as its proxy in relation to those shares. |
71. | Proxies of Appointed Depositaries |
An Appointed Proxy may appoint another person as his proxy for his Appointed Number of Depositary Shares, provided the appointment is made and deposited in accordance with Articles 73 to 77 . These articles apply to that appointment and to the person so appointed as though those Depositary Shares were registered in the name of the Appointed Proxy and the appointment was made by him in that capacity. The directors may require such evidence as they think appropriate to decide that such appointment is effective.
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72. | Identifying Appointed Proxies |
(A) | For the purposes of determining who is entitled as an Appointed Proxy to exercise the rights conferred by Articles 70 and 71 and the number of Depositary Shares in respect of which a person is to be treated as having been appointed as an Appointed Proxy for these purposes, the Approved Depositary may decide that the Appointed Proxies who are so entitled are the persons entered in the Proxy Register at a time and on a date (a Record Time ) agreed between the Approved Depositary and the company. |
(B) | When a Record Date is decided for a particular purpose: |
(i) | an Appointed Proxy is to be treated as having been appointed for that purpose for the number and class of shares appearing against his name in the Proxy Register as at the Record Time; and |
(ii) | changes to entries in the Proxy Register after the Record Time will be ignored for this purpose. |
(C) | Except for recognising the rights given in relation to General Meetings by appointments made by Appointed Proxies pursuant to Article 71 , the company is entitled to treat any person entered in the Proxy Register as an Appointed Proxy as the only person (other than the Approved Depositary) who has any interest in the Depositary Shares in respect of which the Appointed Proxy has been appointed. |
(D) | At a general meeting the chairman has the final decision as to whether any person has the right to vote or exercise any other right relating to any Depositary Shares. In any other situation, the directors have the final decision as to whether any person has the right to exercise any right relating to any Depositary Shares. |
Proxies
73. | Appointment of Proxies |
The appointment of a proxy shall be in writing signed by the appointor or his duly authorised attorney or, if the appointor is a corporation, shall either be executed under its seal or signed by an officer, attorney or other person authorised to sign it. If a member appoints more than one proxy and the proxy forms appointing those proxies would give those proxies the apparent right to exercise votes on behalf of the member in a general meeting over more shares than are held by the member, then each of those proxy forms will be invalid and none of the proxies so appointed will be entitled to attend, speak or vote at the relevant general meeting.
74. | Receipt of Proxies |
(A) | The appointment of a proxy must: |
(i) |
in the case of an appointment made in hard copy form, be received at the office (or such other place in the United Kingdom or in the United States as may be specified by the company for the receipt of appointments of proxy in |
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hard copy form) not less than 48 hours (or such shorter time as the board may determine) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote together with (if required by the board) any authority under which it is made or a copy of the authority, certified notarially or in accordance with the Powers of Attorney Act 1971 or in some other manner approved by the board; |
(ii) | in the case of an appointment made by electronic means, be received at the address specified by the company for the receipt of appointments of proxy by electronic means not less than 48 hours (or such shorter time as the board may determine) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote. Any authority pursuant to which such an appointment is made or a copy of the authority, certified notarially or in accordance with the Powers of Attorney Act 1971 or in some other manner approved by the board, must, if required by the board, be received at such address or at the office (or such other place in the United Kingdom as may be specified by the company for the receipt of such documents) not less than 48 hours (or such shorter time as the board may determine) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; |
(iii) | in the case of an appointment delivered by an Approved Depositary (except in respect of a proxy appointed in accordance with Article 68 ) be delivered to the appropriate place referred to in (i) or (ii) above, as appropriate, depending on whether the appointment is made in hard copy or electronic form; |
(iv) | in the case of a vote taken more than 48 hours subsequently to the date of the meeting or adjourned meeting, be received as aforesaid not less than 24 hours (or such shorter time as the board may determine) before the time appointed for the taking of the vote; and |
(v) | in the case of a vote taken not more than 48 hours subsequently to the date of the meeting or adjourned meeting, be received as aforesaid by the time at which the vote was demanded (or at such later time as the board may determine), |
and an appointment of a proxy which is not, or in respect of which the authority or copy thereof is not, received in a manner so permitted shall be invalid. When two or more valid but differing appointments of a proxy are received in respect of the same share for use at the same meeting or poll, the one which is last received (regardless of its date or of the date of its signature) shall be treated as replacing and revoking the others as regards that share; if the company is unable to determine which was last received, none of them shall be treated as valid in respect of that share. The appointment of a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. The proceedings at a general meeting shall not be invalidated where an appointment of a proxy in
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respect of that meeting is sent in electronic form as provided in these articles, but because of a technical problem it cannot be read by the recipient.
(B) | The board may at its discretion determine that in calculating the periods mentioned in this article no account shall be taken of any part of a day that is not a working day. |
75. | Maximum Validity of Proxy |
No appointment of a proxy shall be valid after 12 months have elapsed from the date of its receipt save that, unless the contrary is stated in it, an appointment of a proxy shall be valid for use at an adjourned meeting or vote after a meeting or an adjourned meeting even after 12 months, if it was valid for the original meeting.
76. | Form of Proxy |
The appointment of a proxy shall be in any usual form or in such other form as the board may approve. The appointment of a proxy shall be deemed to confer authority to vote on any amendment of a resolution put to, or any other business which may properly come before, the meeting for which it is given as the proxy thinks fit. The appointment of a proxy shall, unless the contrary is stated in it, be valid as well for any adjournment of the meeting as for the meeting to which it relates.
77. | Cancellation of Proxys Authority |
A vote given by a proxy or by the duly authorised representative of a corporation shall be valid notwithstanding the previous determination of the authority of the person voting, unless notice in writing of the determination was received by the company at the office (or such other place or address as was specified by the company for the receipt of appointments of proxy) not later than the last time at which an appointment of a proxy should have been received in order to be valid for use at the meeting at which the vote was given.
Class Meetings
78. | Separate General Meetings |
The provisions of these articles relating to general meetings shall apply, with any necessary modifications to any separate general meeting of the holders of shares of a class convened otherwise than in connection with the variation or abrogation of the rights attached to the shares of that class. For this purpose, a general meeting at which no holder of a share other than an ordinary share may, in his capacity as a member, attend or vote shall also constitute a separate general meeting of the holders of the ordinary shares.
Appointment, Retirement and Removal of Directors
79. | Number of Directors |
Unless otherwise determined by ordinary resolution of the company, the directors (disregarding alternate directors) shall be not less than two nor more than 24 in number.
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80. | Directors Shareholding Qualification |
No shareholding qualification for directors shall be required.
81. | Power of Company to Appoint Directors |
Subject to the provisions of these articles, the company may by ordinary resolution elect any person who is willing to act to be a director, either to fill a vacancy or as an addition to the existing board, but so that the total number of directors shall not at any time exceed any maximum number fixed by or in accordance with these articles.
82. | Power of Board to Appoint Directors |
Subject to the provisions of these articles, the board may appoint any person who is willing to act to be a director, either to fill a vacancy or as an addition to the existing board, but so that the total number of directors shall not at any time exceed any maximum number fixed by or in accordance with these articles. Any director so appointed shall retire at the next annual general meeting and shall then be eligible for re-appointment.
83. | Retirement of Directors by Rotation |
At every annual general meeting any director:
(i) | who has been appointed by the board since the last annual general meeting, or |
(ii) | who held office at the time of the two preceding annual general meetings and who did not retire at either of them, or |
(iii) | who has held office with the company, other than employment or executive office, for a continuous period of nine years or more at the date of the meeting, |
shall retire from office and may offer himself for re-appointment by the members.
84. | Filling Vacancies |
Subject to the provisions of these articles, at the meeting at which a director retires the company can pass an ordinary resolution to re-appoint the director or to elect some other eligible person in his place.
85. | Power of Removal by Special Resolution |
In addition to any power of removal conferred by the Companies Acts, the company may by special resolution remove any director before the expiration of his period of office and may (subject to these articles) by ordinary resolution appoint another person who is willing to act to be a director in his place.
86. | Persons Eligible as Directors |
No person other than a director retiring at the meeting shall be appointed or re-appointed a director at any general meeting unless:
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(i) | he is recommended by the board; or |
(ii) | not less than seven nor more than 42 days before the day appointed for the meeting, notice in writing by a member qualified to vote at the meeting (not being the person to be proposed) has been given to the secretary of the intention to propose that person for appointment or re-appointment together with confirmation in writing by that person of his willingness to be appointed or re-appointed. |
87. | Position of Retiring Directors |
A director who retires at an annual general meeting may, if willing to continue to act, be re-appointed. If he is re-appointed he is treated as continuing in office throughout. If he is not re-appointed, he shall retain office until the end of the meeting or (if earlier) when a resolution is passed to appoint someone in his place or when a resolution to re-appoint the director is put to the meeting and lost.
88. | Vacation of Office by Directors |
Without prejudice to the provisions for retirement contained in these articles, the office of a director shall be vacated if:
(i) | he resigns his office by notice in writing sent to or received at the office or at an address specified by the company for the purposes of communication by electronic means or tendered at a meeting of the board; or |
(ii) | by notice in writing sent to or received at the office or at an address specified by the company for the purposes of communication by electronic means or tendered at a meeting of the board, he offers to resign and the board resolves to accept such offer; or |
(iii) | by notice in writing sent to or received at the office or at an address specified by the company for the purposes of communication by electronic means or tendered at a meeting of the board, his resignation is requested by all of the other directors and all of the other directors are not less than three in number; or |
(iv) | he is or has been suffering from mental or physical ill health and the board resolves that his office is vacated; or |
(v) | he is absent without the permission of the board from meetings of the board (whether or not an alternate director appointed by him attends) for six consecutive months and the board resolves that his office is vacated; or |
(vi) | he becomes bankrupt or compounds with his creditors generally; or |
(vii) | he is prohibited by law from being a director; or |
(viii) | he ceases to be a director by virtue of the Companies Acts or is removed from office pursuant to these articles. |
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If the office of a director is vacated for any reason, he shall cease to be a member of any committee or sub-committee of the board.
89. | Alternate Directors |
(A) | Each director may appoint any person to be his alternate and may at his discretion remove an alternate director so appointed. If the alternate director is not already a director, the appointment, unless previously approved by the board, shall have effect only upon and subject to its being so approved. Any appointment or removal of an alternate director shall be effected by notice in writing signed by the appointor and sent to or received at the office or at an address specified by the company for the purpose of communication by electronic means or tendered at a meeting of the board, or in any other manner approved by the board. An alternate director shall be entitled to receive notice of all meetings of the board or of committees of the board of which his appointor is a member. He shall also be entitled to attend and vote as a director at any such meeting at which the director appointing him is not personally present and at such meeting to exercise and discharge all the functions, powers, rights and duties of his appointor as a director and for the purposes of the proceedings at such meeting the provisions of these articles shall apply as if he were a director. |
(B) | Every person acting as an alternate director shall (except as regards power to appoint an alternate and remuneration) be subject in all respects to the provisions of these articles relating to directors and shall during his appointment be an officer of the company. An alternate director shall alone be responsible to the company for his acts and defaults and shall not be deemed to be the agent of or for the director appointing him. An alternate director may be paid expenses and shall be entitled to be indemnified by the company to the same extent as if he were a director. An alternate director shall not be entitled to receive from the company any fee in his capacity as an alternate director but the company shall, if so requested in writing by the appointor, pay to the alternate director any part of the fees or remuneration otherwise due to the appointor. |
(C) | A director or any other person may act as an alternate director to represent more than one director. Every person acting as an alternate director shall have one vote for each director for whom he acts as alternate, in addition to his own vote if he is also a director but he shall count as only one for the purposes of determining whether a quorum is present. Signature by an alternate director of any resolution in writing of the board or a committee of the board shall, unless the notice of his appointment provides to the contrary, be as effective as signature by his appointor. |
(D) | An alternate director shall cease to be an alternate director: |
(i) | if his appointor ceases for any reason to be a director except that, if at any meeting any director retires but is re-appointed at the same meeting, any appointment made by him pursuant to this article which was in force immediately before his retirement shall remain in force as though he had not retired; or |
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(ii) | on the happening of any event which if he were a director would cause him to vacate his office as director; or |
(iii) | if he resigns his office by notice in writing to the company. |
90. | Executive Directors |
The board or any committee authorised by the board may from time to time appoint one or more directors to hold any employment or executive office with the company for such period and upon such other terms as the board or any committee authorised by the board may in its discretion decide and may revoke or terminate any appointment so made. Any revocation or termination of the appointment shall be without prejudice to any claim for damages that the director may have against the company or the company may have against the director for any breach of any contract of service between him and the company which may be involved in the revocation or termination. A director so appointed shall receive such remuneration (whether by way of salary, commission, participation in profits or otherwise) as the board or any committee authorised by the board may decide, and either in addition to or in lieu of his remuneration as a director.
Fees, Remuneration, Expenses and Pensions
91. | Directors Fees |
(A) | The directors can decide on the amount, timing and manner of payment of fees to be paid by the company to the directors for acting as directors, but the total fees paid to all of the directors for acting as directors (including amounts paid under Article 92(ii) to 92(v) but excluding any amounts paid under any other provision of these articles) shall not exceed the higher of: |
(i) | £3 million a year; and |
(ii) | any higher amount as the company may by ordinary resolution decide. |
These fees can be satisfied in cash or in any other form.
(B) | If the directors decide to satisfy any of these fees in shares or in any other non-cash form, the value of the shares or other assets to be counted towards this limit will be their value at the time the entitlement to them is first allocated, or provisionally allocated, to the director. This value will be taken into account for the purpose of the limit in the year in which the entitlement is first allocated, or provisionally allocated, and not in any later year when the fees, shares or other assets are actually paid or delivered to the director. This paragraph applies even if: |
(i) | the directors entitlement to the fees, or to receive the assets, is subject to conditions which will, or may, be fulfilled at a later time; |
(ii) | the fees, shares or other assets are to be, or may be, paid or delivered to the director at a later time or the director elects, agrees or is required to receive the cash equivalent of the shares or other assets as determined by reference to their value at such later time; |
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(iii) | the company has not paid for the relevant shares or other assets at the time the director first becomes, or becomes provisionally, entitled to them, and their value subsequently changes. |
(C) | Unless an ordinary resolution is passed saying otherwise, the fees will be divided between some or all of the directors in the way that they decide. If they fail to decide, the fees will be shared equally by the directors, except that any director holding office as a director for only part of the period covered by the fee is only entitled to a pro rata share covering that part period. |
92. | Additional Remuneration |
The directors can award special pay to any director who:
(i) | holds any executive post; |
(ii) | acts as chairman; |
(iii) | acts as senior independent director; |
(iv) | acts as a scientific/medical expert on the board; |
(v) | is chairman of, or serves on, any committee of the directors; or |
(vi) | performs any other services which the directors consider to extend beyond the ordinary duties of a director. |
Special pay can take the form of salary, commission or other benefits or can be paid in some other way. This is decided on by the directors.
93. | Expenses |
(A) | Each director may be paid his reasonable travelling, hotel and incidental expenses of attending and returning from meetings of the board or committees of the board or general meetings of the company or any other meeting which as a director he is entitled to attend and shall be paid all other costs and expenses properly and reasonably incurred by him in the conduct of the companys business or in the discharge of his duties as a director. The company may also fund a directors or former directors expenditure for the purposes permitted under the Companies Acts and may do anything to enable a director or former director of the company to avoid incurring such expenditure as provided in the Companies Acts. |
(B) | The directors can award extra pay to any director who, at the request of the directors, performs special services or goes or lives abroad for any purposes of the company. |
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94. | Pensions and Gratuities for Directors |
The board or any committee authorised by the board may exercise all the powers of the company to provide benefits, either by the payment of gratuities or pensions or by insurance or in any other manner whether similar to the foregoing or not, for any director or former director or the relations, or dependants of, or persons connected to, any director or former director, provided that no benefits (except such as may be provided for by any other article) may be granted to or in respect of a director or former director who has not been employed by, or held an executive office or place of profit under, the company or any body corporate which is or has been its subsidiary undertaking or any predecessor in business of the company or any such body corporate without the approval of an ordinary resolution of the company. No director or former director shall be accountable to the company or the members for any benefit provided pursuant to this article and the receipt of any such benefit shall not disqualify any person from being or becoming a director of the company.
Directors Interests
95. | Conflicts of interest requiring board authorisation |
(A) | The board may, subject to the quorum and voting requirements set out in this article, authorise any matter which would otherwise involve a director breaching his duty under the Companies Acts to avoid conflicts of interest ( Conflict ). |
(B) | A director seeking authorisation in respect of a Conflict shall declare to the board the nature and extent of his interest in a Conflict as soon as is reasonably practicable. The director shall provide the board with such details of the relevant matter as are necessary for the board to decide how to address the Conflict together with such additional information as may be requested by the board. |
(C) | Any director (including the relevant director) may propose that the relevant director be authorised in relation to any matter the subject of a Conflict. Such proposal and any authority given by the board shall be effected in the same way that any other matter may be proposed to and resolved upon by the board under the provisions of these articles save that: |
(i) | the relevant director and any other director with a similar interest shall not count towards the quorum nor vote on any resolution giving such authority; and |
(ii) | the relevant director and any other director with a similar interest may, if the other members of the board so decide, be excluded from any board meeting while the Conflict is under consideration. |
(D) | Where the board gives authority in relation to a Conflict, or where any of the situations described in Article 96(B) apply in relation to a director ( Relevant Situation ): |
(i) |
the board may (whether at the relevant time or subsequently) (a) require that the relevant director is excluded from the receipt of information, the |
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participation in discussion and/or the making of decisions (whether at meetings of the board or otherwise) related to the Conflict or Relevant Situation; and (b) impose upon the relevant director such other terms for the purpose of dealing with the Conflict or Relevant Situation as it may determine; |
(ii) | the relevant director will be obliged to conduct himself in accordance with any terms imposed by the board in relation to the Conflict or Relevant Situation; |
(iii) | the board may provide that where the relevant director obtains (otherwise than through his position as a director of the company) information that is confidential to a third party, the director will not be obliged to disclose that information to the company, or to use or apply the information in relation to the companys affairs, where to do so would amount to a breach of that confidence; |
(iv) | the terms of the authority shall be recorded in writing (but the authority shall be effective whether or not the terms are so recorded); and |
(v) | the board may revoke or vary such authority at any time but this will not affect anything done by the relevant director prior to such revocation in accordance with the terms of such authority. |
96. | Other conflicts of interest |
(A) | If a director is in any way directly or indirectly interested in a proposed contract with the company or a contract that has been entered into by the company, he must declare the nature and extent of that interest to the directors in accordance with the Companies Acts. |
(B) | Provided he has declared his interest in accordance with paragraph (A) , a director may: |
(i) | be party to, or otherwise interested in, any contract with the company or in which the company has a direct or indirect interest; |
(ii) | hold any other office or place of profit with the company (except that of auditor) in conjunction with his office of director for such period and upon such terms, including as to remuneration, as the board may decide; |
(iii) | act by himself or through a firm with which he is associated in a professional capacity for the company or any other company in which the company may be interested (otherwise than as auditor); |
(iv) | be or become a director or other officer of, or employed by or otherwise be interested in any holding company or subsidiary company of the company or any other company in which the company may be interested; and |
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(v) | be or become a director of any other company in which the company does not have an interest and which cannot reasonably be regarded as giving rise to a conflict of interest at the time of his appointment as a director of that other company. |
97. | Benefits |
A director shall not, by reason of his office or of the fiduciary relationship thereby established, be liable to account to the company or the members for any remuneration, profit or other benefit realised by reason of his having any type of interest authorised under Article 95(A) or permitted under Article 96(B) and no contract shall be liable to be avoided on the grounds of a director having any type of interest authorised under Article 95(A) or permitted under Article 96(B) .
98. | Quorum and voting requirements |
(A) | A director shall not vote on or be counted in the quorum in relation to any resolution of the board concerning his own appointment, or the settlement or variation of the terms or the termination of his own appointment, as the holder of any office or place of profit with the company or any other company in which the company is interested. |
(B) | Where proposals are under consideration concerning the appointment, or the settlement or variation of the terms or the termination of the appointment, of two or more directors to offices or places of profit with the company or any other company in which the company is interested, a separate resolution may be put in relation to each director and in that case each of the directors concerned shall be entitled to vote and be counted in the quorum in respect of each resolution unless it concerns his own appointment or the settlement or variation of the terms or the termination of his own appointment or the appointment of another director to an office or place of profit with a company in which the company is interested and the director seeking to vote or be counted in the quorum has a Relevant Interest in it. |
(C) | A director shall not vote on, or be counted in the quorum in relation to, any resolution of the board in respect of any contract in which he has an interest and, if he shall do so, his vote shall not be counted, but this prohibition shall not apply to any resolution where that interest cannot reasonably be regarded as likely to give rise to a conflict of interest or where that interest arises only from one or more of the following matters: |
(i) | the giving to him of any guarantee, indemnity or security in respect of money lent or obligations undertaken by him or by any other person at the request of or for the benefit of the company or any of its subsidiary undertakings; |
(ii) | the giving to a third party of any guarantee, indemnity or security in respect of a debt or obligation of the company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security; |
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(iii) | the giving to him of any other indemnity where all other directors are also being offered indemnities on substantially the same terms; |
(iv) | the funding by the company of his expenditure on defending proceedings or the doing by the company of anything to enable him to avoid incurring such expenditure where all other directors are being offered substantially the same arrangements; |
(v) | where the company or any of its subsidiary undertakings is offering securities in which offer the director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which the director is to participate; |
(vi) | any contract in which he is interested by virtue of his interest in shares or debentures or other securities of the company or by reason of any other interest in or through the company; |
(vii) | any contract concerning any other company (not being a company in which the director has a Relevant Interest) in which he is interested directly or indirectly whether as an officer, shareholder, creditor or otherwise howsoever; |
(viii) | any contract concerning the adoption, modification or operation of a pension fund, superannuation or similar scheme or retirement, death or disability benefits scheme or employees share scheme which relates both to directors and employees of the company or of any of its subsidiary undertakings and does not provide in respect of any director as such any privilege or advantage not accorded to the employees to which the fund or scheme relates; |
(ix) | any contract for the benefit of employees of the company or of any of its subsidiary undertakings under which he benefits in a similar manner to the employees and which does not accord to any director as such any privilege or advantage not accorded to the employees to whom the contract relates; and |
(x) | any contract for the purchase or maintenance of insurance against any liability for, or for the benefit of, any director or directors or for, or for the benefit of, persons who include directors. |
(D) | A company shall be deemed to be one in which a director has a Relevant Interest if and so long as (but only if and so long as) he is to his knowledge (either directly or indirectly) the holder of or beneficially interested in one per cent. or more of any class of the equity share capital of that company (calculated exclusive of any shares of that class in that company held as treasury shares) or of the voting rights available to members of that company. In relation to an alternate director, an interest of his appointor shall be treated as an interest of the alternate director without prejudice to any interest which the alternate director has otherwise. |
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(E) | Where a company in which a director has a Relevant Interest is interested in a contract, he also shall be deemed interested in that contract. |
(F) | If any question shall arise at any meeting of the board as to the interest of a director (other than the chairman of the meeting) in a contract and whether it is likely to give rise to a conflict of interest or as to the entitlement of any director (other than the chairman of the meeting) to vote or be counted in the quorum and the question is not resolved by his voluntarily agreeing to abstain from voting or not to be counted in the quorum, the question shall be referred to the chairman of the meeting and his ruling in relation to the director concerned shall be conclusive except in a case where the nature or extent of the directors interest (so far as it is known to him) has not been fairly disclosed to the board. If any question shall arise in respect of the chairman of the meeting, the question shall be decided by a resolution of the board (for which purpose the chairman of the meeting shall be counted in the quorum but shall not vote on the matter) and the resolution shall be conclusive except in a case where the nature or extent of the interest of the chairman of the meeting (so far as it is known to him) has not been fairly disclosed to the board. |
(G) | Subject to these articles, the board may also cause any voting power conferred by the shares in any other company held or owned by the company or any power of appointment to be exercised in such manner in all respects as it thinks fit, including the exercise of the voting power or power of appointment in favour of the appointment of the directors or any of them as directors or officers of the other company, or in favour of the payment of remuneration to the directors or officers of the other company. Subject to these articles, a director may also vote on and be counted in the quorum in relation to any of such matters. |
99. | General |
(A) | References in Articles 95 to 98 to: |
(i) | a contract include references to any proposed contract and to any transaction or arrangement or proposed transaction or arrangement whether or not constituting a contract; and |
(ii) | a conflict of interest include a conflict of interest and duty and a conflict of duties. |
(B) | The company may by ordinary resolution suspend or relax the provisions of Articles 95 to 98 to any extent or ratify any contract not properly authorised by reason of a contravention of any of the provisions of Articles 95 to 98 . |
Powers and Duties of the Board
100. | General Powers of Company Vested in Board |
Subject to the these articles and to any directions given by the company in general meeting by special resolution, the business of the company shall be managed by the board which may exercise all the powers of the company whether relating to the management of the business of the company or not. No alteration of these articles and no
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special resolution shall invalidate any prior act of the board which would have been valid if that alteration had not been made or that resolution had not been passed. The powers given by this article shall not be limited by any special power given to the board by any other article.
101. | Borrowing Powers |
Subject to the provisions of the Companies Acts, the directors may exercise all the powers of the company:
(i) | to borrow money; |
(ii) | to mortgage or charge all or any of the companys undertaking, property (present and future) and uncalled capital; |
(iii) | to issue debentures and other securities; and |
(iv) | to give security either outright or as collateral security for any debt, liability or obligation of the company or of any third party. |
102. | Agents |
(A) | The board can appoint anyone as the companys attorney by granting a power of attorney or by authorising them in some other way. Attorneys can either be appointed directly by the board or the board can give someone else the power to select attorneys. The board or the persons who are authorised by it to select attorneys can decide on the purposes, powers, authorities and discretions of attorneys. But they cannot give an attorney any power, authority or discretion which the board does not have under these articles. |
(B) | The board can decide how long a power of attorney will last for and attach any conditions to it. The power of attorney can include any provisions which the board decides on for the protection and convenience of anybody dealing with the attorney. The power of attorney can allow the attorney to grant any or all of his power, authority or discretion to any other person. |
(C) | The board can: |
(i) | delegate any of its authority, powers or discretions to any manager or agent of the company; |
(ii) | allow managers or agents to delegate to another person; |
(iii) | remove any people it has appointed in any of these ways; and |
(iv) | cancel or change anything that it has delegated, although this will not affect anybody who acts in good faith who has not had any notice of any cancellation or change. |
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(D) | Any appointment or delegation by the board which is referred to in this article can be on any conditions decided on by the board. |
(E) | The ability of the board to delegate under this article applies to all its powers and is not limited because certain articles refer to powers being exercised by the board or by a committee authorised by the board while other articles do not. |
103. | Delegation to Individual Directors |
The board may entrust to and confer upon any director any of its powers, authorities and discretions (with power to sub-delegate) upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, authorities and discretions and may from time to time revoke or vary all or any of them but no person dealing in good faith and without notice of the revocation or variation shall be affected by it. The power to delegate contained in this article shall be effective in relation to the powers, authorities and discretions of the board generally and shall not be limited by the fact that in certain articles, but not in others, express reference is made to particular powers, authorities or discretions being exercised by the board or by a committee authorised by the board.
104. | Registers |
The company may keep an overseas or local or other register in any place and the board may make and vary such regulations as it may think fit respecting the keeping of the register.
105. | Provision for Employees |
The board may exercise any power conferred by the Companies Acts to make provision for the benefit of persons employed or formerly employed by the company or any of its subsidiaries in connection with the cessation or the transfer to any person of the whole or part of the undertaking of the company or that subsidiary.
Proceedings of the Board
106. | Board Meetings |
The board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it thinks fit. A director at any time may, and the secretary on the requisition of a director at any time shall, summon a board meeting.
107. | Notice of Board Meetings |
Notice of a board meeting shall be deemed to be properly given to a director if it is given to him personally or by word of mouth or sent in writing to him at his last known address or any other address given by him to the company for this purpose. A director may waive his entitlement to notice of any meeting either prospectively or retrospectively and any retrospective waiver shall not affect the validity of the meeting or of any business conducted at the meeting.
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108. | Quorum |
The quorum necessary for the transaction of the business of the board may be fixed by the board and, unless so fixed at any other number, shall be two. Subject to the provisions of these articles, any director who ceases to be a director at a board meeting may continue to be present and to act as a director and be counted in the quorum until the termination of the board meeting if no other director objects and if otherwise a quorum of directors would not be present.
109. | Directors below Minimum through Vacancies |
The continuing directors or a sole continuing director may act notwithstanding any vacancy in their number but, if and so long as the number of directors is reduced below the minimum number fixed by or in accordance with these articles or is below the number fixed by or in accordance with these articles as the quorum or there is only one continuing director, the continuing directors or director may act for the purpose of filling vacancies or of summoning general meetings of the company but not for any other purpose. If there are no directors or director able or willing to act, then any two members (excluding any member holding shares as treasury shares) may summon a general meeting for the purpose of appointing directors.
110. | Appointment of Chairman |
The board may appoint a director to be the chairman or a deputy chairman of the board, and may at any time remove him from that office. The chairman of the board or failing him a deputy chairman shall act as chairman at every meeting of the board. If more than one deputy chairman is present they shall agree amongst themselves who is to take the chair or, if they cannot agree, the deputy chairman who has been in office as a director longest shall take the chair. But if no chairman of the board or deputy chairman is appointed, or if at any meeting neither the chairman nor any deputy chairman is present within five minutes after the time appointed for holding the meeting, the directors present may choose one of their number to be chairman of the meeting. References in these articles to a deputy chairman include, if no one has been appointed to that title, a person appointed to a position with another title which the board designates as equivalent to the position of deputy chairman.
111. | Competence of Meetings |
A meeting of the board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions vested in or exercisable by the board.
112. | Voting |
Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes the chairman of the meeting shall have a second or casting vote.
113. | Delegation to Committees |
(A) |
The board may delegate any of its powers, authorities and discretions (with power to sub-delegate) to any committee, consisting of such person or persons (whether a |
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member or members of its body or not) as it thinks fit, provided that the majority of persons on any committee or sub-committee must be directors. References in these articles to committees include sub-committees permitted under this article. |
(B) | Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations which may be imposed on it by the board. The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these articles for regulating the meetings and proceedings of the board so far as the same are applicable and are not superseded by any regulations imposed by the board. |
(C) | The power to delegate contained in this article shall be effective in relation to the powers, authorities and discretions of the board generally and shall not be limited by the fact that in certain articles, but not in others, express reference is made to particular powers, authorities or discretions being exercised by the board or by a committee authorised by the board. |
114. | Participation in Meetings |
All or any of the members of the board may participate in a meeting of the board by means of a conference telephone or any communication equipment which allows all persons participating in the meeting to speak to and hear each other or by a series of telephone calls from the chairman of the meeting. A person so participating shall be deemed to be present in person at the meeting and shall be entitled to vote and be counted in a quorum accordingly. Any such meeting will be treated as taking place where the chairman is located.
115. | Resolution in Writing |
A resolution in writing signed by all the directors who are at the relevant time entitled to receive notice of a meeting of the board and who would be entitled to vote on the resolution at a meeting of the board (if that number is sufficient to constitute a quorum) shall be as valid and effectual as a resolution passed at a meeting of the board properly called and constituted. The resolution may be contained in one document or in several documents in like form each signed by one or more of the directors concerned.
116. | Validity of Acts of Board or Committee |
All acts done by the board or by any committee or by any person acting as a director or member of a committee shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any member of the board or committee or person so acting or that they or any of them were disqualified from holding office or had vacated office or were not entitled to vote, be as valid as if each such member or person had been properly appointed and was qualified and had continued to be a director or member of the committee and had been entitled to vote.
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Seals
117. | Use of Seals |
The board shall provide for the custody of every seal of the company. A seal shall only be used by the authority of the board or of a committee of the board authorised by the board in that behalf. Subject as otherwise provided in these articles, and to any resolution of the board or committee of the board dispensing with the requirement for any counter-signature on any occasion, any instrument to which the common seal is applied shall be signed by at least one director and the secretary, or by at least two directors or by one director in the presence of a witness who attests the signature or by such other person or persons as the board may approve. Any instrument to which an official seal is applied need not, unless the board otherwise decides or the law otherwise requires, be signed by any person.
Dividends and Other Payments
118. | Declaration of Dividends by Company |
The company may by ordinary resolution from time to time declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the board.
119. | Payment of Interim and Fixed Dividends by Board |
The board may pay such interim dividends as appear to the board to be justified by the financial position of the company and may also pay any dividend payable at a fixed rate at intervals settled by the board whenever the financial position of the company, in the opinion of the board, justifies its payment. If the board acts in good faith, it shall not incur any liability to the holders of any shares for any loss they may suffer in consequence of the payment of an interim or fixed dividend on any other class of shares ranking pari passu with or after those shares.
120. | Calculation and Currency of Dividends |
(A) | Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide: |
(i) | all dividends shall be declared and paid according to the amounts paid up on the share in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for the purposes of this article as paid up on the share; |
(ii) | all dividends shall be apportioned and paid pro rata according to the amounts paid up on the share during any portion or portions of the period in respect of which the dividend is paid; and |
(iii) | dividends may be declared or paid in any currency. |
(B) | The board may decide the basis of conversion for any currency conversions that may be required and how any costs involved are to be met. |
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(C) | The board may also decide that a particular Approved Depositary should be able to receive dividends in a currency other than the currency in which it is declared and may make arrangements accordingly. In particular, if an Approved Depositary has chosen or agreed to receive dividends in another currency, the directors may make arrangements with that Approved Depositary for payment to be made to them for value on the date on which the relevant dividend is paid, or a later date decided on by the directors. |
121. | Amounts Due on Shares may be Deducted from Dividends |
The board may deduct from any dividend or other moneys payable to a member by the company on or in respect of any shares all sums of money (if any) presently payable by him to the company on account of calls or otherwise in respect of shares of the company. Sums so deducted can be used to pay amounts owing to the company in respect of the shares.
122. | No Interest on Dividends |
Subject to the rights attaching to, or the terms of issue of, any shares, no dividend or other moneys payable by the company on or in respect of any share shall bear interest against the company.
123. | Payment Procedure |
Any dividend or other sum payable in cash by the company in respect of a share may be paid by cheque, warrant or similar financial instrument sent by post addressed to the holder at his registered address or, in the case of joint holders, addressed to the holder whose name stands first in the register in respect of the shares at his address as appearing in the register or addressed to such person and at such address as the holder or joint holders may in writing direct. Every cheque, warrant or similar financial instrument shall, unless the holder or joint holders otherwise direct, be made payable to the holder or, in the case of joint holders, to the holder whose name stands first on the register in respect of the shares, and shall be sent at his or their risk and payment of the cheque, warrant or similar financial instrument by the financial institution on which it is drawn shall constitute a good discharge to the company. In addition, any such dividend or other sum may be paid by any bank or other funds transfer system or such other means including, in respect of uncertificated shares, by means of the facilities and requirements of a relevant system and to or through such person as the holder or joint holders may in writing direct and the company may agree, and the making of such payment shall be a good discharge to the company and the company shall have no responsibility for any sums lost or delayed in the course of payment by any such system or other means or where it has acted on any such directions and accordingly, payment by any such system or other means shall constitute a good discharge to the company. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable on or in respect of the shares held by them. Where a person is entitled by transmission to a share, any dividend or other sum payable by the company in respect of the share may be paid as if he were a holder of the share and his address noted in the register were his registered address and where two or more persons are so entitled, any one of them may give effectual receipts for any dividends or other moneys payable or property distributable on or in respect of the shares.
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124. | Uncashed Dividends |
The company may cease to send any cheque, warrant or similar financial instrument through the post or to employ any other means of payment, including payment by means of a relevant system, for any dividend payable on any shares in the company which is normally paid in that manner on those shares if in respect of at least two consecutive dividends payable on those shares the cheques, warrants or similar financial instruments have been returned undelivered or remain uncashed during or at the end of the period for which the same are valid or that means of payment has failed. In addition, the company may cease to send any cheque, warrant or similar financial instrument through the post or may cease to employ any other means of payment if, in respect of one dividend payable on those shares, the cheque, warrant or similar financial instrument has been returned undelivered or remains uncashed during or at the end of the period for which the same is valid or that means of payment has failed and reasonable enquiries have failed to establish any new postal address or account of the holder. Subject to the provisions of these articles, the company must recommence sending cheques, warrants or similar financial instruments or employing such other means in respect of dividends payable on those shares if the holder or person entitled by transmission requests such recommencement in writing.
125. | Forfeiture of Unclaimed Dividends |
All dividends or other sums payable on or in respect of any shares which remain unclaimed may be invested or otherwise made use of by the board for the benefit of the company until claimed. Any dividend or other sum unclaimed after a period of 12 years from the date when it was declared or became due for payment shall be forfeited and shall revert to the company unless the board decides otherwise and the payment by the board of any unclaimed dividend or other sum payable on or in respect of a share into a separate account shall not constitute the company a trustee in respect of it.
126. | Dividends Not in Cash |
Any general meeting declaring a dividend may, upon the recommendation of the board, by ordinary resolution direct, and the board may in relation to any interim dividend direct, that it shall be satisfied wholly or partly by the distribution of assets, and in particular of paid up shares or debentures of any other company, and where any difficulty arises in regard to the distribution the board may settle it as it thinks expedient, and in particular may authorise any person to sell and transfer any fractions or may ignore fractions altogether, and may fix the value for distribution purposes of any assets or any part thereof to be distributed and may determine that cash shall be paid to any members upon the footing of the value so fixed in order to secure equality of distribution and may vest any assets to be distributed in trustees as may seem expedient to the board.
127. | Scrip Dividends and Dividend Plans Generally |
The board may, if authorised by an ordinary resolution of the company, offer any holders of ordinary shares (excluding any member holding shares as treasury shares) the right to elect to receive ordinary shares, credited as fully paid, instead of cash in respect of the whole (or some part, to be determined by the board) of any dividend specified by the ordinary resolution. The following provisions shall apply:
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(i) | an ordinary resolution may specify some or all of a particular dividend (whether or not already declared) or may specify some or all of any dividends declared or paid within a specified period, but such period may not end later than the fifth anniversary of the date of the meeting at which the ordinary resolution is passed; |
(ii) | the entitlement of each holder of ordinary shares to new ordinary shares shall be such that the relevant value of the entitlement shall be as nearly as possible equal to (but not greater than) the cash amount (disregarding any tax credit) of the dividend that such holder elects to forgo. For this purpose relevant value shall be calculated by reference to the average of the middle market quotations for the companys ordinary shares on the London Stock Exchange as derived from the Daily Official List (or any other publication of a recognised investment exchange showing quotations for the companys ordinary shares) on such five consecutive dealing days as the board shall determine provided that the first of such days shall be on or after the day on which the ordinary shares are first quoted ex the relevant dividend or in such other manner as may be determined by or in accordance with the ordinary resolution. A certificate or report by the auditors as to the amount of the relevant value in respect of any dividend shall be conclusive evidence of that amount and in giving such a certificate or report the auditors may rely on advice or information from brokers or other sources of information as they think fit; |
(iii) | no fraction of any ordinary share shall be allotted. The board may make such provisions as it thinks fit for any fractional entitlements including provisions whereby, in whole or in part, the benefit thereof accrues to the company and/or under which fractional entitlements are accrued and/or retained without interest and in each case accumulated on behalf of any holder of ordinary shares and such accruals or retentions are applied to the allotment by way of bonus to or cash subscription on behalf of such holder of fully paid ordinary shares and/or provisions whereby cash payments may be made to such holders in respect of their fractional entitlements; |
(iv) | the board, if it intends to offer an election in respect of any dividend, shall give notice to the holders of ordinary shares of the right of election offered to them, and specify the procedure to be followed which, for the avoidance of doubt, may include an election by means of a relevant system and the place at which, and the latest time by which, elections must be lodged in order for elections to be effective; no such notice need be given to holders of ordinary shares who have previously given election mandates in accordance with this article and whose mandates have not been revoked; the accidental omission to give notice of any right of election to, or the non receipt (even if the company becomes aware of such non-receipt) of any such notice by, any holder of ordinary shares entitled to the same shall neither invalidate any offer of an election nor give rise to any claim, suit or action; |
(v) | the board shall not proceed with any election unless the company has sufficient reserves or funds that may be capitalised, and the board has authority to allot sufficient shares, to give effect to it after the basis of allotment is determined; |
(vi) |
the board may exclude or restrict from any offer any shareholder who is an Approved Depositary or a nominee for an Approved Depositary if the offer or exercise of the right to or by the persons on whose behalf the Approved Depositary |
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holds the shares would suffer legal or practical problems of the kind mentioned in Article 127(vii) . If other shareholders (other than those excluded under Article 127(vii) ) have the right to opt for new shares, the directors must be satisfied that an appropriate dividend reinvestment plan or similar arrangement is available to a substantial majority of the people on whose behalf the Approved Depositary holds shares or that such arrangement will be available promptly and the first sentence of this Article 127(vi) does not apply until the directors are satisfied of this; |
(vii) | the board may exclude from any offer or make other arrangement in relation to any holders of ordinary shares where the board believes that such exclusion or arrangement is necessary or expedient in relation to legal or practical problems under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory, or the board believes that for any other reason the offer should not be made to them; |
(viii) | the dividend (or that part of the dividend in respect of which a right of election has been offered) shall not be payable on ordinary shares in respect of which an election has been made (for the purposes of this article the elected ordinary shares ) and instead additional ordinary shares shall be allotted to the holders of the elected ordinary shares on the basis of allotment calculated as stated. For such purpose the board shall capitalise, out of any amount standing to the credit of any reserve or fund (including the retained earnings) at the relevant time whether or not the same is available for distribution as the board may determine, a sum equal to the aggregate nominal amount of the additional ordinary shares to be allotted on that basis and apply it in paying up in full the appropriate number of ordinary shares for allotment and distribution to the holders of the elected ordinary shares on that basis. The board may do all acts and things considered necessary or expedient to give effect to any such capitalisation; |
(ix) | the additional ordinary shares when allotted shall rank pari passu in all respects with the fully-paid ordinary shares then in issue except that they will not be entitled to participation in the relevant dividend; |
(x) | unless the board otherwise determines, or unless the uncertificated securities rules otherwise require, the new ordinary share or shares which a member has elected to receive instead of cash in respect of the whole (or some part) of the specified dividend declared or paid in respect of his elected ordinary shares shall be in uncertificated form (in respect of the members elected ordinary shares which were in uncertificated form on the date of the members election) and in certificated form (in respect of the members elected ordinary shares which were in certificated form on the date of the members election); |
(xi) | the board may also from time to time establish or vary a procedure for election mandates, which, for the avoidance of doubt, may include an election by means of a relevant system, under which a holder of ordinary shares may elect in respect of future rights of election offered to that holder under this article until the election mandate is revoked or deemed to be revoked in accordance with the procedure; |
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(xii) | the board may decide how any costs relating to making new shares available in place of a cash dividend will be met, including deciding to deduct an amount from the entitlement of a shareholder under this article; and |
(xiii) | at any time before new ordinary shares are allotted instead of cash in respect of any part of a dividend, the board may determine that such new ordinary shares will not be allotted. Any such determination may be made before or after any election has been made by holders of ordinary shares in respect of the relevant dividend. |
Capitalisation of Reserves
128. | Power to Capitalise Reserves and Funds |
The company may, upon the recommendation of the board, at any time and from time to time pass an ordinary resolution to the effect that it is desirable to capitalise all or any part of any amount standing to the credit of any reserve or fund (including retained earnings) at the relevant time whether or not the same is available for distribution and accordingly that the amount to be capitalised be set free for distribution among the members or any class of members who would be entitled to it if it were distributed by way of dividend and in the same proportions, on the footing that it is applied either in or towards paying up the amounts unpaid at the relevant time on any shares in the company held by those members respectively or in paying up in full shares, debentures or other obligations of the company to be allotted and distributed credited as fully paid up among those members, or partly in one way and partly in the other, but so that, for the purposes of this article: (i) a share premium account and a capital redemption reserve, and any reserve or fund representing unrealised profits, may be applied only in paying up in full shares of the company that are to be allotted and distributed as fully paid up; and (ii) where the amount capitalised is applied in paying up in full shares that are to be allotted and distributed as fully paid up, the company will also be entitled to participate in the relevant distribution in relation to any shares of the relevant class held by it as treasury shares and the proportionate entitlement of the relevant class of members to the distribution will be calculated accordingly. The board may authorise any person to enter into an agreement with the company on behalf of the persons entitled to participate in the distribution and the agreement shall be binding on those persons.
129. | Settlement of Difficulties in Distribution |
Where any difficulty arises in regard to any distribution of any capitalised reserve or fund the board may settle the matter as it thinks expedient and in particular may authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments shall be made to any members in order to adjust the rights of all parties, as may seem expedient to the board.
Record Dates
130. | Power to Choose Any Record Date |
Notwithstanding any other provision of these articles, the company or the board may fix any date as the record date for any dividend, distribution, allotment or issue and such
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record date may be on or at any time before or after any date on which the dividend, distribution, allotment or issue is declared, paid or made. The power to fix any such record date shall include the power to fix a time on the chosen date.
Records and Summary Financial Statements
131. | Inspection of Records |
No member in his capacity as such shall have any right of inspecting any accounting record or book or document of the company except as conferred by law, ordered by a court of competent jurisdiction or authorised by the board or by ordinary resolution of the company.
132. | Summary Financial Statements |
The company may send or supply summary financial statements to members of the company instead of copies of its full accounts and reports.
Service of Notices, Documents and Other Information
133. | Method of Service |
(A) | Any notice, document (including a share certificate) or other information may be served on or sent or supplied to any member by the company: |
(i) | personally; |
(ii) | by sending it through the post addressed to the member at his registered address or by leaving it at that address addressed to the member; |
(iii) | by means of a relevant system; |
(iv) | where appropriate, by sending or supplying it in electronic form to an address notified by the member to the company for that purpose; |
(v) | where appropriate, by making it available on a website and notifying the member of its availability in accordance with this article; or |
(vi) | by any other means authorised in writing by the member. |
In the case of joint holders of a share, service, sending or supply of any notice, document or other information on or to one of the joint holders shall for all purposes be deemed a sufficient service on or sending or supplying to all the joint holders.
(B) | In the case of joint holders of a share, anything to be agreed or specified in relation to any notice, document or other information to be served on or sent or supplied to them may be agreed or specified by any one of the joint holders and the agreement or specification of the senior shall be accepted to the exclusion of that of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding. |
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(C) | If any member, including any joint holder, who is without a United Kingdom or United States postal address provides the company with such postal address is entitled to have notice or documents served or supplied to him at that address. If such a member fails to provide the company with a United Kingdom or United States postal address he may be ignored for the purposes of sufficient service or supply of any notice or documents. |
(D) | If on three consecutive occasions any notice, document or other information served on or sent or supplied to a member has been returned undelivered, such member shall not thereafter be entitled to receive notices, documents or other information from the company until he shall have communicated with the company and supplied to the company (or its agent) a new registered address, or a postal address within the United Kingdom or the United States for the service of notices and the despatch or supply of documents and other information, or shall have informed the company of an address for the service of notices and the despatch or supply of documents and other information in electronic form. For these purposes, any notice, document or other information sent by post shall be treated as returned undelivered if the notice, document or other information is served, sent or supplied back to the company (or its agents) and a notice, document or other information served, sent or supplied in electronic form shall be treated as returned undelivered if the company (or its agents) receives notification that the notice, document or other information was not delivered to the address to which it was sent. |
(E) | The company may at any time and in its sole discretion choose to serve, send or supply notices, documents or other information in hard copy form alone to some or all members. |
134. | Record Date for Service |
Any notice, document or other information may be served, sent or supplied by the company by reference to the register as it stands at any time not more than 15 days before the date of service, sending or supply. No change in the register after that time shall invalidate that service, sending or supply. Where any notice, document or other information is served on or sent or supplied to any person in respect of a share in accordance with these articles, no person deriving any title or interest in that share shall be entitled to any further service, sending or supply of that notice, document or other information.
135. | Members Resident Abroad or on Branch Registers |
(A) |
Any member whose registered address is not within the United Kingdom or the United States and who gives to the company a postal address within the United Kingdom or the United States at which notices, documents or other information may be served upon, or sent or supplied to, him shall be entitled to have notices, documents or other information served on or sent or supplied to him at that address or, where applicable, by making them available on a website and notifying the holder at that address. Any member whose registered address is not within the United Kingdom or the United States and who gives to the company an address for the purposes of communications by electronic means may, subject to these articles, have notices, documents or other information served on or sent or supplied to him |
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at that address or, where applicable, by making them available on a website and notifying the holder at that address. Otherwise, a member whose registered address is not within the United Kingdom or the United States shall not be entitled to receive any notice, document or other information from the company. |
(B) | For a member registered on a branch register, notices, documents or other information can be posted or despatched in the United Kingdom, the United States or in the country where the branch register is kept. |
136. | Service of Notice on Person Entitled by Transmission |
A person who is entitled by transmission to a share, upon supplying the company with a postal address within the United Kingdom or the United States for the service of notices and the despatch or supply of documents and other information shall be entitled to have served upon or sent or supplied to him at such address any notice, document or other information to which he would have been entitled if he were the holder of that share or, where applicable, to be notified at that address of the availability of the notice, document or other information on a website. A person who is entitled by transmission to a share, upon supplying the company with an address for the purposes of communications by electronic means for the service of notices and the despatch or supply of documents and other information may have served on, sent or supplied to him at such address any notice, document or other information to which he would have been entitled if he were the holder of that share or, where applicable, may be notified at that address of the availability of the notice, document or other information on a website. In either case, such service, sending or supply shall for all purposes be deemed a sufficient service, sending or supply of such notice, document or other information on all persons interested (whether jointly with or as claimants through or under him) in the share. Otherwise, any notice, document or other information served on or sent or supplied to any member pursuant to these articles shall, notwithstanding that the member is then dead or bankrupt or that any other event giving rise to the transmission of the share by operation of law has occurred and whether or not the company has notice of the death, bankruptcy or other event, be deemed to have been properly served, sent or supplied in respect of any share registered in the name of that member as sole or joint holder.
137. | Deemed Delivery |
(A) | Any notice, document or other information, if served, sent or supplied by the company by post, shall be deemed to have been received on the day following that on which it was posted if first class post was used or 48 hours after it was posted if first class post was not used and, in proving that a notice, document or other information was served, sent or supplied, it shall be sufficient to prove that the notice, document or other information was properly addressed, prepaid and put in the post. |
(B) | Any notice, document or other information not served, sent or supplied by post but left by the company at a registered address or at an address (other than an address for the purposes of communications by electronic means) notified to the company in accordance with these articles by a person who is entitled by transmission to a share shall be deemed to have been received on the day it was so left. |
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(C) | Any notice, document or other information served, sent or supplied by the company by means of a relevant system shall be deemed to have been received when the company or any sponsoring system-participant acting on its behalf sends the issuer-instruction relating to the notice, document or other information. |
(D) | Any notice, document or other information served, sent or supplied by the company using electronic means shall be deemed to have been received on the day on which it was sent notwithstanding that the company subsequently sends a hard copy of such notice, document or information by post. Any notice, document or other information made available on a website shall be deemed to have been received on the day on which the notice, document or other information was first made available on the website or, if later, when a notice of availability is received or deemed to have been received pursuant to this article. In proving that a notice, document or other information served, sent or supplied by electronic means was served, sent or supplied, it shall be sufficient to prove that it was properly addressed. |
(E) | Any notice, document or other information served, sent or supplied by the company by any other means authorised in writing by the member concerned shall be deemed to have been received when the company has carried out the action it has been authorised to take for that purpose. |
138. | Notice When Post Not Available |
If there is a suspension or curtailment of postal services within the United Kingdom, the United States or some part of either the United Kingdom or the United States, the company need only give notice of a general meeting to those members with whom the company can communicate by electronic means and who have provided the company with an address for this purpose. The company shall also advertise the notice in at least one newspaper with a national circulation and make it available on its website from the date of such advertisement until the conclusion of the meeting or any adjournment thereof. If at least six clear days prior to the meeting the sending or supply of notices by post in hard copy form has again become generally possible, the company shall send or supply confirmatory copies of the notice by post to those members who would otherwise receive the notice in hard copy form.
Destruction of Documents
139. | Presumptions Where Documents Destroyed |
If the company destroys or deletes:
(i) | any share certificate which has been cancelled at any time after a period of one year has elapsed from the date of cancellation, or |
(ii) |
any instruction concerning the payment of dividends or other moneys in respect of any share or any notification of change of name or address at any time after a |
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period of two years has elapsed from the date the instruction or notification was recorded by the company, or |
(iii) | any instrument of transfer of shares or Operator-instruction for the transfer of shares which has been registered by the company at any time after a period of six years has elapsed from the date of registration, or |
(iv) | any instrument of proxy which has been used for the purpose of a poll at any time after a period of one year has elapsed from the date of use, or |
(v) | any instrument of proxy which has not been used for the purpose of a poll at any time after a period of one month has elapsed from the end of the meeting to which the instrument of proxy relates, or |
(vi) | any other document on the basis of which any entry is made in the register at any time after a period of six years has elapsed from the date the entry was first made in the register in respect of it, |
and the company destroys or deletes the document or instruction in good faith and without express notice that its preservation was relevant to a claim, it shall be presumed irrebuttably in favour of the company that every share certificate so destroyed was a valid certificate and was properly cancelled, that every instrument of transfer or Operator-instruction so destroyed or deleted was a valid and effective instrument of transfer or instruction and was properly registered and that every other document so destroyed was a valid and effective document and that any particulars of it which are recorded in the books or records of the company were correctly recorded. If the documents relate to uncertificated shares, the company must comply with any requirements of the uncertificated securities rules which limit its ability to destroy these documents. Nothing contained in this article shall be construed as imposing upon the company any liability which, but for this article, would not exist or by reason only of the destruction of any document of the kind mentioned above before the relevant period mentioned in this article has elapsed or of the fact that any other condition precedent to its destruction mentioned above has not been fulfilled. References in this article to the destruction of any document include references to its disposal in any manner.
Indemnity and Insurance
140. | Indemnity of Directors |
(A) | To the extent permitted by the Companies Acts, every director or former director or other officer of the company or of any associated company shall be indemnified by the company out of its own funds against all costs, charges, losses, expenses and liabilities incurred by him in performing his duties and/or in exercising his powers and/or in supposedly doing these things and/or otherwise in relation to or in connection with his duties, powers or office. |
(B) | To the extent permitted by the Companies Acts, every director or former director or other officer of the company or of any associated company is exempted from any liability to the company where that liability would be covered by the indemnity in Article 140(A) . |
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(C) | Without prejudice to Article 140(A) , the company may purchase and maintain insurance against any liability for any persons who are or were at any time directors, officers or employees of the company or of any associated company or trustees of any pension fund or employee share scheme in which employees of any such company are interested. |
(D) | No director or former director of the company or of any associated company shall be accountable to the company or the members for any benefit provided pursuant to this article and the receipt of any such benefit shall not disqualify the person from being or becoming a director of the company. |
(E) | For the purposes of this article, no person appointed or employed by the company or an associated company as an auditor is an officer. |
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Exhibit 4.7
Dated 20th December, 2016
GLAXOSMITHKLINE SERVICES UNLIMITED
and
EMMA N. WALMSLEY
SERVICE AGREEMENT
This Agreement is made on 20th December, 2016 between :
(1) | GLAXOSMITHKLINE SERVICES UNLIMITED whose registered office is at GSK House, Brentford, Middlesex, TW8 9GS (the Company ); and |
(2) | EMMA N. WALMSLEY (the Executive ). |
1 | Interpretation |
1.1 | In this Agreement (and any schedules to it) |
Accrued Obligations means:
1.1.1 | the Executives base salary under this Agreement through to the end of the month in which the Termination Date occurs at the rate in effect on the Termination Date and the reimbursement (in accordance with Group policy) of any expenses incurred by the Executive prior to the Termination Date; |
1.1.2 | any unpaid bonus pertaining to the previous financial year and the product of any target bonus for the financial year in which the Termination Date occurs and a fraction, the numerator of which is the number of days in the Companys current financial year up to the Termination Date and the denominator of which is 365; |
1.1.3 | any remuneration previously deferred by the Executive (together with any accrued interest) and not yet paid by the Company including payment for any accrued holiday not taken by the Executive; and |
1.1.4 | any other benefits to which the Executive is entitled, as determined in accordance with the applicable plans and policies of the Company; |
Board means the board of directors of the Company from time to time or any person or committee nominated by that board as its representative for the purposes of this Agreement;
Chief Executive Officer means the Chief Executive Officer of GSK plc from time to time;
Employment means the employment governed by this Agreement;
Group means the Company and any other company controlling, controlled by or under the direct or indirect common control of the Company, including, without limitation, GSK plc and any of its subsidiaries from time to time;
Group Company means a member of the Group and Group Companies will be interpreted accordingly;
GSK Board means the board of directors of GSK plc from time to time or any person or committee nominated by the GSK Board as its representative for the purposes of this Agreement;
GSK plc means GlaxoSmithKline plc;
Termination Date means the date on which the Employment terminates, whether on the expiration of notice to terminate the Employment pursuant to Section 3 or otherwise pursuant to this Agreement.
1.2 | References to any statutory provisions include any modifications or re-enactments of those provisions. |
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1.3 | In this Agreement, terms used in the context of the GlaxoSmithKline 2009 Performance Share Plan shall have the meaning ascribed to them in such plan. |
2 | Employment |
The Company confirms the employment of the Executive, and the Executive confirms her employment with the Company, on the terms and conditions set out in this Agreement.
3 | Termination by Notice |
3.1 | The Executives continuous employment began on 1 st May, 2010. |
3.2 | The Employment under the terms of this Agreement shall be deemed to have commenced on 1 st October, 2016 and the Employment shall continue until: |
(i) | the Employment is otherwise terminated in accordance with this Agreement; or |
(ii) | not less than 12 calendar months notice in writing is given by the Company to the Executive; or |
(iii) | not less than 12 calendar months notice in writing is given by the Executive to the Company. |
3.3 | The Company may, in its absolute discretion, lawfully terminate the employment of the Executive at any time by paying to the Executive a sum equal to her basic salary (excluding any other benefits) for the period this Agreement would otherwise continue. For this purpose, basic salary shall be the basic salary in effect at the date of termination of the employment. |
4 | Duties and Responsibilities |
4.1 | The Executive shall be appointed as CEO Designate of GSK plc and shall perform this role until 1 st April, 2017, when she shall take on the role as Chief Executive Officer on terms to be agreed. The Executive shall have such powers and duties as are from time to time given to her by the Chief Executive Officer consistent with the Employment and this Agreement. In addition, and for no additional consideration, the Executive shall, if requested by the GSK Board, serve as a director on the GSK Board, the Board or any other board of directors of any Group Company. The Executive agrees that for the purposes of the Working Time Regulations 1998 she is a managing executive. |
4.2 | During the Employment, the Executive shall devote her full business time and energies to the business and affairs of the Company and GSK plc, consistent with any other duties and responsibilities she may have to any Group Companies. The Executives time shall be allocated among the Group Companies in accordance with the Executives reasonable judgment and dependent upon the level of her responsibilities to any other Group Company, subject to the overall supervision and direction of the Chief Executive Officer. |
4.3 | The Executive shall not, without the prior written consent of the GSK Board, accept directorships, trusteeships and other appointments (other than of Group Companies) or carry on or be engaged, concerned or interested either directly or indirectly in any other business or activity. |
4.4 |
The location of the Executives activities shall be at GSK House, but subject to the overall supervision and direction of the Chief Executive Officer, and to perform properly her duties, she may be required to undertake reasonable travel elsewhere in the world. The |
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Executive is required to reside at a location convenient to the Companys offices at GSK House (or such other location as the GSK Board may determine) during the Employment. |
5 | Salary, etc. |
5.1 | In consideration of the services to be rendered by the Executive under this Agreement the Executive shall be paid a salary at the rate of £850,000 per annum payable in accordance with the Companys pay practices for its executives from time to time in force (but not less frequently than calendar monthly). The salary will be credited to the Executives bank account notified to the Company for the purpose. Salary shall be reviewed annually in accordance with the Companys normal administrative practices for its executives and may be increased (but not reduced) by the Company by such amount (if any) as it shall think fit. |
5.2 | The Executive shall be entitled subject to Section 6.5 to participate |
(i) | in all such cash bonus plans and programmes as are made available from time to time to board level executives of the Company in accordance with the Companys policy (or GSK plcs policy, as applicable); and |
(ii) | in respect of the salary provided by Section 5.1, in such incentive programmes as are made available from time to time to board level executives of the Company and/or GSK plc generally, |
in each case subject to the terms and conditions of such bonus plans and programmes from time to time in force. Any grants of share options or awards of performance shares under such plans and programmes shall be granted subject to performance conditions as determined by the GSK Board. The Executives future participation in certain of these plans and programmes may be affected if she does not satisfy the Share Ownership Requirements (as amended from time to time). It is agreed that in the event of the Executive retiring from the Company, the Executive will retain the relevant number of shares (as set out in the Share Ownership Requirements) until at least one year after the earlier of (i) the Executives Retirement Date contemplated by Section 14 of this Agreement, or (ii) the date on which the Executive retires from the Company in accordance with the terms of any Company policy (as may be in force from time to time).
5.3 | The Executives salary under Section 5.1 of this Agreement shall be inclusive of any fees or other remuneration to which the Executive may be entitled or receives as a Director, alternate Director, specialist adviser, consultant or by virtue of any other office or appointment in any Group Company. The Executive shall account to the Company for all such fees or other remuneration by paying over or procuring to be paid over the same to the Company. |
5.4 | GSK shall not be liable for any costs or expenses, including any costs or expenses pertaining to travel undertaken by the Executive, incurred as a result of any activity or participation in any role or capacity external to and unrelated to GSK or any Group Company. It is agreed that the Executive will promptly reimburse GSK against any such costs that may be incurred by GSK. Further, the Executive authorises the Company at any time to deduct from her salary, or any other monies payable to her by the Company, all sums which she owes the Company. If this is insufficient, the Company will require repayment of the balance. |
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6 | Expenses and other Benefits |
6.1 | The Company shall promptly reimburse to the Executive all reasonable travel and other out of pocket expenses properly incurred by her in the performance of her duties under the Employment. The Executive will submit claims for expenses reimbursement to the Company regularly with appropriate supporting documentation. |
6.2 | The Executive is eligible to participate in the GlaxoSmithKline Cash Allowance and Car Ownership Scheme subject to the rules of the scheme as amended from time to time. Full details of the Scheme are available on the TotalReward section on myGSK. |
6.3 | The medical benefit arrangements for the Executive and her family are as set out in the GlaxoSmithKline Executive Medical Plan (as amended from time to time). Details, including eligibility criteria, are set out in the TotalReward section on myGSK. |
6.4 | The Company at its expense shall provide the Executive with other benefits provided to board level executives of the Company, and the Executive shall be entitled to participate in all benefit plans, practices and policies as are made available by the Company from time to time to its board level executives subject to their terms and conditions from time to time in force. Details of the relevant plans and programmes are set out in the TotalReward section on my GSK. |
6.5 | The Company (and GSK plc, as applicable) reserves the absolute right and discretion to amend, modify or terminate all such benefits, plans and programmes as are referred to in Sections 5.2, 6.2, 6.3, 6.4 and 8 at any time and for any reason. |
7 | Holidays |
In addition to all statutory and Bank Holidays, the Executive shall be entitled to 27 days holiday in each year at full pay, increasing to 28 days after 10 years service, in accordance with Company policy from time to time in force, which shall accrue rateably during the calendar year. Up to four days of such holiday shall be taken at times to be designated by the Company and the remainder shall be taken at such times as the business of the Company may permit. On termination of the Employment the Executive will be entitled to be paid for any accrued holiday not taken and will reimburse the Company for any holiday taken but not accrued.
Holiday which is not taken in the year in which it is accrued may be carried forward, in accordance with the Companys rules on the banking of holidays outlined in its Holiday Policy, as amended from time to time. Any holiday which is not banked in accordance with these rules will be lost.
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8 | Pension and Life Insurance |
The Executive is entitled to be a member of the GSK Pension Plan Senior Executive section (the Pension Plan), subject to the conditions of the trust deed and rules governing the Pension Plan from time to time. If the Executive has reached or reaches any limit set by the Government relating to pension allowances, the Executive can opt out of the Pension Plan and the Company may pay her a cash supplement in lieu of any employer pension contributions. The Pension Plan is subject to amendment or withdrawal at the Companys discretion. Any contributions payable by the Executive to the pension plan will be deducted from salary via salary sacrifice. The Company shall provide the Executive with the benefit of life cover which would provide a lump sum equivalent to four times the level of her base salary in the event of death in service.
9 | Sickness |
9.1 | The Executive shall comply with the Companys sick pay rules from time to time in force. |
9.2 | Without prejudice to the Companys right to terminate the Employment in accordance with Sections 3, 13, 15 and 16 and to automatic termination in accordance with Section 14, if the Executive is absent from the Employment as a result of sickness or injury she shall be paid her full salary for the first 26 weeks absence (whether or not consecutive) and half of her salary for the second 26 weeks (whether or not consecutive) in aggregate in any period of 24 calendar months. The amount of any benefit which the Executive is entitled to claim during that period of absence under any Social Security or National Insurance Scheme and/or any Scheme of which the Executive is a non-contributory member by virtue of the Employment, will be deducted from any salary paid to her. The Company will pay the Executive statutory sick pay under the Social Security Contributions and Benefits Act 1992 (as amended) and any salary paid to her will be deemed to include statutory sick pay. The Company reserves the right to offset the amount of these benefits against salary paid to the Executive even if the Executive has not recovered them. |
9.3 | The Company may request the Executive to have a medical examination every year (or at such shorter intervals as they may agree between them), by a doctor approved by the Company. The costs of such examinations shall be borne by the Company. |
10 | Inventions and Copyright |
The Companys standard policy on inventions and copyright from time to time in force shall apply to the Executive.
11 | Confidentiality; Company Securities |
11.1 | Without prejudice to any other duty owed to the Company or to any Group Company, the Executive shall not, except in the proper performance of her duties or as authorised by the Board, during or after the Employment, use or disclose to any person any Confidential Information obtained by her during the Employment. |
11.2 |
In the course of the Employment, the Executive is likely to obtain trade secrets and confidential information belonging to or relating to Group Companies and other persons. She will treat such information as if it falls within the terms of Section 11.1 and Section 11.1 will apply with any necessary amendments to such information. If requested to do |
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so by the Company, the Executive will enter into an agreement with other Group Companies and any other persons in the same terms as Section 11.1 with any amendments necessary to give effect to this provision. |
11.3 | For the purposes of this Agreement, the term Confidential Information shall include, but not be limited to confidential commercial, financial and strategic data pertaining to the Group and any other confidential information relating to the business or affairs of the Group including, without limitation, any invention, trade secret, manufacturing process or patent information. The term Confidential Information shall not include any information: |
11.3.1 | which is or becomes generally available to the public; or |
11.3.2 | which is acquired by the Executive apart from her association with the Group |
other than, in each case, as a result of disclosure by the Executive or by any person to whom she has supplied information or by any person in breach of a duty of confidentiality.
In addition, the term Confidential Information shall not include any information which the Executive is required to disclose by applicable law or regulation or by order of a court or governmental body of competent jurisdiction, so long as the Executive gives the Chief Executive Officer reasonable prior notice of such required disclosure. This does not affect any rights the Executive has under Part IVA of the Employment Rights Act 1996.
11.4 | During the Employment, the Executive shall be bound, in respect of transactions in securities issued by any Group Company, by the Companys and GSK plcs policies from time to time in effect on employee securities dealing. In particular, the Executive shall advise the Chief Executive Officer, Chief Financial Officer or Chairman of GSK plc before she or any member of her immediate family seeks to trade in such securities and shall be bound by any directions given by the CEO, CFO or Chairman. |
12 | General Termination Provisions |
12.1 | On the termination of the Employment for whatever reason, or at any other time when requested to do so by the Company, the Executive, upon receipt of written request from the Company, shall promptly |
(i) | deliver up to the Company any property belonging to the Company or any other Group Company which may be in her possession or under her control including Confidential Information, lists of customers, correspondence, documents and other property. The Executive will not retain any copies of any materials or other information. The Company shall promptly return to the Executive and permit her to remove from the premises of the Company and any other Group Company, any property, personal records, files, etc. belonging to the Executive; and |
(ii) | resign on request by the Company or the GSK Board (if she has not already done so) from all offices held by her in the Company and any other Group Company (except for any she is entitled to retain under any separate agreement with any Group Company), failing which the Executive irrevocably authorises the Company or GSK plc to appoint an officer of the Company or GSK plc to execute all documents on her behalf and do all things necessary to effect such resignations; PROVIDED, however, that any such resignations pursuant to this Section 12.1(ii) shall be without prejudice to the Executives rights under this Agreement. |
12.2 | Any termination of the Employment shall be without prejudice to the Executives and the Companys continuing obligations under this Agreement. |
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12.3 | Upon the termination of the Executives employment for whatever reason, the Executive shall immediately repay all outstanding debts or loans due to the Company or any Group Company and the Company is hereby authorised to deduct from any payment of wages any sum in repayment of all or any part of such debts or loans. |
12.4 | The terms of the GSK Redundancy Policy as in force from time to time, shall not apply to the Executive who shall only be entitled to statutory redundancy pay in addition to any other entitlement under this Agreement if her Employment is terminated by reason of redundancy. |
13 | Termination due to Death or Disability |
13.1 | In the event of the Executives death, the Employment will terminate automatically on the date of her death, which shall be the Termination Date for the purposes of this Agreement. Her duly qualified executor shall be entitled to receive the Accrued Obligations. |
13.2 | The Company may elect to terminate the Employment immediately without notice or payment in lieu of notice by serving written notice ( Termination Notice for Disability ), if an independent physician selected by the Company has certified in writing that, by reason of a physical or mental illness or other condition of the Executive, the Executive is unlikely to be able to resume performance of duties under the Employment for the foreseeable future. The Employment will terminate on the Termination Date specified in the Termination Notice for Disability. Provided that the Company shall not be entitled to terminate the employment by reason of physical or mental illness or other condition if this would lead to the Executive becoming dis-entitled to benefits under the Companys or GSK plcs permanent health insurance plan. |
13.3 | In the event the Company delivers a Termination Notice for Disability, the Executive shall immediately be relieved from all offices, appointments and responsibilities that she may then hold under the Employment and be relieved of any duty to work for or serve the Company or any Group Company. The Executive shall be entitled only to the Accrued Obligations, together with such rights as are provided for in the applicable benefits plan(s) in which the Executive participates. |
14 | Termination on Retirement |
The Employment shall automatically terminate on the last day of the month in which the Executive reaches her sixty-fifth (65th) birthday (the Retirement Date ) and the Executive shall thereafter be entitled only to payment of the Accrued Obligations.
15 | Termination for Cause |
15.1 | The Company shall be entitled to terminate the Employment immediately without notice or payment in lieu of notice for Cause (as defined in this Section 15) by serving written notice ( Notice of Termination for Cause ). |
15.2 | Cause shall mean: |
15.2.1 | the Executive is convicted of any criminal offence which in the reasonable opinion of the Chairman of GSK plc or the GSK Board affects the Executives position as CEO Designate of GSK plc (other than a motoring offence for which no custodial sentence is given to her); or |
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15.2.2 | the Executive, in carrying out her duties under the Employment, is found guilty of gross neglect or gross misconduct; or |
15.2.3 | the Executive shall become bankrupt or have an order under Section 252 of the Insolvency Act 1986 made in respect of her or if an interim receiver of her property is appointed under Section 286 of the Act; or |
15.2.4 | the Executive shall be or become prohibited by law from being a director; or |
15.2.5 | the Executive commits a serious breach of any material term of this Agreement. |
15.3 | Any delay or forbearance by the Company in exercising any right of termination shall not constitute a waiver of it. |
15.4 | In the event that the Employment is terminated for Cause, the Employment shall terminate upon the date on which the Board serves Notice of Termination for Cause and the Executive shall be entitled only to payment of all previously accrued and unpaid salary then due and owing under this Agreement, up to the date of termination including reimbursement for expenses previously incurred and, save for the provisions of this Section 15.4, the Executive will have no claim for damages or any other remedy against the Company or any Group Company. |
16 | Termination by Notice |
16.1 | If either notice to terminate the Employment is given by the Executive according to Section 3.2(iii) above, or if the Executive resigns without giving due notice and the Company does not accept her resignation or the Company has given notice in accordance with Section 3.2(ii) above then the Company may require the Executive to comply with any and all of the provisions in this Section 16.1 for a maximum period of 12 months (the Garden Leave Period ). |
16.1.1 | The Company may require that the Executive does not: |
(i) | enter or attend the premises of the Company, or any Group Company; or |
(ii) | contact or have any communication with any customer or client of the Company, or any Group Company in relation to the business of the Company, or any Group Company; or |
(iii) | contact or have any communication with any employee, officer, director, agent or consultant of the Company, or any Group Company in relation to the business of the Company, or any Group Company; or |
(iv) | become employed or engaged by any company, partnership or other entity whether as an employee, director, partner or consultant or carry on any business either on her own account or for any other person whether directly or indirectly (except as the holder, directly or indirectly, of less than 5 per cent of the shares or save for those activities permitted in accordance with Section 4.3); |
(v) | remain or become involved in any aspect of the business of the Company, or any Group Company except as required by such companies. |
16.1.2 | The Company may require the Executive: |
(i) | to comply with the provisions of Section 12; and |
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(ii) | to immediately resign from any directorship which she holds in the Company, and any Group Company or any other company where such directorship is held as a consequence or requirement of the Employment, unless she is required to perform duties to which any such directorship relates in which case she may retain such directorships while those duties are ongoing. The Executive hereby irrevocably appoints the Company to appoint an officer of GSK plc as her attorney to execute any instrument and do anything in her name and on her behalf to effect her resignation if she fails to do so in accordance with this Section 16.1.2(ii). |
16.1.3 | During any Garden Leave Period the Company may appoint another individual to carry out the duties of the Executive and the Executive shall: |
(i) | continue to be bound by the provisions of this Agreement and conduct herself with good faith towards the Company and not do anything that is harmful to the Company or any Group Company; |
(ii) | remain available to perform any reasonable duty requested by the Company or any Group Company and to co-operate generally with the Company or any Group Company to ensure a smooth handover of her duties (provided that if the Executive should fail to make herself available for such work having been requested by the Company or any Group Company to attend she shall, notwithstanding any other provision of this Agreement forfeit her right to salary and contractual benefits in respect of such period of non-availability). |
16.1.4 | During the Garden Leave Period, the Executive will be entitled to receive her salary and benefits in accordance with the terms of this Agreement including any bonus payable in accordance with Section 5.2 but excluding any share entitlements under Section 5.2 above. |
16.1.5 | Where the Company gives notice to terminate the Employment in accordance with Section 3.2 (except where termination is effected pursuant to the terms of Section 15) above then notwithstanding the continuation of the Employment during any period after notice has been given, including, any Garden Leave Period, within 30 days of the date such notice was given to the Executive, the Company shall pay to the Executive as a lump sum her full salary in respect of the entire period of notice (except for any part of it attributable to the period falling after the Executives Retirement Date and subject to deduction of tax and any other deductions required to be made) (the Lump Sum ). For this purpose, full salary shall be the basic salary in effect at the date such notice is given to the Executive. For the avoidance of doubt, the payment by the Company to the Executive of the Lump Sum will extinguish any and all liability imposed on the Company under this Agreement to make any further payment to the Executive in respect of salary under this Agreement during any period after notice has been given, including, any Garden Leave Period. |
16.1.6 |
After the payment of a Lump Sum pursuant to Section 16.1.5, at the end of or at any time during the Garden Leave Period the Company may at its sole and absolute discretion terminate the Employment by further written notice to the Executive without any further payment. In any event at the end of the 12 month Garden Leave Period the Employment will also terminate automatically and the |
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Company shall be under no obligation to make any further payment to the Executive, save for in respect of any Accrued Obligations that may exist. |
16.1.7 | However, in the event that the Executive obtains an offer of future alternative employment with another employer, or otherwise wishes to take up alternative business activities, and she can satisfy the GSK Board that such employment/activities are not in breach of Section 17, the Company shall waive the balance of any unexpired notice period or the Garden Leave Period so as to enable the Executive to take up such alternative employment/activities; whereupon, subject to Section 12.3 above, the Companys obligations to the Executive under this Section 16.1 shall cease with effect from the agreed revised Termination Date. |
16.1.8 | The Company and the Executive agree that if the Company shall fully perform, when due, all its obligations under this Section 16, such performance shall be in full and final settlement of all and any claims or rights of action which the Executive might have against the Company, or any Group Company arising out of this Agreement or its termination or otherwise howsoever relating to the Employment. |
16.1.9 | A removal by the Company of the Executive from her current position which results in a demotion to a position with less responsibility than her current position will be deemed to be a termination by the Company on notice pursuant to Section 16 of this Agreement. |
17 | Restrictions during and after Termination of Employment |
17.1 | In this Section: |
Restricted Business means the businesses of the Company or any Group Company at the Termination Date (or if earlier the start of any Garden Leave Period ending on the Termination Date) with which the Executive was involved to a material extent during the last 12 months of the Employment.
Restricted Period means any period during which the Executive is employed by the Company (including for the avoidance of doubt, any Garden Leave Period) and the period of 12 months, less any Garden Leave Period imposed by the Company under Section 16 and less any period of notice worked by the Executive during the notice period set out in Section 3, commencing on the Termination Date.
17.2 | The Executive is likely to obtain trade secrets and confidential information and personal knowledge of and influence over customers, clients and employees of the Company, GSK plc and its Group Companies during the course of the Employment. To protect these interests, the Executive agrees with the Company and GSK plc that the Executive will be bound by the following covenants: |
17.2.1 |
During the Restricted Period she will not be employed or engaged in (except as the holder, directly or indirectly, of less than 5 per cent of the shares) any Competing Business. For the purposes of this Section 17.2.1, a Competing Business shall mean the following companies (or, as appropriate, the successors to their operations): Abbott Laboratories; AbbVie Inc.; Amgen Inc.; AstraZeneca PLC; Bayer HealthCare; Bristol-Myers Squibb Company; Colgate-Palmolive Company; Eli Lilly and Company; Johnson & Johnson; Kimberly-Clark; Merck & |
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Co., Inc.; Novartis; Pfizer Inc.; Procter & Gamble; Reckitt Benckiser plc; Roche Holding Ltd; Sanofi S.A.; and, Unilever PLC. |
17.2.2 | During the Restricted Period the Executive will not canvass or solicit in competition with the Company, or any Group Company, the custom of any person who was during the last 12 months of the Employment a customer, or client of, or in the habit of dealing with, the Company, or (as the case may be) any Group Company and in respect of which the Executive had access to confidential information or with whose custom or business the Executive is or was personally concerned, during that 12 month period with a view to providing goods or services to that person in competition with any Restricted Business. |
17.2.3 | During the Restricted Period she will not, in the course of any business concern which is in competition with the Restricted Business provide goods or services to or otherwise have any dealings with any person who was during the last 12 months of the Employment a customer, or client of, or in the habit of dealing with the Company, or any Group Company, and in respect of which the Executive had access to confidential information or with whose custom or business the Executive is or was personally concerned during that 12 month period. |
17.2.4 | During the Restricted Period she will not, interfere or endeavour to interfere with the continuance of the provision of goods or services to the Company, or any Group Company, by any supplier which was a supplier of goods or services to the Company, or any Group Company during the last 12 months of the Employment and with whom the Executive dealt to a material extent during that period. |
17.2.5 | During the Restricted Period she will not entice or try to entice away from the Company or any Group Company any person who is still employed by the Company or a Group Company during the Restricted Period and is a senior employee, director or full time senior consultant of such a company and with whom she worked closely in the last six months of the Employment. |
17.3 | Each of the obligations imposed on the Executive by this Section 17 extend to her acting not only on her own account but also on behalf of any other firm, company or other person and shall apply whether she acts directly or indirectly. |
17.4 | Following the Termination Date, the Executive will not represent herself as being in any way connected with the businesses of the Company, GSK plc or of any other Group Company (except to the extent agreed in writing by such a company). |
17.5 | Any benefit given or deemed to be given by the Executive to any Group Company under the terms of Section 17 is received and held on trust by the Company for the relevant Group Company. The Executive will enter into appropriate restrictive covenants directly with other Group Companies if asked to do so by the Company or GSK plc. |
18 | Reasonableness of Restrictions |
18.1 | Each of the obligations on the Executive contained in Section 17 constitutes a separate and independent restriction on the Executive notwithstanding that they may be contained in the same Section, paragraph or sentence. |
18.2 |
Should the restrictions contained in Section 17 be found to be void but would be valid if some part thereof were deleted or the period or radius of application reduced, then such |
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restriction shall apply with such modification as may be necessary to make it valid and effective. In particular, the Executive agrees that the restrictions are reasonable and necessary for the protection of the Company and the Group Companies. |
18.3 | If the Executive shall, during the Restricted Period, receive from any person, firm or company, an offer to provide services in any capacity whatsoever, or to enter into employment where acceptance of such offer, or the taking of such employment, might render her in breach of the provisions of this Agreement, she shall promptly advise the offeror of the existence of the restrictions set forth in Section 17 of this Agreement. |
18.4 | The Executive acknowledges that the Company may have no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Section 17 above and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of Section 17 above, and to specific performance of the terms of each such Section in addition to any other legal or equitable remedy it may have. The Executive further agrees that she shall not, in any equity proceedings involving her relating to the enforcement of Section 17 above raise the defence that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have. |
19 | Severability |
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
20 | Successors and Assigns |
20.1 | This Agreement shall be binding upon and inure to the benefit of the Company or any corporation or other entity to which the Company may transfer all or substantially all of its assets and business and to which the Company may assign this Agreement, in which case Company , as used in this Agreement, shall mean such corporation or other entity. The foregoing shall not relieve the Company of any of its obligations under Section 16 of this Agreement. The rights of the Executive shall inure to the benefit of her heirs, executors, administrators and other personal representatives. |
20.2 | The Executive may not assign this Agreement or any part of it, or any rights thereunder or delegate any duties to be performed by her under it to anyone else. |
21 | Survivorship |
To the extent contemplated by this Agreement, respective rights and obligations of the parties set out in this Agreement shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
22 | Notices |
Any notice (including any Termination Notice) required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, duly addressed to the party concerned at such address as the party may notify to the other. Any notice delivered personally under this Section 22
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shall be deemed given on the date delivered and any notice sent by courier shall be deemed given on the date delivery is recorded by such courier.
23 | Entire Agreement |
23.1 | This Agreement supersedes any previous written or oral agreement between the parties in relation to the matters dealt with within it. It contains the whole agreement between the parties relating to the Employment at the date the Agreement was entered into (except for those terms implied by law which cannot be excluded by the agreement of the parties). The Executive acknowledges that she has not been induced to enter into this Agreement by any representation, warranty or undertaking not expressly incorporated into it. |
23.2 | Neither partys rights or powers under this Agreement will be affected if: |
23.2.1 | one party delays in enforcing any provision of this Agreement; or |
23.2.2 | one party grants time to the other party. |
24 | Amendment or Modification; Waiver |
No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorised officer of the Company who shall supply the Executive with evidence of such authority.
25 | Withholding |
Anything to the contrary notwithstanding, all payments required to be made by the Company under this Agreement to the Executive, or to her estate or beneficiaries, shall be subject to withholding of such amounts relating to taxes as the Company may be required to withhold pursuant to any applicable statute, law or regulation.
26 | Indemnification and Insurance |
26.1 | The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit, proceeding, prosecution or governmental, regulatory or other investigation by reason of the fact of the Employment or that she is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another Group Company or entity except for any action instigated by the Company or the Executive (a Proceeding ), she shall be indemnified by the Company to the fullest extent permitted by applicable law against all expenses, liabilities, fees, costs, damages and losses reasonably incurred or suffered by the Executive in connection with such a Proceeding (including any tax payable by the Executive as a result of payments made by the Company pursuant to this indemnity), including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding; PROVIDED, however, that written notice of such Proceeding is given promptly to the Company by the Executive and the Company is permitted (where appropriate) to participate in and assume the defence of such Proceeding. The provisions of this Section 26 shall survive the termination of the Employment and shall be in addition to any other rights to indemnification to which the Executive may from time to time be entitled, whether under any applicable insurance policies or otherwise. |
26.2 |
The Company will provide the Executive with Legal Expenses Insurance and Directors and Officers Liability Insurance under the Companys policy current from time to time in force |
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to cover the period during which she acts as a director, officer or employee or agent of any Group Company or entity under this Agreement whether or not she remains a director, officer, employee or agent of any Group Company or entity at the time any claim under the policy is made. |
27 | Collective Agreements Disciplinary Rules and Procedures |
There are no collective agreements which directly affect the terms and conditions set out in this Agreement.
The Companys harassment and bullying policies, disciplinary rules and procedures and grievance procedures, as in force from time to time, shall apply to the Executive. The Company reserves the right to leave out any or all of the stages of those rules and procedures where it considers it appropriate to do so.
28 | Data Protection |
The Executive consents to the Company or any Group Company holding and processing both electronically and manually the data it collects which relates to the Executive for the purpose of the administration and management of its employees and its business and for compliance with applicable procedures, laws and regulations. The Executive also consents to the transfer of such personal information to other offices the Company may have or to a Group Company or to other third parties whether or not outside the European Economic Area for administration purposes and other purposes in connection with the Executives employment where it is necessary or desirable for the Company to do so.
29 | Governing Law |
This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of England. Each of the parties submits to the exclusive jurisdiction of the English courts as regards any claim or matter under this Agreement.
30 | Titles |
Titles to the Sections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any Section.
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In witness whereof the parties hereto have executed this Agreement as a deed on the day and year first above written
THE COMMON SEAL of GLAXOSMITHKLINE SERVICES UNLIMITED was hereunto affixed in the presence of: |
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Director |
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Director |
Signed Sealed and Delivered by the said EMMA N. WALMSLEY in the presence of: |
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Name: |
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Address |
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Occupation |
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Exhibit 4.8
Dated 19 December, 2016
GLAXOSMITHKLINE SERVICES UNLIMITED
and
PATRICK JOHN THOMPSON VALLANCE
SERVICE AGREEMENT
This Agreement is made on 19 December, 2016 between :
(1) | GLAXOSMITHKLINE SERVICES UNLIMITED whose registered office is at GSK House, Brentford, Middlesex, TW8 9GS (the Company ); and |
(2) | PATRICK JOHN THOMPSON VALLANCE (the Executive ). |
1 | Interpretation |
1.1 | In this Agreement (and any schedules to it) |
Accrued Obligations means:
1.1.1 | the Executives base salary under this Agreement through to the end of the month in which the Termination Date occurs at the rate in effect on the Termination Date and the reimbursement (in accordance with Group policy) of any expenses incurred by the Executive prior to the Termination Date; |
1.1.2 | any unpaid bonus pertaining to the previous financial year and the product of any target bonus for the financial year in which the Termination Date occurs and a fraction, the numerator of which is the number of days in the Companys current financial year up to the Termination Date and the denominator of which is 365; |
1.1.3 | any remuneration previously deferred by the Executive (together with any accrued interest) and not yet paid by the Company including payment for any accrued holiday not taken by the Executive; and |
1.1.4 | any other benefits to which the Executive is entitled, as determined in accordance with the applicable plans and policies of the Company; |
Board means the board of directors of the Company from time to time or any person or committee nominated by that board as its representative for the purposes of this Agreement;
Chief Executive Officer means the Chief Executive Officer of GSK plc from time to time;
Employment means the employment governed by this Agreement;
Group means the Company and any other company controlling, controlled by or under the direct or indirect common control of the Company, including, without limitation, GSK plc and any of its subsidiaries from time to time;
Group Company means a member of the Group and Group Companies will be interpreted accordingly;
GSK Board means the board of directors of GSK plc from time to time or any person or committee nominated by the GSK Board as its representative for the purposes of this Agreement;
GSK plc means GlaxoSmithKline plc;
Termination Date means the date on which the Employment terminates, whether on the expiration of notice to terminate the Employment pursuant to Section 3 or otherwise pursuant to this Agreement.
1.2 | References to any statutory provisions include any modifications or re-enactments of those provisions. |
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1.3 | In this Agreement, terms used in the context of the GlaxoSmithKline 2009 Performance Share Plan shall have the meaning ascribed to them in such plan. |
2 | Employment |
The Company confirms the employment of the Executive, and the Executive confirms his employment with the Company, on the terms and conditions set out in this Agreement.
3 | Termination by Notice |
3.1 | The Executives continuous employment began on 1 st May 2006. |
3.2 | The Employment under the terms of this Agreement shall be deemed to have commenced on 1 st January, 2017 and the Employment shall continue until: |
(i) | the Employment is otherwise terminated in accordance with this Agreement; or |
(ii) | not less than 12 calendar months notice in writing is given by the Company to the Executive; or |
(iii) | not less than 12 calendar months notice in writing is given by the Executive to the Company. |
3.3 | The Company may, in its absolute discretion, lawfully terminate the employment of the Executive at any time by paying to the Executive a sum equal to his basic salary (excluding any other benefits) for the period this Agreement would otherwise continue. For this purpose, basic salary shall be the basic salary in effect at the date of termination of the employment. |
4 | Duties and Responsibilities |
4.1 | The Executive shall be appointed as President, R&D of GSK plc. The Executive shall have such powers and duties as are from time to time given to him by the Chief Executive Officer or, if different, the person to whom the Executive reports, consistent with the Employment and this Agreement. In addition, and for no additional consideration, the Executive shall, if requested by the GSK Board, serve as a director on the GSK Board, the Board or any other board of directors of any Group Company. The Executive agrees that for the purposes of the Working Time Regulations 1998 he is a managing executive. |
4.2 | During the Employment, the Executive shall devote his full business time and energies to the business and affairs of the Company and GSK plc, consistent with any other duties and responsibilities he may have to any Group Companies. The Executives time shall be allocated among the Group Companies in accordance with the Executives reasonable judgment and dependent upon the level of his responsibilities to any other Group Company, subject to the overall supervision and direction of the Chief Executive Officer or, if different, the person to whom the Executive reports. |
4.3 |
The Executive shall not, without the prior written consent of the GSK Board, accept directorships, trusteeships and other appointments (other than of Group Companies) or carry on or be engaged, concerned or interested either directly or indirectly in any other business or activity. A list of the directorships and outside interests of the Executive approved by the GSK Board as at the date of this Agreement is attached as Appendix 1 |
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to this Agreement. Any fees earned by the Executive in respect of such authorised activities may be retained by the Executive. |
4.4 | The location of the Executives activities shall be at GSK House, but subject to the overall supervision and direction of the Chief Executive Officer or, if different, the person to whom the Executive reports, and to perform properly his duties, he may be required to undertake reasonable travel elsewhere in the world. The Executive is required to reside at a location convenient to the Companys offices at GSK House (or such other location as the Company may determine) during the Employment. |
5 | Salary, etc. |
5.1 | In consideration of the services to be rendered by the Executive under this Agreement the Executive shall be paid a salary at the rate of £780,000 per annum payable in accordance with the Companys pay practices for its executives from time to time in force (but not less frequently than calendar monthly). The salary will be credited to the Executives bank account notified to the Company for the purpose. Salary shall be reviewed annually in accordance with the Companys normal administrative practices for its executives and may be increased (but not reduced) by the Company by such amount (if any) as it shall think fit. |
5.2 | The Executive shall be entitled subject to Section 6.5 to participate |
(i) | in all such cash bonus plans and programmes as are made available from time to time for executives of the Company generally of the same level in the relevant jurisdiction in accordance with the Companys policy (or GSK plcs policy, as applicable); and |
(ii) | in respect of the salary provided by Section 5.1, in such incentive programmes as are made available from time to time for executives of the Company and/or GSK plc generally who are of the same level in the relevant jurisdiction, |
in each case subject to the terms and conditions of such bonus plans and programmes from time to time in force. Any grants of share options or awards of performance shares under such plans and programmes shall be granted subject to performance conditions as determined by the GSK Board. The Executives future participation in certain of these plans and programmes may be affected if he does not satisfy the Share Ownership Requirements (as amended from time to time). It is agreed that in the event of the Executive retiring from the Company, the Executive will retain the relevant number of shares (as set out in the Share Ownership Requirements) until at least one year after the earlier of (i) the Executives Retirement Date contemplated by Section 14 of this Agreement, or (ii) the date on which the Executive retires from the Company in accordance with the terms of any Company policy (as may be in force from time to time).
5.3 | The Executives salary under Section 5.1 of this Agreement shall be inclusive of any fees or other remuneration to which the Executive may be entitled or receives as a Director, alternate Director, specialist adviser, consultant or by virtue of any other office or appointment in any Group Company. The Executive shall account to the Company for all such fees or other remuneration by paying over or procuring to be paid over the same to the Company. |
5.4 |
GSK shall not be liable for any costs or expenses, including any costs or expenses pertaining to travel undertaken by the Executive, incurred as a result of any activity or |
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participation in any role or capacity external to and unrelated to GSK or any Group Company. It is agreed that the Executive will promptly reimburse GSK against any such costs that may be incurred by GSK. Further, the Executive authorises the Company at any time to deduct from his salary, or any other monies payable to him by the Company, all sums which he owes the Company. If this is insufficient, the Company will require repayment of the balance. |
6 | Expenses and other Benefits |
6.1 | The Company shall promptly reimburse to the Executive all reasonable travel and other out of pocket expenses properly incurred by him in the performance of his duties under the Employment. The Executive will submit claims for expenses reimbursement to the Company regularly with appropriate supporting documentation. |
6.2 | The Executive is eligible to participate in the GlaxoSmithKline Cash Allowance and Car Ownership Scheme subject to the rules of the scheme as amended from time to time. Full details of the Scheme are available on the TotalReward section on myGSK. |
6.3 | The medical benefit arrangements for the Executive and his family are as set out in the GlaxoSmithKline Executive Medical Plan (as amended from time to time). Details, including eligibility criteria, are set out in the TotalReward section on myGSK. |
6.4 | The Company at its expense shall provide the Executive with other benefits provided to executives of the Company of the same level, and the Executive shall be entitled to participate in all benefit plans, practices and policies as are made available by the Company from time to time to its executives generally of the same level subject to their terms and conditions from time to time in force. Details of the relevant plans and programmes are set out in the TotalReward section on my GSK. |
6.5 | The Company (and GSK plc, as applicable) reserves the absolute right and discretion to amend, modify or terminate all such benefits, plans and programmes as are referred to in Sections 5.2, 6.2, 6.3, 6.4 and 8 at any time and for any reason. |
7 | Holidays |
In addition to all statutory and Bank Holidays, the Executive shall be entitled to 28 days holiday in each year at full pay, in accordance with Company policy from time to time in force, which shall accrue rateably during the calendar year. Up to four days of such holiday shall be taken at times to be designated by the Company and the remainder shall be taken at such times as the business of the Company may permit. On termination of the Employment the Executive will be entitled to be paid for any accrued holiday not taken and will reimburse the Company for any holiday taken but not accrued.
Holiday which is not taken in the year in which it is accrued may be carried forward, in accordance with the Companys rules on the banking of holidays outlined in its Holiday Policy, as amended from time to time. Any holiday which is not banked in accordance with these rules will be lost.
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8 | Pension and Life Insurance |
The Executive has opted out of the GSK Pension Plan Senior Executive section and the Company pays him a cash supplement in lieu of any employer pension contributions.
9 | Sickness |
9.1 | The Executive shall comply with the Companys sick pay rules from time to time in force. |
9.2 | Without prejudice to the Companys right to terminate the Employment in accordance with Sections 3, 13, 15 and 16 and to automatic termination in accordance with Section 14, if the Executive is absent from the Employment as a result of sickness or injury he shall be paid his full salary for the first 26 weeks absence (whether or not consecutive) and half of his salary for the second 26 weeks (whether or not consecutive) in aggregate in any period of 24 calendar months. The amount of any benefit which the Executive is entitled to claim during that period of absence under any Social Security or National Insurance Scheme and/or any Scheme of which the Executive is a non-contributory member by virtue of the Employment, will be deducted from any salary paid to him. The Company will pay the Executive statutory sick pay under the Social Security Contributions and Benefits Act 1992 (as amended) and any salary paid to him will be deemed to include statutory sick pay. The Company reserves the right to offset the amount of these benefits against salary paid to the Executive even if the Executive has not recovered them. |
9.3 | The Company may require the Executive to have a medical examination every year (or at such shorter intervals as they may agree between them), by a doctor approved by the Company. The costs of such examinations shall be borne by the Company. The Executive shall authorise such doctor to submit to the Senior Vice President, Human Resources of the Company a copy of the medical report or results of any tests prepared or obtained as a result of that examination (which shall omit reference to any medical condition which in the doctors opinion would not affect the Executives capability to perform his duties then or in the future). |
10 | Inventions and Copyright |
The Companys standard policy on inventions and copyright from time to time in force shall apply to the Executive.
11 | Confidentiality; Company Securities |
11.1 | Without prejudice to any other duty owed to the Company or to any Group Company, the Executive shall not, except in the proper performance of his duties or as authorised by the Board, during or after the Employment, use or disclose to any person any Confidential Information obtained by him during the Employment. |
11.2 | In the course of the Employment, the Executive is likely to obtain trade secrets and confidential information belonging to or relating to Group Companies and other persons. He will treat such information as if it falls within the terms of Section 11.1 and Section 11.1 will apply with any necessary amendments to such information. If requested to do so by the Company, the Executive will enter into an agreement with other Group Companies and any other persons in the same terms as Section 11.1 with any amendments necessary to give effect to this provision. |
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11.3 | For the purposes of this Agreement, the term Confidential Information shall include, but not be limited to confidential commercial, financial and strategic data pertaining to the Group and any other confidential information relating to the business or affairs of the Group including, without limitation, any invention, trade secret, manufacturing process or patent information. The term Confidential Information shall not include any information: |
11.3.1 | which is or becomes generally available to the public; or |
11.3.2 | which is acquired by the Executive apart from his association with the Group |
other than, in each case, as a result of disclosure by the Executive or by any person to whom he has supplied information or by any person in breach of a duty of confidentiality.
In addition, the term Confidential Information shall not include any information which the Executive is required to disclose by applicable law or regulation or by order of a court or governmental body of competent jurisdiction, so long as the Executive gives the Chief Executive Officer reasonable prior notice of such required disclosure. This does not affect any rights the Executive has under Part IVA of the Employment Rights Act 1996.
11.4 | During the Employment, the Executive shall be bound, in respect of transactions in securities issued by any Group Company, by the Companys and GSK plcs policies from time to time in effect on employee securities dealing. In particular, the Executive shall advise the Chief Executive Officer, Chief Financial Officer or Chairman of GSK plc before he or any member of his immediate family seeks to trade in such securities and shall be bound by any directions given by the CEO, CFO or Chairman. |
12 | General Termination Provisions |
12.1 | On the termination of the Employment for whatever reason, or at any other time when requested to do so by the Company, the Executive, upon receipt of written request from the Company, shall promptly |
(i) | deliver up to the Company any property belonging to the Company or any other Group Company which may be in his possession or under his control including Confidential Information, lists of customers, correspondence, documents and other property. The Executive will not retain any copies of any materials or other information. The Company shall promptly return to the Executive and permit him to remove from the premises of the Company and any other Group Company, any property, personal records, files, etc. belonging to the Executive; and |
(ii) | resign on request by the Company or the GSK Board (if he has not already done so) from all offices held by him in the Company and any other Group Company (except for any he is entitled to retain under any separate agreement with any Group Company), failing which the Executive irrevocably authorises the Company or GSK plc to appoint an officer of the Company or GSK plc to execute all documents on his behalf and do all things necessary to effect such resignations; PROVIDED, however, that any such resignations pursuant to this Section 12.1(ii) shall be without prejudice to the Executives rights under this Agreement. |
12.2 | Any termination of the Employment shall be without prejudice to the Executives and the Companys continuing obligations under this Agreement. |
12.3 |
Upon the termination of the Executives employment for whatever reason, the Executive shall immediately repay all outstanding debts or loans due to the Company or any Group |
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Company and the Company is hereby authorised to deduct from any payment of wages any sum in repayment of all or any part of such debts or loans. |
12.4 | The terms of the GSK Redundancy Policy as in force from time to time, shall not apply to the Executive who shall only be entitled to statutory redundancy pay in addition to any other entitlement under this Agreement if his Employment is terminated by reason of redundancy. |
13 | Termination due to Death or Disability |
13.1 | In the event of the Executives death, the Employment will terminate automatically on the date of his death, which shall be the Termination Date for the purposes of this Agreement. His duly qualified executor shall be entitled to receive the Accrued Obligations. |
13.2 | The Company may elect to terminate the Employment immediately without notice or payment in lieu of notice by serving written notice ( Termination Notice for Disability ), if an independent physician selected by the Company has certified in writing that, by reason of a physical or mental illness or other condition of the Executive, the Executive is unlikely to be able to resume performance of duties under the Employment for the foreseeable future. The Employment will terminate on the Termination Date specified in the Termination Notice for Disability. Provided that the Company shall not be entitled to terminate the employment by reason of physical or mental illness or other condition if this would lead to the Executive becoming dis-entitled to benefits under the Companys or GSK plcs permanent health insurance plan. |
13.3 | In the event the Company delivers a Termination Notice for Disability, the Executive shall immediately be relieved from all offices, appointments and responsibilities that he may then hold under the Employment and be relieved of any duty to work for or serve the Company or any Group Company. The Executive shall be entitled only to the Accrued Obligations, together with such rights as are provided for in the applicable benefits plan(s) in which the Executive participates. |
14 | Termination on Retirement |
The Employment shall automatically terminate on the last day of the month in which the Executive reaches his sixty-fifth (65th) birthday (the Retirement Date ) and the Executive shall thereafter be entitled only to payment of the Accrued Obligations.
15 | Termination for Cause |
15.1 | The Company shall be entitled to terminate the Employment immediately without notice or payment in lieu of notice for Cause (as defined in this Section 15) by serving written notice ( Notice of Termination for Cause ). |
15.2 | Cause shall mean: |
15.2.1 | the Executive is convicted of any criminal offence which in the reasonable opinion of the Chairman of GSK plc or the GSK Board affects the Executives position as President, R&D of GSK plc (other than a motoring offence for which no custodial sentence is given to him); or |
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15.2.2 | the Executive, in carrying out his duties under the Employment, is found guilty of gross neglect or gross misconduct; or |
15.2.3 | the Executive shall become bankrupt or have an order under Section 252 of the Insolvency Act 1986 made in respect of him or if an interim receiver of his property is appointed under Section 286 of the Act; or |
15.2.4 | the Executive shall be or become prohibited by law from being a director; or |
15.2.5 | the Executive commits a material breach of any term of this Agreement. |
15.3 | Any delay or forbearance by the Company in exercising any right of termination shall not constitute a waiver of it. |
15.4 | In the event that the Employment is terminated for Cause, the Employment shall terminate upon the date on which the Board serves Notice of Termination for Cause and the Executive shall be entitled only to payment of all previously accrued and unpaid salary then due and owing under this Agreement, up to the date of termination including reimbursement for expenses previously incurred and, save for the provisions of this Section 15.4, the Executive will have no claim for damages or any other remedy against the Company or any Group Company. |
16 | Termination by Notice |
16.1 | If either notice to terminate the Employment is given by the Executive according to Section 3.2(iii) above, or if the Executive resigns without giving due notice and the Company does not accept his resignation or the Company has given notice in accordance with Section 3.2(ii) above then the Company may require the Executive to comply with any and all of the provisions in this Section 16.1 for a maximum period of 12 months (the Garden Leave Period ). |
16.1.1 | The Company may require that the Executive does not: |
(i) | enter or attend the premises of the Company, or any Group Company; or |
(ii) | contact or have any communication with any customer or client of the Company, or any Group Company in relation to the business of the Company, or any Group Company; or |
(iii) | contact or have any communication with any employee, officer, director, agent or consultant of the Company, or any Group Company in relation to the business of the Company, or any Group Company; or |
(iv) | become employed or engaged by any company, partnership or other entity whether as an employee, director, partner or consultant or carry on any business either on his own account or for any other person whether directly or indirectly (except as the holder, directly or indirectly, of less than 5 per cent of the shares or save for those activities permitted in accordance with Section 4.3); |
(v) | remain or become involved in any aspect of the business of the Company, or any Group Company except as required by such companies. |
16.1.2 | The Company may require the Executive: |
(i) | to comply with the provisions of Section 12; and |
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(ii) | to immediately resign from any directorship which he holds in the Company, and any Group Company or any other company where such directorship is held as a consequence or requirement of the Employment, unless he is required to perform duties to which any such directorship relates in which case he may retain such directorships while those duties are ongoing. The Executive hereby irrevocably appoints the Company to appoint an officer of GSK plc as his attorney to execute any instrument and do anything in his name and on his behalf to effect his resignation if he fails to do so in accordance with this Section 16.1.2(ii). |
16.1.3 | During any Garden Leave Period the Company may appoint another individual to carry out the duties of the Executive and the Executive shall: |
(i) | continue to be bound by the provisions of this Agreement and conduct himself with good faith towards the Company and not do anything that is harmful to the Company or any Group Company; |
(ii) | remain available to perform any reasonable duty requested by the Company or any Group Company and to co-operate generally with the Company or any Group Company to ensure a smooth handover of his duties (provided that if the Executive should fail to make himself available for such work having been requested by the Company or any Group Company to attend he shall, notwithstanding any other provision of this Agreement forfeit his right to salary and contractual benefits in respect of such period of non-availability). |
16.1.4 | During the Garden Leave Period, the Executive will be entitled to receive his salary and benefits in accordance with the terms of this Agreement including any bonus payable in accordance with Section 5.2 but excluding any share entitlements under Section 5.2 above. |
16.1.5 | Where the Company gives notice to terminate the Employment in accordance with Section 3.2 (except where termination is effected pursuant to the terms of Section 15) above then notwithstanding the continuation of the Employment during any period after notice has been given, including, any Garden Leave Period, within 30 days of the date such notice was given to the Executive, the Company shall pay to the Executive as a lump sum his full salary in respect of the entire period of notice (except for any part of it attributable to the period falling after the Executives Retirement Date and subject to deduction of tax and any other deductions required to be made) (the Lump Sum ). For this purpose, full salary shall be the basic salary in effect at the date such notice is given to the Executive. For the avoidance of doubt, the payment by the Company to the Executive of the Lump Sum will extinguish any and all liability imposed on the Company under this Agreement to make any further payment to the Executive in respect of salary under this Agreement during any period after notice has been given, including, any Garden Leave Period. |
16.1.6 | After the payment of a Lump Sum pursuant to Section 16.1.5, at the end of or at any time during the Garden Leave Period the Company may at its sole and absolute discretion terminate the Employment by further written notice to the Executive without any further payment. In any event at the end of the 12 month Garden Leave Period the Employment will also terminate automatically and the |
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Company shall be under no obligation to make any further payment to the Executive, save for in respect of any Accrued Obligations that may exist. |
16.1.7 | However, in the event that the Executive obtains an offer of future alternative employment with another employer, or otherwise wishes to take up alternative business activities, and he can satisfy the GSK Board that such employment/activities are not in breach of Section 17, the Company shall waive the balance of any unexpired notice period or the Garden Leave Period so as to enable the Executive to take up such alternative employment/activities; whereupon, subject to Section 12.3 above, the Companys obligations to the Executive under this Section 16.1 shall cease with effect from the agreed revised Termination Date. |
16.1.8 | The Company and the Executive agree that if the Company shall fully perform, when due, all its obligations under this Section 16, such performance shall be in full and final settlement of all and any claims or rights of action which the Executive might have against the Company, or any Group Company arising out of this Agreement or its termination or otherwise howsoever relating to the Employment. |
16.1.9 | A removal by the Company of the Executive from his current position which results in a demotion to a position with less responsibility than his current position will be deemed to be a termination by the Company on notice pursuant to Section 16 of this Agreement. |
17 | Restrictions during and after Termination of Employment |
17.1 | In this Section: |
Restricted Business means the businesses of the Company or any Group Company at the Termination Date (or if earlier the start of any Garden Leave Period ending on the Termination Date) with which the Executive was involved to a material extent during the last 12 months of the Employment.
Restricted Period means any period during which the Executive is employed by the Company (including for the avoidance of doubt, any Garden Leave Period) and the period of 12 months, less any Garden Leave Period imposed by the Company under Section 16 and less any period of notice worked by the Executive during the notice period set out in Section 3, commencing on the Termination Date.
17.2 | The Executive is likely to obtain trade secrets and confidential information and personal knowledge of and influence over customers, clients and employees of the Company, GSK plc and its Group Companies during the course of the Employment. To protect these interests, the Executive agrees with the Company and GSK plc that the Executive will be bound by the following covenants: |
17.2.1 | During the Restricted Period he will not be engaged in (except as the holder, directly or indirectly, of less than 5 per cent of the shares) any business which is or is about to be in competition with the Restricted Business. |
17.2.2 |
During the Restricted Period the Executive will not canvass or solicit in competition with the Company, or any Group Company, the custom of any person who was during the last 12 months of the Employment a customer, or client of, or |
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in the habit of dealing with, the Company, or (as the case may be) any Group Company and in respect of which the Executive had access to confidential information or with whose custom or business the Executive is or was personally concerned, during that 12 month period with a view to providing goods or services to that person in competition with any Restricted Business. |
17.2.3 | During the Restricted Period he will not, in the course of any business concern which is in competition with the Restricted Business provide goods or services to or otherwise have any dealings with any person who was during the last 12 months of the Employment a customer, or client of, or in the habit of dealing with the Company, or any Group Company, and in respect of which the Executive had access to confidential information or with whose custom or business the Executive is or was personally concerned during that 12 month period. |
17.2.4 | During the Restricted Period he will not, interfere or endeavour to interfere with the continuance of the provision of goods or services to the Company, or any Group Company, by any supplier which was a supplier of goods or services to the Company, or any Group Company during the last 12 months of the Employment and with whom the Executive dealt to a material extent during that period. |
17.2.5 | During the Restricted Period he will not entice or try to entice away from the Company or any Group Company any person who is still employed by the Company or a Group Company during the Restricted Period and is a senior employee, director or full time senior consultant of such a company and with whom he worked closely in the last six months of the Employment. |
17.3 | Each of the obligations imposed on the Executive by this Section 17 extend to him acting not only on his own account but also on behalf of any other firm, company or other person and shall apply whether he acts directly or indirectly. |
17.4 | Following the Termination Date, the Executive will not represent himself as being in any way connected with the businesses of the Company, GSK plc or of any other Group Company (except to the extent agreed in writing by such a company). |
17.5 | Any benefit given or deemed to be given by the Executive to any Group Company under the terms of Section 17 is received and held on trust by the Company for the relevant Group Company. The Executive will enter into appropriate restrictive covenants directly with other Group Companies if asked to do so by the Company or GSK plc. |
18 | Reasonableness of Restrictions |
18.1 | Each of the obligations on the Executive contained in Section 17 constitutes a separate and independent restriction on the Executive notwithstanding that they may be contained in the same Section, paragraph or sentence. |
18.2 | Should the restrictions contained in Section 17 be found to be void but would be valid if some part thereof were deleted or the period or radius of application reduced, then such restriction shall apply with such modification as may be necessary to make it valid and effective. In particular, the Executive agrees that the restrictions are reasonable and necessary for the protection of the Company and the Group Companies. |
18.3 |
If the Executive shall, during the Restricted Period, receive from any person, firm or company, an offer to provide services in any capacity whatsoever, or to enter into |
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employment where acceptance of such offer, or the taking of such employment, might render him in breach of the provisions of this Agreement, he shall promptly advise the offeror of the existence of the restrictions set forth in Section 17 of this Agreement. |
18.4 | The Executive acknowledges that the Company may have no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Section 17 above and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of Section 17 above, and to specific performance of the terms of each such Section in addition to any other legal or equitable remedy it may have. The Executive further agrees that he shall not, in any equity proceedings involving him relating to the enforcement of Section 17 above raise the defence that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have. |
19 | Severability |
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
20 | Successors and Assigns |
20.1 | This Agreement shall be binding upon and inure to the benefit of the Company or any corporation or other entity to which the Company may transfer all or substantially all of its assets and business and to which the Company may assign this Agreement, in which case Company , as used in this Agreement, shall mean such corporation or other entity. The foregoing shall not relieve the Company of any of its obligations under Section 16 of this Agreement. The rights of the Executive shall inure to the benefit of his heirs, executors, administrators and other personal representatives. |
20.2 | The Executive may not assign this Agreement or any part of it, or any rights thereunder or delegate any duties to be performed by him under it to anyone else. |
21 | Survivorship |
To the extent contemplated by this Agreement, respective rights and obligations of the parties set out in this Agreement shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
22 | Notices |
Any notice (including any Termination Notice) required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, duly addressed to the party concerned at such address as the party may notify to the other. Any notice delivered personally under this Section 22 shall be deemed given on the date delivered and any notice sent by courier shall be deemed given on the date delivery is recorded by such courier.
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23 | Entire Agreement |
23.1 | This Agreement supersedes any previous written or oral agreement between the parties in relation to the matters dealt with within it. It contains the whole agreement between the parties relating to the Employment at the date the Agreement was entered into (except for those terms implied by law which cannot be excluded by the agreement of the parties). The Executive acknowledges that he has not been induced to enter into this Agreement by any representation, warranty or undertaking not expressly incorporated into it. |
23.2 | Neither partys rights or powers under this Agreement will be affected if: |
23.2.1 | one party delays in enforcing any provision of this Agreement; or |
23.2.2 | one party grants time to the other party. |
24 | Amendment or Modification; Waiver |
No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorised officer of the Company who shall supply the Executive with evidence of such authority.
25 | Withholding |
Anything to the contrary notwithstanding, all payments required to be made by the Company under this Agreement to the Executive, or to his estate or beneficiaries, shall be subject to withholding of such amounts relating to taxes as the Company may be required to withhold pursuant to any applicable statute, law or regulation.
26 | Indemnification and Insurance |
26.1 | The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit, proceeding or governmental or other investigation by reason of the fact of the Employment or that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another Group Company or entity except for any action instigated by the Company or the Executive (a Proceeding ), he shall be indemnified by the Company to the fullest extent permitted by applicable law against all expenses, liabilities and losses reasonably incurred or suffered by the Executive in connection with such a Proceeding (including any tax payable by the Executive as a result of payments made by the Company pursuant to this indemnity), including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding; PROVIDED, however, that written notice of such Proceeding is given promptly to the Company by the Executive and the Company is permitted (where appropriate) to participate in and assume the defence of such Proceeding. The provisions of this Section 26 shall survive the termination of the Employment and shall be in addition to any other rights to indemnification to which the Executive may from time to time be entitled, whether under any applicable insurance policies or otherwise. |
26.2 | The Company will provide the Executive with Legal Expenses Insurance and Directors and Officers Liability Insurance under the Companys policy current from time to time in force subject to such cover being available at reasonable commercial rates. |
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27 | Collective Agreements Disciplinary Rules and Procedures |
There are no collective agreements which directly affect the terms and conditions set out in this Agreement.
The Companys harassment and bullying policies, disciplinary rules and procedures and grievance procedures, as in force from time to time, shall apply to the Executive. The Company reserves the right to leave out any or all of the stages of those rules and procedures where it considers it appropriate to do so.
28 | Data Protection |
The Executive consents to the Company or any Group Company holding and processing both electronically and manually the data it collects which relates to the Executive for the purpose of the administration and management of its employees and its business and for compliance with applicable procedures, laws and regulations. The Executive also consents to the transfer of such personal information to other offices the Company may have or to a Group Company or to other third parties whether or not outside the European Economic Area for administration purposes and other purposes in connection with the Executives employment where it is necessary or desirable for the Company to do so.
29 | Governing Law |
This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of England. Each of the parties submits to the exclusive jurisdiction of the English courts as regards any claim or matter under this Agreement.
30 | Titles |
Titles to the Sections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any Section.
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In witness whereof the parties hereto have executed this Agreement as a deed on the day and year first above written
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Appendix 1: Schedule of Directorships and Outside Interests
A list of the directorships and outside interests of the Executive approved by the GSK Board as at the date of this Agreement is out below:
| Series A Director: Tempero Pharmaceuticals, Inc. |
| Board Member: Office for Strategic Co-ordination of Health Research (OSCHR) UK |
| Member of business board: NY Stem Cell Foundation |
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Exhibit 12.1
Section 302 Certificate
Form of Certification Required by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Sir Andrew Witty, certify that:
1. | I have reviewed this annual report on Form 20-F of GlaxoSmithKline plc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. | The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and |
1
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: March 17, 2017 |
/s/ Sir Andrew Witty |
|||||
Sir Andrew Witty | ||||||
Chief Executive Officer |
2
Exhibit 12.2
Section 302 Certificate
Form of Certification Required by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Simon Dingemans, certify that:
1. | I have reviewed this annual report on Form 20-F of GlaxoSmithKline plc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. | The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and |
1
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: March 17, 2017 |
/s/ Mr Simon Dingemans |
|||||
Mr Simon Dingemans | ||||||
Chief Financial Officer |
2
Exhibit 13.1
Section 906 Certificate
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of GlaxoSmithKline plc, a public limited company incorporated under English law (the company ), does hereby certify, to such officers knowledge, that:
The Annual Report on Form 20-F for the year ended December 31, 2016 (the Form 20-F ) of the company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the company.
Date: March 17, 2017 |
/s/ Sir Andrew Witty |
|||
Sir Andrew Witty | ||||
Chief Executive Officer | ||||
Date: March 17, 2017 |
/s/ Mr Simon Dingemans |
|||
Mr Simon Dingemans | ||||
Chief Financial Officer |
1
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-88966, 333-100388 and 333-162702) of GlaxoSmithKline plc of our report dated 17 March 2017 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London, United Kingdom
17 March 2017
Exhibit 15.2
Annual Report 2016
2016 saw good sales momentum
across Pharmaceuticals, Vaccines
and Consumer Healthcare
and further pipeline progress
We are a global science-led
healthcare company.
Our three world-leading businesses
research and deliver innovative
medicines, vaccines and consumer
healthcare products.
Cautionary statement regarding forward-looking statements
The Groups 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 Groups current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, intend, will, project, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and shareholders and investors are cautioned not to place undue reliance on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Groups control or precise estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Such factors include, but are not limited to, those discussed under Principal risks and uncertainties on pages 253-262 of this Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge of and information available to the Directors on the date of this Annual Report.
All expectations and targets regarding future performance should also be read together with Assumptions related to 2016-2020 outlook on the inside back cover of this document.
A number of adjusted measures are used to report the performance of our business. These measures are defined on page 57 and a reconciliation of core results to total results is set out on page 66.
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Footnotes
a | AER growth rates represent growth at actual exchange rates. We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. These measures are used by management for planning and reporting purposes and may not be directly comparable with similarly described measures used by other companies. Core results exclude a number of items and are presented as management believes that core results allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. A reconciliation of total results to core results is set out on page 66. |
b | New products defined as: |
Pharmaceuticals: Relvar/Breo Ellipta, Incruse Ellipta, Anoro Ellipta, Arnuity Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq . |
Vaccines: Menveo, Bexsero, Shingrix (not yet approved). |
c | Primarily reflecting impact of £9.2 billion profit in 2015 from disposal of Oncology business. |
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At GSK, our mission is to improve the quality of human life by enabling people to do more, feel better and live longer.
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Footnote
a | We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. |
Our Pharmaceuticals, Vaccines and Consumer Healthcare businesses generated combined turnover of £27.9 billion in 2016. Each business benefits from our global commercial infrastructure, integrated supply networks and innovative R&D.
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99,300 |
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Number of employees | Number of markets | Manufacturing sites |
In 2016, we invested £3.6 billion in R&D across our three businesses. External partnerships and collaborations enable us to develop and access knowledge, and increase our understanding in new areas of science.
We focus our research across six core areas and are using next generation technology to develop new approaches to disease management and control.
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Respiratory diseases |
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HIV/infectious diseases |
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Vaccines |
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Immuno-inflammation |
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We are focused on optimising our operations through restructuring, investment and modernisation to improve profitability and efficiency.
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£1.4 bn | 9.3 % | 27.9 % | ||||||||
Incremental annual savings delivered in 2016 (including £0.2 billion currency benefit) | Total operating profit margin in 2016 | Core operating profit margin in 2016 a |
03 GSK Annual Report 2016 Investor information Financial statements Governance and remuneration Strategic report Our Pharmaceuticals business discovers, develops and commercialises medicines to treat a range of acute and chronic diseases. We have a broad portfolio of innovative and established medicines in respiratory and HIV, in which we are global leaders. We focus our research across respiratory, HIV and infectious diseases, immuno-inflammation, oncology and rare diseases. Read more on pages 20 to 27 Top three categories by sales £m Respiratory 6,510 HIV 3,556 Established products 2,541 £16.1bn Turnover % of Group turnover 58% 2bn packs of medicines produced in 2016 Our Vaccines business has the broadest portfolio of any company, with vaccines for people of all ages from babies and adolescents to adults and older people. We deliver over two million vaccine doses per day to people living in over 160 countries. Read more on pages 28 to 33 Top three categories by sales £m Infanrix/Pediarix 769 Hepatitis 602 Meningitis 592 £4.6bn Turnover % of Group turnover 16% 833m vaccines delivered in 2016 Our Consumer Healthcare business develops and markets products in Wellness, Oral health, Nutrition and Skin health categories. Our seven global power brands Otrivin, Panadol, parodontax, Poligrip, Sensodyne, Theraflu and Voltaren, include some of the most trusted and best-selling brands in the world. Read more on pages 34 to 39 Sales by category £m Wellness 3,726 Oral health 2,223 Nutrition 674 Skin health 570 £7.2bn Turnover % of Group turnover 26% 5bn Consumer Healthcare products produced in 2016 Pharmaceuticals Vaccines Consumer Healthcare
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GSK made further progress during 2016. Operating performance significantly improved and there was continued progress in the R&D pipeline.
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Read more
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Governance report |
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See pg 80 |
Our Corporate Governance report sets out our corporate governance practices and includes the reports of our Board Committees.
Remuneration |
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See pg 112 |
Our Remuneration report sets out our remuneration arrangements for Executive and Non-Executive Directors and includes our new Remuneration policy for 2017.
Diversity statement |
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See pg 96 |
Our Boards Diversity policy, including gender, sets out measurable objectives which our Nominations Committee monitors and reports progress towards their achievement.
Viability statement |
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See pg 56 |
Our viability statement sets out our assessment of the prospects of the Group over the next three years.
I am pleased to report that GSK made further good progress during 2016. Operating performance significantly improved in our three businesses and there was continued progress in the late and early stage R&D pipeline. In every important area, it has been a year of solid achievement.
2016 performance
Management continues to make strong progress in driving the sales and cost benefits from the integration of the Novartis businesses in Vaccines and Consumer Healthcare. These businesses have been transformed through the transaction and are now true global leaders in their respective markets, well positioned strategically and improving financially.
In Pharmaceuticals, new product sales have shown very good momentum, particularly in HIV and Respiratory. New products now make up around a quarter of total pharmaceutical sales. This is important given the pricing pressure faced generally by pharmaceutical companies and the potential introduction of generic competition to Advair for many years the Groups biggest single source of profits in the US during 2017.
The Groups improved operational performance also contributed to markedly increased cash generation. Operational cash flow also benefited strongly from the devaluation of Sterling following the Brexit vote in June, although the value of non-sterling liabilities for debt funding and contingent consideration, has also increased.
Ordinary dividends of 80p per share have been declared for 2016, the same level as 2015. The company expects to maintain the same payment in 2017, in accordance with the statements made in 2015. This level of distribution still exceeds the free cash flow generated by the business despite the material improvement in cash generated in 2016 referred to above. Given that 2017 is the last year of the three year dividend commitment made in 2015, the Board will be considering the appropriate dividend policy for 2018 and beyond during the course of the year.
CEO succession
A key area of focus for the Board through 2016 has been to manage the CEO succession as Sir Andrew steps down after 33 years with the company and into a tenth year as CEO. The Board conducted a thorough, global search for a successor, which included internal and external candidates.
The Board was unanimous in its decision to appoint Emma Walmsley, previously Head of GSKs Consumer Healthcare business, as the new CEO. Emma has very strong leadership skills and a clear track record of delivery on performance. The Board believe Emma will bring new thinking to how the Group operates in todays healthcare environment, whilst at the same time harnessing the momentum evident in current performance.
I want to thank Sir Andrew again for his dedicated service to GSK. Through his commitment and leadership GSK has built a balanced set of businesses with fine prospects and delivered very significant rewards to shareholders with substantial cash returns. He has also led efforts to address the most pressing concerns the industry faces, ranging from reforming our commercial model, increasing transparency of trial results, and ensuring medicines are priced more fairly and made more accessible to patients worldwide. He will be much missed within GSK and we wish him well in his future endeavours.
Board changes during the year
We continue to refresh the Board. In 2016 we welcomed two new Non-Executive Directors: Dr Jesse Goodman and Dr Vivienne Cox. Jesse is Professor of Medicine at Georgetown University and a leader in public health, and Vivienne brings many years experience in complex global manufacturing organisations. Meanwhile, Stacey Cartwright stepped down from the Board at the end of December. My thanks go to Stacey for nearly six years of dedicated service to the Board.
As we enter a critical period of pipeline activity, we have reflected this on the Board with the creation of a new Board Science Committee, chaired by Dr Goodman. In addition, Dr Patrick Vallance, President R&D, has joined the Board. Later this year, Moncef Slaoui will step down from the Board after 28 years with the company. Moncef is a scientist of global repute and has been a remarkable presence at GSK, particularly in the Vaccines business. We wish him, too, well in the future.
In closing, I would like to thank all GSKs employees and partners for their hard work and dedication. The business has outstanding people and they have made 2016 a very successful year.
Philip Hampton
Chairman
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GSK performed strongly in 2016, with good sales growth across all three businesses, excellent new product momentum and further pipeline progress.
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Footnote
a | We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. |
The Group executed strongly in 2016, delivering sales growth across all three businesses, remaining disciplined on costs and progressing our pipeline of innovative products.
Trading performance
Group sales rose 17% at actual rates, 6% CER (5% pro-forma) to £27.9 billion, despite the uncertainty and volatility experienced globally in 2016. Total earnings per share was 18.8p (down 89% at actual rates, 99% CER), primarily reflecting comparisons with the £9.2 billion profit in 2015 from the disposal of the marketed Oncology assets. Core earnings per share was 102.4p a a 12% CER increase and at the top end of our guidance for the year.
We saw growth across all three of the Groups businesses in 2016, with a particular contribution from new Pharmaceuticals and Vaccine products. Sales from this portfolio more than doubled to £4.5 billion and in Pharmaceuticals, new products accounted for 24% of sales.
HIV products, Tivicay and Triumeq , continued to be the standout products with sales of £2.7 billion, while our new respiratory products Relvar/Breo , Anoro , Incruse , Arnuity and Nucala also grew strongly as did our meningitis vaccines, Bexsero and Menveo . We expect the momentum in this group of products to continue through 2017.
Our Consumer Healthcare business performed strongly, with sales up 19% at actual rates, 9% CER (5% pro-forma) to £7.2 billion, driven by power brands such as Sensodyne , Voltaren and Panadol as well as growth from Flonase which we switched from prescription to over-the-counter.
Strong R&D innovation pipeline
We filed four assets with regulators in 2016 which, if approved, have the potential to drive further growth in the business, including Shingrix , our candidate vaccine for shingles and our once-daily Closed Triple therapy for COPD. In addition, we also started a number of phase III trials for assets in HIV, respiratory and anaemia.
Investment in our R&D organisation continues to deliver significant innovation. For example, 2016 saw the European approval of Strimvelis , our first of its kind gene therapy for children with the very rare condition ADA-SCID. This remarkable technology has the potential to be a platform for a number of other gene therapies.
The next two years will be an exciting time for our R&D organisation, with key research data on 20-30 assets due by the end of 2018.
Delivering performance responsibly
GSK has a strong commitment to operating responsibly and playing our part in meeting some of societys biggest healthcare challenges.
In 2016, we took further industry-leading steps by stopping all payments to healthcare professionals to speak about our medicines to other prescribers, and offered essential vaccines at our lowest price to organisations supporting refugees in acute need. We also introduced a new approach to filing and enforcing patents and IP based on a countrys economic maturity, and are working with partners to help the world better prepare for future epidemics such as Ebola and Zika.
I was very pleased that our efforts to operate as a values-based company were recognised when we came first in the Access to Medicine Index for the fifth consecutive time.
Outlook
The progress in 2016 highlights the investments we have made in the Group over the last several years to build scale and sustainability as well as develop new products. I expect the Group to make continued progress in 2017 and, as we enter a new period of leadership for the company, I believe GSK is well positioned to deliver long-term performance for shareholders.
Finally, as this is my last annual report before I retire, I would like to thank all our employees, partners and shareholders for their support during my time as CEO. GSK is a very special company that touches peoples lives across the world and which I have been enormously privileged to lead.
Sir Andrew Witty
Chief Executive Officer
By understanding our operating environment and having
a clear
strategy, against which we measure performance
and manage risks, we deliver long-term value for
shareholders and society.
We operate in a growing marketplace and our strategy
is designed to respond to the challenges and opportunities
in our sector.
R&D underpins our three businesses and we prioritise our investments
to where we see the most potential to
develop innovative products for
unmet medical needs.
The market in which we operate
Demographic
change
Technological
and scientific
advances
Increased
expectations
of businesses
Increasing payer
emphasis on cost,
value and access
Our
business model
Read more on page 8 Read more on page 12
06 GSK Annual Report 2016
Our integrated approach
Changing political
landscape
Manufacturing
Commercialisation
and distribution
Pharmaceuticals
Vaccines
Consumer
Healthcare
R&D
Our strategic priorities provide a framework
to create long-term value
for shareholders
and society.
We assess our performance against
a set of financial and non-financial
measures, many of which form the
basis of our executive remuneration.
We manage a number of current and
emerging risks. Below, our Principal Risks
are mapped against the primary strategic
priority they are most likely to impact.
Intellectual property
Commercialisation
Turnover growth
Growth of earnings per share
Product quality
Research practices
Supply continuity and crisis management
New Pharmaceuticals and Vaccines
product performance
Financial control and reporting
Information protection
Operating profit and margin
Free cash flow
Dividends declared
Net debt
Grow a balanced business and
product portfolio, centred on our
three global businesses.
Deliver more products of value to
offer improved treatment for patients,
consumers and healthcare providers.
Simplify the way we operate to reduce
complexity, increase efficiency and free
up resources to reinvest in the business
or return to shareholders, wherever we
see the most attractive returns.
Grow
Deliver
Simplify
A
clear strategy for growth How we measure success How we manage risks
Read more on page 14 Read more on page 16 Read more on page 18
07 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Patient safety
Anti-bribery and Corruption
Environment, Health and Safety
and Sustainability
Access to Medicine Index
Dow Jones Sustainability Index
Being a responsible business,
as how we deliver success is as
important as the results we achieve.
Responsible business
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We operate in a growing marketplace and
our strategy is designed to respond to the
challenges and opportunities we face.
The market in which we operate
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In 2016, the global healthcare market continued to grow against a backdrop of a challenging global economic environment. |
Global pharmaceutical sales were £648 billion on a 12 month rolling basis (September 2015-2016), up from £605 billion during the equivalent period (September 2014-2015). North America remained the largest pharmaceuticals market with a 50% share of global sales. Europe represented 21%, Asia Pacific (including Japan) was 21% and emerging markets was 8%. b
Global vaccine sales totalled ~£18 billion in 2016 and are expected to grow 5% annually by 2022. c
The consumer healthcare markets in which GSK operates account for approximately $70 billion, and are projected to grow 3-4% annually over the next five years. d
Societal trends supported market growth, but are also contributing to challenges in the healthcare sector, particularly on price and affordability.
Demographic change The world population continues to grow and, according to the United Nations, is predicted to reach 8.5 billion by 2030. The proportion of elderly people is growing and the number of people over the age of 60 is expected to reach 1.4 billion by 2030. e At the same time, developing countries are experiencing growth in their middle classes, and by 2030 it is expected that 60% of the worlds population will be middle class. f
In emerging markets, long-term economic growth, increasing expectations of healthcare provision, and changing diets and lifestyles are increasing demand for healthcare products, especially to treat chronic conditions including respiratory and cardiovascular disease. This demand is expected to grow significantly faster in these markets over the coming years than in more mature economies. |
In developed economies, demand for healthcare provision continues to remain high, although the dynamics are becoming more complex. Trends such as higher life expectancy are contributing towards the increasing proportion of elderly people, and along with improvements in medical technology, are putting pressure on healthcare budgets.
The changing global political landscape Shifting attitudes to globalisation and free trade, wage stagnation for many and concerns about inequality are causing significant volatility and uncertainty in western markets.
2016 was characterised by political uncertainty and this was exemplified by the vote to leave the EU in the UK and the result of the US Presidential Election. Political uncertainty in Europe is expected to continue in 2017 with national elections in France and Germany.
In the US there is also uncertainty as to how the new administration will shape healthcare, particularly with respect to repealing and replacing the Affordable Care Act, prescription drug pricing and regulation. This is coupled with questions over the impact of the new administrations economic, tax and trade policies.
In the UK, it remains unclear how Brexit will affect the countrys trading relationships, corporate taxation policy, the movement of people, and regulatory affairs.
Footnotes
a World Population Ageing 2015 Highlights. United Nations.
b IMS data (latest available at time of publishing).
c Internal data and EvaluatePharma, World Preview 2016.
d Internal forecasts based on Nicholas Hall and Euromonitor.
e World Population Ageing 2015 Highlights. United Nations.
f Future State 2030: The global megatrends shaping government. KPMG.
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The market in which we operate continued
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Our strategy to create a balanced business and product portfolio positions us well for the changes in our marketplace. |
Increasing payer emphasis on cost, value and access Demographic changes are contributing to increased demand for healthcare and in turn putting pressure on government budgets and payers. This has led to continued focus on, and public debate about, the industrys approach to drug pricing across all key markets.
In the US the ultimately unsuccessful Proposition 61 vote, which called for medicine price controls in California, was the first of several drug pricing ballot initiatives expected in the US. There has also been increasing use of healthcare technology assessments to consider value for money as well as medical efficacy, by government-appointed bodies like the UKs National Institute for Health and Care Excellence and Australias Pharmaceutical Benefits Advisory Committee.
As demand for healthcare in emerging markets rises, governments are continuing to reform healthcare systems to support access. In China, the government continues to work to realise the goals set out in the Healthy China 2030 plan, with significant measures taken during the year to reduce pharmaceutical prices through the National Price Negotiations.
During the year, the UNs High-Level Panel on Access to Medicines report, reiterated the rights of countries to issue compulsory licences to access cheaper supplies of generic drugs.
We expect the political and public scrutiny on pricing to continue.
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Technological and scientific advances Key advances in the understanding of human biology and genomics are leading to fundamental changes in how we research diseases, and the pharmaceutical industrys ability to develop treatments specifically to tackle them with innovative treatment approaches has increased substantially in recent years. Alongside these scientific advances, digital technology and data analytics are enabling researchers to explore and interpret larger volumes of biological data from genomics and disease biology than ever before. This is providing opportunities to increase the speed and efficiency of drug discovery and the development of novel therapies that could transform how diseases are managed.
Increasing expectations of companies Beyond our sector-specific context, where value, cost and affordability are so important, society has increasing and changing expectations of companies, particularly of large global companies. Stakeholders from employees to consumers to policy makers and influencers expect companies to behave with integrity and fairness; operate transparently; be connected to their local communities; and play their part in addressing global challenges from health epidemics to climate change. Responding to this requires strong partnership and connectivity between public and private sector organisations.
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R&D underpins our three businesses and we prioritise our investments to where we see the most potential to develop innovative products for unmet medical needs. |
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Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
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Our strategic priorities provide a framework to
create long-term value for shareholders and society.
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The market in which we operate
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Progress in 2016
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Global sales: £27.9 billion, up 17% AER; 6% CER; 5% pro-forma CER
New Pharmaceutical and Vaccine product sales were £4.5 billion, up >100% AER; >100% CER |
18.8 p Total earnings per share (down 89% AER; 99% CER)
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Grow a balanced business and product portfolio, centred on our three global businesses.
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Consumer Healthcare sales were £7.2 billion (up 19% AER; 9% CER; 5% pro-forma CER), with strong contributions from power brands |
102.4 p Core earnings per share (up 35% AER; 12% CER) a
22 % New Pharmaceutical and Vaccine product sales
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Four filings with regulators, including Shingrix candidate vaccine and Closed Triple
EU approval for Strimvelis , the first gene therapy for rare disease (ADA-SCID)
13% of Consumer Healthcare innovation sales from products launched in the last three years |
4 filings with regulators in 2016 |
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Deliver more products of value to offer improved treatment for patients, consumers and healthcare providers.
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Improved core operating leverage across all three businesses
Incremental annual cost savings of £1.4 billion delivered (including £0.2 billion currency benefit)
Continued to roll out new global systems and standardisation of our processes |
9.3 % Total operating profit margin
27.9 % Core operating profit margin (up 2.6 percentage points pro-forma CER) a |
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Simplify the way we operate to reduce complexity, increase efficiency and free up resources to reinvest in the business or return to shareholders, wherever we see the most attractive returns.
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Expanded graduated approach to patents and IP to widen access to medicines
Committed to supply essential vaccines at the lowest price to civil society organisations for refugees
EMA approval for chlorhexedine, our antiseptic gel for newborn umbilical cord infections in developing countries |
1 st in the Access to Medicine Index
3 rd in our sector for Dow Jones Sustainability Index |
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Being a responsible business, as how we deliver success is as important as the results we achieve.
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Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. |
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Key challenges in 2016
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Key priorities in 2017
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Continued pricing pressure in the US and Europe
Volatility and slowing emerging market economies |
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Deliver our 2017 guidance
Drive sales and market growth for respiratory, HIV, meningitis vaccines, and power brands
Progress the four regulatory filings made in 2016 and launch successfully if approved
Manage impact of possible generic competition to Advair in the US |
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Continued prioritisation of the pipeline and appropriate deployment of resources
Increasing global demand for vaccines and complex manufacturing process leading to supply pressures |
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Deliver key data on 20-30 assets by the end of 2018 and manage prioritisation of capital allocation
Continue to improve efficiency and capacity of supply chain for new and existing products |
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Integration of reporting systems and processes following Novartis transaction |
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Continue to roll out new global systems and standardisation processes
Continue to focus on improving cash conversion and management of working capital
Continue to optimise capital expenditure |
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Responding to stakeholder concerns on affordability and access
Continue to strengthen values- based culture |
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Ensure sustainable funding for biopreparedness organisation to enhance preparedness against future epidemics
Embed flexible approach to IP and patent protection |
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We assess our performance against a set of financial
and non-financial metrics, many of which form the
basis of our executive remuneration.
17 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
£13.8bn
1st
We have been first since the
index began in 2008
Access to Medicine Index ranking
Net debt
How we manage risks
2016
2015
2014 14.4
10.7
13.8
Key R The remuneration of our executives is linked to the key indicators marked. See page 119.
2016
2015
2014
4.7e
2.6
2.5e
(44)
n/a
>100
3.9e
3.1
(0.2)
£3.1bn
Free cash flowd
Growth £ %
R
Dow Jones Sustainability Index ranking
3rd
in the pharmaceutical industry
(2016: 95th percentile 2015: 89th percentile,
2014: 98th percentile)
See page 43 for more information See page 43 for more information
Footnotes
a Excluding divestments completed in 2013.
b New products defined as:
Pharmaceuticals: Relvar/Breo Ellipta, Anoro Ellipta, Incruse Ellipta, Arnutiy Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq.
Vaccines: Menveo, Bexsero, Shingrix (not yet approved).
c 2015 includes special dividend.
d We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER
and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
e Free cash flow excluding payments for legal costs, restructuring, tax on the Oncology disposal and the purchase of HIV clinical assets which are treated as
intangible asset purchases.
2016
2015
2014 3.8
2.0 3.9
3.9
1.0c
Dividends
£3.9bn
Dividends declared
18 |
GSK Annual Report 2016 |
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We manage current and emerging risks that may
impact our strategic priorities through rigorous and
consistent risk management processes.
The market in which we operate
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Our business model
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A clear strategy for growth
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How we measure success
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19 | GSK Annual Report 2016 |
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Governance and remuneration
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Financial statements
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Investor information
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2016 assessment
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Macro
environment
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GSK exposure
post mitigation
|
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The macro environment has remained stable, with patient safety regulation and standards remaining consistent.
We have improved safety data management, patient communications and product labelling. These improvements are being incorporated throughout the organisation, leaving the GSK exposure level unchanged.
|
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The macro risk is unchanged due to no significant changes that affect our ability to secure, maintain and enforce patents.
The GSK exposure level is stable, based on the maturity of our risk management processes and general ability to enforce and defend patents where appropriate.
|
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The macro risk is higher, with increasing regulatory scrutiny of data integrity, supply continuity and drug shortages, accompanied by new guidance and revised legislation.
Despite the challenging macro environment, the GSK exposure level is unchanged, reflecting effective responses to external regulatory reviews during 2016, a greater focus on data integrity and improved governance.
|
|
|
|
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||||||||||||||||
The macro environment has remained stable, due to no material change in financial reporting requirements.
The unchanged GSK exposure level is reflective of the significant IT systems and operating model changes that are being implemented throughout the organisation, as well as continued risk from third-party relationships. While we expect that these system and model changes will reduce risk in the future, the risk impact from these changes is being mitigated through strong risk management and governance, as well as the continued progress of the global Third Party Oversight programme.
|
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The macro environment has remained stable, with the regulatory environment and global attitude towards Anti-bribery and Corruption remaining within expectations.
The GSK exposure level is lower as our risk management practices have gained strength and are embedded deeper across the organisation through our ABAC programme, which builds on the Groups values and standards and has enabled us to manage the risk more effectively.
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The macro risk level has increased due to greater industry pricing pressures and increased regulatory scrutiny in respect of sales and promotional activities.
The GSK exposure level is unchanged, as we implement industry-leading changes in our operating model and in particular in the compensation model for sales representatives and our relationships with healthcare professionals.
|
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The macro risk level is elevated due to increased regulatory scrutiny of Good Clinical Practices.
The GSK exposure level is unchanged based on mature internal control processes and an enhanced governance programme, designed to promote best practice across the business units.
|
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The macro risk level is higher due to greater focus and increased regulatory activity on environmental issues.
The GSK exposure level is unchanged due to our controls and governance being well established and capable of allowing for the increased focus and regulatory activity.
|
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The macro risk has increased as the threat has become more sophisticated and targeted, with a higher volume of incidents.
The GSK exposure level is unchanged while we see the effects of the substantial progress we have made in upgrading our level protection against cyber attacks and safeguarding our critical and sensitive data.
|
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Macro factors such as regulatory focus on contract manufacturers outside of the US and EU and increased data integrity expectations, are increasing supply risk.
The GSK exposure level is stable, based on the significant improvements delivered through our ongoing supply remediation programmes and our increased monitoring and supervision of third parties.
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20 GSK Annual Report 2016
Pharmaceuticals
Our Pharmaceuticals business discovers,
develops and commercialises medicines
to treat a broad range of the worlds most
common acute and chronic diseases.
As a leader in
respiratory, GSK has
been at the forefront
of research in this area
for over 45 years.
21 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Grow
£16.1bn
2016 Pharmaceutical
reported sales were up
14% AER and 3% CERa
(4% pro-forma CER).
Sales of new products
were 24% of
Pharmaceutical sales.
Deliver
3
There were three filings
with regulators in 2016
for Closed Triple, Benlysta
subcutaneous and
sirukumab.
Responsible
business
6 We have launched our
last six new products in
the US priced similar to
or below those we aim
to replace.
Simplify
34.1%
Operating profit margin
in 2016 was 34.1%,
3.7 percentage points
higher than in 2015 and
1.2 percentage points higher
on a CER pro-forma basis.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described
on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
22 |
GSK Annual Report 2016 |
|||
Overview
Our Pharmaceuticals business has a portfolio of innovative and established medicines across a broad range of therapy areas, including respiratory and HIV, in which we are global leaders, as well as immuno-inflammation, anti-infectives, urology and rare diseases. Around a quarter of Pharmaceutical sales come from products launched over the past four years.
Respiratory
We have the industrys broadest range of inhaled respiratory products. Our respiratory portfolio is the largest contributor to Pharmaceutical sales and our expectation is that by 2020, nine products will account for approximately 90% of respiratory sales, compared to four in 2015.
In the past four years, we have launched a new generation of respiratory products including Nucala (mepolizumab) and our Ellipta portfolio.
HIV
Our global HIV business is managed through ViiV Healthcare, a company 78.3% owned by GSK, with Pfizer and Shionogi the other shareholders.
ViiV Healthcare is growing rapidly, and accounts for over 20% of Pharmaceutical sales. This was led by strong demand for Tivicay (dolutegravir), an innovative integrase strand transfer inhibitor, and Triumeq , a single-pill treatment combining dolutegravir, abacavir and lamivudine.
Specialty products
Our Specialty products portfolio includes medicines such as Benlysta , a treatment for lupus disease, and Tanzeum/Eperzan , for Type 2 diabetes.
Classic and Established products
Our Classic and Established products include over 400 post-patent medicines in the areas of anti-infectives, allergy, neurosciences, dermatology, respiratory and urology. Many of these medicines continue to be the top-selling brand in their therapy area. These products are an important part of our emerging markets business, where we sell 47% more volume than our nearest competitor.
23 | GSK Annual Report 2016 |
Strategic report
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Grow |
|
|
Sales of our Respiratory products returned to growth of 2% in 2016. |
All growth rates are at CER, a non-IFRS measure as described on page 57, unless otherwise stated.
|
2016 performance summary
Reported Pharmaceutical sales were £16,104 million, up 14% at actual rates and 3% CER. Adjusting for the disposal of the Oncology business to Novartis in 2015, pro-forma turnover was up 4% CER.
Performance reflected a return to growth of the respiratory business, which grew 2%. Sales of new Respiratory products launched over the last four years, including our Ellipta based products Breo , Anoro , Arnuity and Incruse as well as biologic Nucala , more than doubled to £1,052 million. HIV sales increased 37% to £3,556 million, with the US up 46%. This was driven primarily by strong performances from both Triumeq and Tivicay , with sales of £1,735 million and £953 million.
Sales of new Pharmaceutical products were £3,861 million and now account for 24% of total Pharmaceutical sales.
US Pharmaceutical sales were £4,705 million and declined 1% on a reported basis (up 1% pro-forma). Respiratory sales grew 7%, and sales of new Respiratory products were £654 million, exceeding the decline in Advair .
In Europe, Pharmaceutical reported sales declined 8% (5% pro-forma). Respiratory sales declined by 10%, reflecting the ongoing transition to the new Respiratory portfolio and generic competition to Seretide . This was partly offset by growth in the new Respiratory products, which recorded sales of £225 million. Established products were down 4% to £513 million.
International sales were £4,976 million, down 5% (4% pro-forma). Sales in Emerging Markets were impacted by the decline in the China business, primarily as a result of the ongoing reshaping programme and broader Healthcare reforms, including price reductions.
Worldwide HIV sales increased 37% to £3,556 million, with the US up 46%, Europe up 29% and International up 21%. This growth was primarily driven by strong performance from Triumeq and Tivicay .
In 2016, we continued to implement our new commercial model. We stopped payments to HCPs to speak on our behalf in January and continued our drive to recruit HCPs as internal medical experts. In addition, we continued to roll out digital tools to further our medical education efforts. Following medical product information sessions with GSK experts in over 60 countries, 92% of more than 42,000 HCPs agreed that the interaction helped them make a more informed decision benefiting patient care. Around 79% rated their experience as superior to similar interactions with other pharmaceutical companies.
24 |
GSK Annual Report 2016 |
|||
Pharmaceuticals continued
Deliver |
|
|
In 2016, we achieved accelerated filing for the first once-daily Closed Triple therapy for COPD, received approval in Europe for our first gene therapy medicine and obtained positive data to support a new single tablet two-drug HIV regimen. |
Our Pharmaceuticals R&D organisation drives discovery and development in several areas of research, including respiratory, HIV, infectious diseases, immuno-inflammation, oncology and rare diseases.
2016 progress
We continued to see progress across all stages of our R&D pipeline. In respiratory, we filed our once-daily Closed Triple therapy for COPD for regulatory approval in both Europe and the US, bringing forward our original US filing date by 18 months. We also announced positive results from the pioneering COPD Salford Lung Study. The study showed that, compared to those receiving usual standard of care, COPD patients using Relvar/Breo Ellipta achieved a superior reduction in exacerbations in an everyday clinical practice setting.
We also strengthened the prospects for our next wave of respiratory medicines with the in-licensing of a novel anti-IL33R antibody for severe asthma, and new data supporting the progression of a potential oral treatment, danirixin, into phase IIb clinical development for potential use in treating patients with COPD.
Our HIV pipeline contains a number of promising medicines and regimens, with innovative formulations, mode of action and delivery methods. We announced positive results from two phase III studies evaluating a two-drug regimen combining dolutegravir and rilpivirine ( Edurant , a Janssen medicine). By breaking the mould of conventional three-drug treatments, this therapy could reduce and streamline HIV medication in the future.
We have three further HIV programmes in phase III: a new attachment inhibitor; another two-drug regimen, combining dolutegravir and lamivudine; and cabotegravir, a once-monthly injectable therapy, which combined with long-acting rilpivirine could also make HIV treatment simpler and easier to adhere to. In addition, we announced the start of a phase III study to evaluate long-acting cabotegravir as an injection every two months, for prevention in men who have sex with men at risk of HIV infection. We also completed the acquisitions of the BMS HIV pipeline and discovery teams and programmes, which have now been fully integrated into ViiV Healthcares R&D organisation.
25 | GSK Annual Report 2016 |
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
20-30 | ||
assets with data expected by the end of 2018.
|
We continued to strengthen our emerging immuno-inflammation portfolio, with regulatory filings in Europe and the US; a subcutaneous formulation of Benlysta , our treatment for systemic lupus disease currently available as an IV formulation; and sirukumab, an investigational IL-6 treatment for rheumatoid arthritis which we are co-developing with Janssen. If approved, both treatments will be self-administered at home, making them a convenient treatment option for patients.
In 2016, we also gained approval of Strimvelis , the first corrective gene therapy for children suffering from the very rare disease ADA-SCID (adenosine deaminase severe combined immunodeficiency) see case study below.
We started several phase II studies including: one to evaluate an anti-GM-CSF (anti-granulocyte macrophage colony-stimulating factor) monoclonal antibody for inflammatory hand osteoarthritis; the other assessing an oral RIP1 kinase inhibitor, for rheumatoid arthritis and psoriasis patients.
We also received positive phase II data for our first-in-class antibacterial gepotidacin, in treating gonorrhoea, for which the US Food and Drug Administration (FDA) has granted fast-track status on the basis of the serious unmet need for new medicines in this area.
In oncology, we have 11 assets in clinical development and have seen encouraging developments in our core areas of immuno-oncology, cell therapy and epigenetics. During the year, the FDA granted breakthrough therapy status to the affinity enhanced T-cell therapy, which targets the antigen NY-ESO in synovial cancer that we are developing with Adaptimmune.
During 2016, we terminated the development of Iosmapimod for COPD following analysis of phase II results, and halted development of the HIV maturation inhibitor 3532795 in favour of other maturation inhibitors in our pipeline that may have a better profile.
2017/2018 milestones
The coming two years will be significant for the pharmaceutical pipeline, marking the start of another intense period of R&D activity for the company, as we expect important data on between 20 and 30 assets in areas including HIV, respiratory, immuno-inflammation and oncology.
26 |
GSK Annual Report 2016 |
|||
Pharmaceuticals continued
Deliver continued
1,500 | ||
Our range of partners includes academic institutions, public-private partnerships, and pharmaceutical and biotechnology companies.
|
Pharmaceuticals R&D approach
We focus our investment on areas where we believe there are the most attractive opportunities, having considered patient need, market opportunity and scientific understanding. We concentrate on mechanisms that might slow down or reverse the course of diseases and present opportunities to achieve remission or cure.
Our early research efforts centre on around 30 discovery performance units. These nimble units have their own budgets and project accountability, so are different from the traditional hierarchical R&D model. They help us to maintain flexibility, create agility, and enable us to focus on the most promising early opportunities.
As a treatment advances, Medicines Development Teams of multi-disciplinary specialists ensure its progress from investigational medicine and later stage development to filing with regulators and ongoing evidence generation.
Strategic issues and overall budget management are overseen by the R&D management team. Robust governance boards manage investment, technical, scientific and commercial decisions throughout a molecules lifecycle.
Collaboration with external partners is an important part of our approach. We partner with more than 1,500 organisations around the world, including academic institutions, public-private partnerships, and other pharmaceutical and biotechnology companies.
Collaborating with the Francis Crick Institute
|
||||||||
|
GSK joins forces with world-leading biomedical research centre. |
|||||||
A landmark collaboration between GSK and the Francis Crick Institute aims to achieve new breakthroughs in understanding and treating diseases.
The open innovation collaboration combines our pharmaceutical R&D expertise with the Cricks deep knowledge of disease biology.
Our mutual aim is to explore new avenues of medical research and drug discovery across a range of diseases. The collaboration takes a LinkLabs approach to working, with teams of scientists from each organisation working side-by-side in integrated teams at the Cricks world-leading centre of biomedical research in the heart of London and GSKs global R&D hub in Stevenage. GSK and the Crick believe this fluid interchange of skills and ideas benefits both sides, introducing new ways of working and stimulating the development of
|
novel approaches to problems. By pooling our knowledge and resources we hope the collaboration will ultimately improve the success rate for discovering new medicines.
In the spirit of open innovation, research findings from the collaboration will be shared externally, via joint publication in peer-reviewed journals. This will enable important discoveries to be applied across the research community, maximising the potential to progress scientific understanding and accelerate the development of treatments for patients.
The Francis Crick Institute is a charity funded by the Medical Research Council, Cancer Research UK, the Wellcome Trust, University College London, Imperial College London and Kings College London. |
27 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
28 GSK Annual Report 2016
Vaccines
We have the broadest vaccines portfolio
of any company, with vaccines for people
of all ages from babies and adolescents
to adults and older people.
Following impressive clinical
trial results, we have filed
our candidate shingles
vaccine with regulators in
the US, Canada and Europe.
Grow
£4.6bn
Vaccines sales were up
26% AER and 14% CERa
(12% pro-forma CER) in
2016 with growth across
the US, Europe and
International markets.
Deliver
14
In 2016, we filed our
candidate shingles vaccine,
Shingrix, and have 14
candidate vaccines in
our pipeline for a range
of diseases.
Responsible
business
We are working with
partners to help the world
be better prepared for
global health epidemics.
Simplify
>30%
Operating profit
margin
was 31.7% in 2016, 5.3
percentage points higher
than in 2015 and 7.6
percentage points higher
on a CER pro-forma basis.
29 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described
on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
30 |
GSK Annual Report 2016 |
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31 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
32 |
GSK Annual Report 2016 |
|||
Vaccines continued
Deliver |
|
Our broad pipeline includes vaccines targeting shingles, meningitis, respiratory syncytial virus, group B streptococcus, and a new vaccine concept for COPD.
Our Vaccines R&D work focuses on discovering and developing vaccines to help protect people against a broad range of diseases and conditions across all age groups. We have a pipeline of 14 candidate vaccines in early, mid and late stage development against a range of diseases.
In 2016, we received regulatory approval to expand the indication for FluLaval in the US to cover infants from six months of age, rather than from three years. We obtained approval in Europe for a label update for Boostrix and Boostrix Polio with human safety data to support use in pregnant women. We also launched our Hiberix vaccine in the US.
In 2016, we filed for regulatory approval in North America and Europe for our candidate vaccine for the prevention of shingles and its complications. (See case study on page 30.) In 2017, we plan to file for its use in Japan.
We have a number of promising earlier assets in our pipeline. For example, the candidate vaccines in phase II, are for meningococcal A,B,C,W,Y, respiratory syncytial virus (RSV), group B streptococcus and exacerbations in chronic obstructive pulmonary disease (COPD).
Following the positive scientific opinion from European regulators for our infant malaria vaccine Mosquirix , the World Health Organization will start pilot implementation of the vaccine in three sub-Saharan Africa countries in 2018. With our partners at the non-profit organisation PATH, we will donate doses of Mosquirix for the pilots.
In a bid to assist with the Zika virus, we are evaluating a new vaccine technology known as SAM (self-amplifying mRNA), with the National Institutes of Health. We believe this technology may potentially induce protective immunity against Zika.
Investment and governance
Our priorities are meeting patient needs and addressing global health challenges for which no vaccines yet exist, or where significant improvements could be made. Our vaccine R&D investment in 2016 was £597 million, up 2% from £525 million in 2015.
In R&D, we complemented our existing global hubs, in Siena, Italy and Wavre, Belgium, with the opening of a third centre, in Rockville, Maryland, close to our major US public health stakeholders. Our three global centres each have their own area of expertise in vaccine discovery and specific assets in development while also benefiting from scientific exchange between the three world-class teams.
33 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Simplify |
|
We have continued to simplify our operating model and realised significant savings.
In 2016, we continued to further simplify our operating model, strengthen our manufacturing network, and reduce supply costs.
During the year, we completed the majority of the Novartis Vaccines business integration. Cost savings generated in the Vaccines business have contributed to the delivery of £3 billion of annual savings for the Group by the end of 2016 (including £0.2 billion currency benefit). These savings, combined with strong sales growth, delivered improved operating leverage and a profit margin of 31.7%. This was 5.3 percentage points higher than in 2015 and 7.6 percentage points higher on a pro-forma CER basis.
Investing in our supply chain
We have 16 vaccine manufacturing sites in 11 countries. This international presence enables us to manufacture our vaccines with greater capacity, efficiency and flexibility. We aim to keep critical production steps in-house wherever possible, and during the year we invested in new production facilities at our Marburg site in Germany. This will enable us to produce all of the active components of our Bexsero vaccine in-house, and adds a new mumps production line for our combined measles, mumps, rubella and varicella vaccine.
Committed to quality
The discovery and development of new vaccines is a complex process. Our vaccines are manufactured to the highest quality standards, according to current Good Manufacturing Practice (cGMP) regulations. In 2016, we had 45 regulatory inspections and 38 had minor or no findings. In all cases, we worked with regulators to address their observations.
Responsible
business
|
Preparing for public health emergencies
GSK is committed to helping whenever we can when public health crises occur.
|
|||||||||||||
When Ebola broke out in West Africa, we accelerated the development of our candidate Ebola vaccine and, following the outbreak of Zika, we employed our novel technology platforms to start a vaccine discovery programme with the US National Institutes of Health.
However, responding after a life-threatening disease surfaces is not enough. Vaccine research and discovery is a lengthy process, typically taking 10 to 15 years. To have the best chance to save lives, the global community has to prepare itself in advance.
For this reason, we are proposing to create a dedicated and permanent biopreparedness organisation (BPO) at our Global Vaccines R&D Centre in Rockville. The planned facility would design, develop and manufacture new vaccines against potential public health
|
threats, with targeted pathogens selected and prioritised with guidance from independent experts. It would have dedicated and permanent R&D and pilot production facilities, and the capacity to respond rapidly to future global health emergencies.
The BPO would operate on a no-profit, no-loss basis, with funding from both governments and non-governmental organisations.
We also strongly support the Coalition for Epidemic Preparedness Innovations (CEPI) and its focus on vaccines development as a solution to protecting against infectious disease outbreaks. We stand ready to partner with CEPI to advance epidemic preparedness.
|
34 GSK Annual Report 2016
Consumer Healthcare
Our Consumer Healthcare business develops and
markets products in Wellness, Oral health, Nutrition
and Skin health. Our portfolio includes some of the
worlds most trusted and best-selling brands, such
as Sensodyne, Voltaren and Panadol.
35 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
A migraine is more than
just a headache. Excedrin
is helping people in the US
manage their symptoms.
Responsible
business
Our Panadol power brand
is helping raise awareness
of dengue fever.
Grow
£7.2bn
Sales increased 19%
AER and 9% CERa (5%
pro-forma CER) in 2016,
with growth broadly
balanced across the
US, Europe and
International markets.
Deliver
13%
of sales in 2016 were
from product innovations
launched over past
three years.
Simplify
15.5%
Operating profit margin
was 15.5% in 2016, 4.2
percentage points higher
than in 2015 and 3.7
percentage points higher
on a CER pro-forma basis.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described
on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
36 |
GSK Annual Report 2016 |
|||
|
Our Consumer Healthcare business* is split almost equally between over-the-counter (OTC) medicines and fast moving consumer goods (FMCG), across our four categories of Wellness, Oral health, Nutrition and Skin health.
Wellness
We are the global leader in Wellness, which is our largest category, and number one in 36 countries by retail sales. We have leading global positions in respiratory, cold and flu, nasal decongestants, allergy, smoking cessation, and pain management, where we have two of the top four brands, Panadol and Voltaren .
Oral health
We are a top three company, globally, by sales in toothpaste and the number one in specialist oral health, globally and in 50 countries, with leading positions in sensitivity, acid erosion, denture care and gum health. In 2016, Sensodyne became our first £1 billion consumer healthcare brand, making it the third-largest product by sales in the whole GSK portfolio.
Nutrition
Our Nutrition business includes Horlicks , the long established wheat, milk and malted barley drink.
Skin health
We are in the top three, by sales, globally in medicated skin health which treats such conditions as cold sores and dry and sensitive skin. Our Abreva and Zovirax brands hold leading positions in some of the worlds largest markets.
Power brands
We prioritise seven global power brands Otrivin, Panadol, Parodontax, Poligrip, Sensodyne, Theraflu and Voltaren and 12 regional core brands, including Flonase, Horlicks and Tums . These brands, including Physiogel , benefit from our broad geographic footprint and a combined focus on scientific expertise and consumer insight.
* | Represents the Consumer Healthcare Joint Venture with Novartis together with the GSK Consumer Healthcare listed businesses in India and Nigeria. |
37 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Grow |
|
Strong growth in our Oral health and Wellness power brands helped Consumer Healthcare to a 9% increase in reported sales (+5% pro-forma), to £7.2 billion.
All growth rates are at CER, a non-IFRS measure as described on page 57, unless otherwise stated.
|
2016 performance summary
Consumer Healthcare sales grew 19% at actual rates, 9% CER and 5% on a pro-forma basis to £7,193 million.
On a category basis there was growth in Wellness (15%), Oral health (8%) and Skin health (4%). This was partly offset by Nutrition which declined 8%.
At a brand level, Sensodyne, Panadol and Otrivin performed strongly. Sales of Sensodyne reached £1 billion for the first time. Sales from innovation within the last three years represented 13% of sales, with a particular contribution from Flonase , which was switched to OTC in Q1 2015. Other notable launches in 2016 included Sensodyne True White and Excedrin Gel-tabs in the US.
Growth was broadly balanced across our three global geographies. US sales grew 9% to £1,761 million (5% pro-forma) driven primarily by Sensodyne delivering double-digit growth following the launch of True White combined with strong momentum from Pronamel . Within Wellness, Flonase OTC grew strongly in the first half following line extensions.
In Europe, sales grew 12% to £2,191 million (4% pro-forma). Good momentum across Germany, Scandinavia and Italy was partly offset by the impact of challenging economic conditions in the Commonwealth of Independent States. Voltaren grew in double-digits as a result of the continued success of the 12-hour variant, while in Oral health, Sensodyne and the Gum health portfolio also recorded strong growth.
In International markets, sales grew 8% (5% pro-forma) to £3,241 million. Growth was impacted by the sale of the Nigerian beverages business on 30 September 2016 and the effective cessation of trade in Venezuela at the end of 2015. Demonetisation implemented in India in November also impacted the Indian business. Sales in the Middle East, Latin America and China grew particularly strongly as a result of better pricing and new product introductions.
38 |
GSK Annual Report 2016 |
|||
Consumer Healthcare continued
Deliver |
|
Our success in delivering consumer-driven, science-led innovation enabled us to generate our best-ever sales from recent launches.
13%
of our sales were generated from innovations launched over the past three years.
|
The success of our Consumer Healthcare business is built on our ability to understand customer needs and meet them with effective products from our strong research pipeline. In 2016, we refocused our investment in innovation to ensure we achieve a high return and delivered 30 new-to-market product launches. During 2016, 13% of our sales were generated from innovations launched over the past three years our highest level ever.
In 2016, R&D investment in Consumer Healthcare was £243 million (2015 £258 million). We prioritise investment on our power and core brands, with our strategic focus now on fewer but bigger innovations. In 2016, examples included Sensodyne True White , Excedrin Gel-tabs , a new Eno ajwain herb flavour variant in India and Otrivin Oxy which was launched a record six months from conception.
We continue to see success in moving products from prescription-only to over-the-counter, with the approval and launch of Flonase Sensimist Allergy Relief in the US in 2017. (See case study on page 37).
Understanding consumers everyday healthcare needs, views and product preferences is an integral part of our new product development process. As digital technology becomes central to all our lives, we are exploring ways both internally and in discussion with external entrepreneurs and inventors of harnessing digital capability to improve consumer health. We continued to invest in state-of-the-art digital and real life innovation by opening new US shopper and sensory labs. (See case study below).
In 2016, we strengthened our commitment to R&D in India, building headcount to ~200 people a significant increase versus both legacy organisations. Our increased focus on innovation in this area is already paying off, with seven market-first innovations launched in the region over the course of the year. Two of our six R&D hubs are now based in emerging markets, a region that represents over a third of our business.
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We continued to further simplify and streamline our Consumer Healthcare business and increased our operating profit margin.
During 2016, we completed the majority of the integration enabling us to increase our emphasis on core innovation and to deliver stronger growth from our brands. Incremental annual cost savings in 2016 helped to increase the operating profit margin by 4.2 percentage points to 15.5%. This was 3.4 percentage points higher than in 2015 on a CER basis and 3.7 percentage points higher on a CER pro-forma basis. We remain on track to deliver the annual cost savings anticipated, and to deliver our target operating margin of at least 20% by 2020.
Our consolidation activities over the year resulted in a reduction of costs and overheads. We established common distribution routes and shared enterprise resource planning platforms, enabling access to data across the organisation and more informed decision making.
In 2016, unified branding was rolled out to all integrated sites and more than 10,000 artwork changes were delivered.
Our streamlining efforts also involved 59 markets moving to standardised platforms over the course of the year, and we are on track to deliver against our synergy targets.
Committed to quality
Our Consumer Healthcare products are manufactured to the highest quality standards, according to current Good Manufacturing Practice (cGMP) regulations. In 2016, we had 56 regulatory inspections, all with satisfactory outcomes.
Responsible business
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Helping communities to better identify, prevent and treat dengue fever
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A GSK-led health campaign encouraged better understanding of how to manage the disease. |
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Mosquito-borne dengue fever causes around 400 million infections and 20,000 deaths each year. It is endemic in more than 100 countries, particularly across the South East Asia and Western Pacific regions.
Paracetamol, in Panadol , can help treat some of the symptoms of dengue fever, so GSK Consumer Healthcare launched the Allied Against Dengue campaign in 2016 in Malaysia, Indonesia and the Philippines. It brought together GSK and our Panadol power brand with doctors, pharmacy chains, governments and non-government organisations.
The campaign has helped educate seven million people about the disease. |
It included 48 train the trainer sessions, to refresh physicians and pharmacists knowledge of the virus; the recruitment of 21,000 voluntary dengue warriors to spread the word about prevention and treatment; and the distribution of dengue proficiency kits to healthcare professionals.
Assisted by wide media coverage, the campaigns impact was dramatic. In Malaysia, after three years of rising mortality rates, the campaign contributed towards the number of deaths falling by 39%.
The campaign also helped increase our regional Consumer Healthcare product sales. In the Philippines alone, net sales increased by 48% in Q3 2016, versus the same period in 2015.
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40 GSK Annual Report 2016
Responsible business
Being a responsible business is central
to our strategy, how we deliver success
is as important as the results we achieve.
41 GSK Annual Report 2016 Strategic report Governance and remuneration Financial statements Investor information
We have expanded our graduated approach to filing and enforcing patents and intellectual property to widen access to medicines in the poorest countries. Health for all Our be haviour Our
people Our planet 1.3m 99% 75 countries 18% Our partnership with Our mandatory annual Our Partnership for We have cut operational Save the Children reached training on our code of Prevention programme carbon emissions (Scope an additional 1.3
million conduct was completed is being rolled out 1 and 2) by 18% since children in 2016 with by 99% of our employees globally and is offering 2010. Total value chain treatments, immunisations and complementary unprecedented access to emissions have
risen by and other interventions. workers in 2016.a preventive healthcare for 1% as we extend access almost 100,000 employees to our medicines, and we and their family members are working to address this. in 75 countries. Footnote a The remaining 1%
represents employees who did not complete the training in the required timeframe and are subject to disciplinary action (see page 47) and employees still within the completion timeframe (e.g. new starters)
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By being commercially successful and operating responsibly, we will improve peoples health and benefit society, as well as create value for our shareholders.
Creating value for society
By developing innovative healthcare products, we directly benefit patients and consumers. Our equitable pricing strategy, which allows prices to reflect a countrys ability to pay, and global footprint enables greater access to our medicines, vaccines and consumer healthcare products. By delivering profitable and sustainable business performance, we generate value and returns for our shareholders and can reinvest in the business. Over and above this, wider society benefits as healthy people are essential to building strong and sustainable communities.
We make significant direct and indirect economic contributions to the countries and communities where we operate through tax, our employment of 99,300 people and charitable support.
Our responsible business priorities
GSKs responsible business priorities sit within the context of the macro-economic and social trends that affect all companies and wider society. These trends present both opportunities and challenges for global healthcare companies like GSK (see page 8).
We report our progress across four areas: Health for all, Our behaviour, Our people, and Our planet. We identified our priorities in these areas by understanding the issues that are most important to our business and to our stakeholders.
Our longer-term commitments across the four areas reflect global health needs and align with GSKs strategic priorities and our values. We detail our progress against these commitments in our responsible business supplement available at www.gsk.com/responsibility.
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Measuring progress
We have well-established, long-term responsible commitments which sit across four areas: Health for all, Our behaviour, Our people and Our planet. We also measure our performance in the Access to Medicine Index and Dow Jones Sustainability Index.
Access to Medicine Index
In 2016, GSK topped the Access to Medicine Index for the fifth consecutive time. This means we have led every edition of the biannual index since its 2008 launch.
The Access to Medicine Index is funded by the Bill & Melinda Gates Foundation and the UK and Dutch governments. It measures the top 20 pharmaceutical companies efforts to improve access to healthcare in developing countries. We led our peers in three of the 2016 indexs seven categories: research and development; pricing, manufacturing and distribution; and product donations.
The index describes GSK as the most access-oriented company and recognises our clear strategy on increasing access to medicines, which is aligned with our corporate strategy.
It also cites our company-wide ownership for access as a key strength, together with our commitment to research and development for low and middle income countries and high-priority medical needs.
At the beginning of 2017 we also performed well in the first ever Access to Vaccines Index, leading in all three categories under consideration.
Dow Jones Sustainability Index
In 2016, we came third in our sector in the Dow Jones Sustainability Index. The Index analyses the economic, environmental and social performance of the worlds leading companies. Our overall percentile ranking increased from 89th in 2015 to 95th in 2016, meaning we scored within the top 5% of our sector.
We led the industry in code of business conduct, climate strategy, environmental reporting and health outcome contributions, and had strong performance in corporate governance, marketing practices, risk and crisis management, tax and corporate citizenship.
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Our approach
We are tackling some of the greatest global health challenges by innovating to meet unmet needs, making our medicines and vaccines more accessible, and strengthening healthcare systems.
Innovating for unmet needs
We aim to develop innovative products for diseases that disproportionately affect the worlds poorest people and where need is greatest.
In 2016, we committed to working with governments, multinational organisations and NGOs to enhance preparedness against potential future outbreaks of diseases such as Ebola and Zika. We are supporting the Coalition for Epidemic Preparedness Innovation (CEPI) (see case study on page 33) and are proposing to create a permanent biopreparedness organisation (BPO) at our Rockville, Maryland Vaccines site.
In 2016, our gel to help prevent umbilical cord infections in newborns received a positive scientific opinion from the European Medicines Agency (EMA). Three million babies die each year from infection, often when the newly-cut umbilical cord attracts bacteria a particular issue in developing countries. If approved by local regulators, we will make the gel available at a not-for-profit price and share manufacturing knowledge so it can be widely made.
Our Mosquirix vaccine targets a significant health threat malaria. Phase III trials of the vaccine, which received a positive opinion from the EMA in 2015, have shown the vaccine could have a considerable public health impact when used in combination with malaria control measures.
In 2016, the World Health Organization confirmed that full funding has been committed to enable the pilot implementation of Mosquirix in three settings in sub-Saharan Africa due to begin in early 2018.
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£21m
Since 2009, we have invested £21 million in 39 countries and trained 43,000 frontline health workers who have reached 17.5 million people.
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Our charitable giving in 2016 totalled £210.2 million (2015 £208.3 million) |
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Cash £67.3m | |
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Management £12.3m | |
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Time (PULSE) £3.4m |
We also share our expertise, resources and intellectual property with external researchers. Our open innovation lab in Tres Cantos, Spain, has built up a portfolio of 63 research projects looking at diseases of the developing world since 2010. It had 20 visiting scientists in 2016 and results from the lab have led to papers in more than 50 scientific publications. Our Africa Non-Communicable Diseases Open Lab is currently focusing on cardiovascular disease, oncology, chronic respiratory disease, chronic kidney disease and diabetes. Its first project looks at severe asthma across East Africa, led by Ugandas Makerere University.
Extending affordability and availability
We are committed to widening access to our medicines and vaccines. Our equitable pricing strategy is based on the country, disease area, product type, and patients ability to pay.
Since 2010, we have capped the prices of our patented medicines and vaccines in the least-developed countries (LDCs) at 25% of the prices in the EU5 (France, Germany, Italy, Spain and the UK), as long as our manufacturing costs are covered.
We offer our lowest vaccine prices to organisations such as Gavi, the Vaccine Alliance, which supports countries with a low gross national income. In 2016, we delivered more than 74 million doses of our Synflorix vaccine against pneumoccal disease and more than 35 million doses of Rotarix , our vaccine against rotavirus gastroenteritis.
In middle-income countries, where many still live in poverty, our equitable pricing approach enables more people to access our products. In Egypt, we offer a portfolio of prices to meet the needs of all levels of income, including a price reduction of Seretide inhaler devices targeted to middle and lower income groups.
We also understand payer and patient concerns about affordability in developed markets and we are leading efforts to develop sustainable solutions. For example, in the USA, the last six GSK pharmaceutical products were launched similar to or below prices to the medicines we aim to supersede. In 2016, we integrated three of our US patient assistance programmes into one GSK Patient Assistance Program, which is designed to simplify and improve the programme experience for eligible uninsured patients and patients with a Medicare Part D prescription Drug Plan.
In Europe, we continue to engage with payers in all EU markets to balance affordable cost to healthcare systems through funding solutions which also support ongoing innovation for medicines. We have achieved reimbursement for our Ellipta portfolio in most EU markets by finding local solutions when issues of affordability challenged the introduction of new innovation.
Strengthening healthcare systems
We reinvest 20% of our profits from the sales of our Pharmaceuticals and Consumer Healthcare products in LDCs to strengthen healthcare infrastructure in these nations. Since 2009, working with Amref Health Africa, CARE International and Save the Children, we have invested £21 million in 39 countries, reached 17.5 million people and trained 43,000 frontline health workers.
Through our pioneering partnership with Save the Children, we reached 1.3 million children with live-saving interventions in 2016, bringing the total number to 2.6 million. Since 2013, over one million children have been screened for malnutrition, more than 86,500 under-fives have been immunised, over 290,000 children have been vaccinated against measles or polio, and over 183,000 have been treated for diarrhoea, malaria or pneumonia.
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GSK values
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Be patient focused |
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Act with integrity |
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Demonstrate respect for people |
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We expect all employees to act in line with our values.
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Our approach
We aim to have a values-based culture by training our people on the standards we expect, encouraging the reporting of any concerns and embedding our values into the way we measure employee performance.
Patient and consumer safety
We manufacture our medicines and vaccines according to current Good Manufacturing Practice regulations and our internal Quality Management System.
In 2016, we had 167 regulatory inspections of our manufacturing sites and 86% of these received no observations or minor observations. a Eleven of the inspections were conducted by the US Food and Drug Administration (FDA), of which five resulted in a Form 483 being issued to sites, citing deficiencies to current Good Manufacturing Practices (cGMP). None of these observations had any direct impact on product supply from our sites, and corrective action plans to mitigate the observations have been submitted to the FDA in all cases.
Transparency in clinical trial data
GSK was the first company to sign up to AllTrials, which campaigns for every clinical trial to be registered and its results reported. We have been leading the industry in clinical study transparency over the past decade. In 2016, we publicly posted more than 1,900 clinical study reports and more than 6,000 result summaries.
Researchers can submit proposals to request access to the details of around 2,000 of our clinical trials through the www.clinicalstudydatarequest.com website. An independent panel reviews proposals for scientific merit and to ensure patient privacy and confidentiality are protected. In 2016, 88 proposals were approved and 66 research teams were granted access to anonymised patient-level data.
We have also begun providing plain language summaries of our clinical studies on our online clinical study register.
Working with third parties
We expect our suppliers to share our high ethical standards. In 2016, we increased our use of preferred suppliers, bringing them to more than 90% of our global purchase order spend. We continued the roll-out of our global third-party oversight programme, which reached a total of 43 countries across Latin America and South East Asia. The programme aims to drive improvements in our supply chain and distributor network and ensure that the third parties we engage with support our values.
In 2016, we also completed over 70 third-party audits on health and safety, ethics, environment and labour rights. We also conducted a further 1,850 audits focused specifically on quality processes. Where we identify areas for improvement, we engage with the respective third parties to develop improvement plans and track their completion with the overall aim of enhancing performance in the supply chain. We may also suspend or terminate work with a third-party if significant issues are identified.
Training our people
In 2016, we updated our Code of Conduct and accompanying annual training to give people a deeper understanding of how to apply our values in their everyday activities.
In 2016, 99% b of our employees and complementary workers completed mandatory training on the code. The code of conduct training enables the learner to understand and manage the risks associated with our business activities. This includes anti-bribery and corruption risk, to which we maintain a zero tolerance approach. More than 70,000 people working in high risk roles completed additional in-depth anti-bribery and corruption training to help them understand how to manage particular challenges they may face in their daily work.
Reporting and investigating concerns
We centrally track misconduct allegations and concerns through our multiple Speak Up channels. In 2016, our investigations team received 2,568 reports, a 21% reduction since 2015.
Footnotes
a | At this time we are still awaiting 11 reports from 2016 inspections. |
b | The remaining 1% represents employees who did not complete the training in the required time and are subject to disciplinary action, as well as those who are still within the completion timeframe (e.g. new starters). |
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Disciplinary action
We take action when employees fail to act in line with our policies. During the year, 3,600 employees were disciplined for policy violations (2015 3,574), including 499 employees for failing to complete mandatory training (Code of Conduct and Anti-bribery and Corruption) within the required timeframe. Of the total disciplined, 2,499 employees received a documented warning (2015 2,890), 547 had verbal warnings (2015 297) and 221 were dismissed or agreed to leave the company voluntarily (2015 387). Most of these were related to attendance and payroll which included disciplinary actions related to employee absence, punctuality or misstating hours worked.
Human rights
GSK is a signatory to the UN Global Compact, which sets out key principles for business on human rights. We are committed to upholding the Universal Declaration of Human Rights and the International Labour Organisations core labour standards.
We focus on those areas where our operations have the biggest potential impact on human rights. We manage human rights risks in the supply chain by reinforcing our requirements on labour rights and health and safety and ensuring
these are communicated consistently through our revised third-party contracts. We monitor existing suppliers and screen new ones.
Our approach to tax
We understand our responsibility to pay an appropriate amount of tax and we fully support efforts to ensure companies are transparent about how they manage their tax affairs.
We pay a significant amount of tax in the UK, where most of our global corporate functions and significant manufacturing and R&D facilities are located, and in other countries around the world where we have a substantial business and employment presence.
Over the past 16 years, we have paid £28.9 billion in corporation tax globally. Of this, £2.8 billion, nearly 10% of the global total, was paid in the UK. Read more on page 178.
We do not engage in artificial tax arrangements those without business or commercial substance. At the same time, we have a responsibility to our shareholders to be financially efficient and deliver a sustainable tax rate.
Further details on our approach to tax and our tax disclosures can be found on page 55.
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Our approach
We need a talented and motivated workforce to deliver against our strategy. To achieve this, we strive to attract the best people and to create an environment that empowers and inspires. Our people strategy focuses on talent, leadership, performance and engagement.
Talent and leadership
Our talent and leadership programmes focus on developing our employees at all levels with the skills they need to advance their careers.
In 2016, we welcomed 465 graduates and postgraduates onto our Future Leaders and Esprit programmes, including 164 from emerging markets. GSK was voted top graduate employer for Research and Development in The Times Top 100 Graduate Employers 2016 (for the 19th successive year) and ranked 13th overall.
We put particular emphasis on leadership development. In 2016, we trained around 3,500 people to support their promotion to first and second line leader roles; continued to evolve our global leadership development programmes; and have found that managers who complete them show significant improvement in effectiveness based on feedback from their teams.
We also trained 245 leaders as coaches, with our strategic use of coaching being recognised as world-class by the International Coach Federations Prism Award.
Performance and engagement
Our global performance system centres on a set of clear expectations that emphasises not just the results people achieve, but the way they achieve them in line with our values.
Listening to our people is essential for employee engagement. Responding even more so. During the year, we responded to the insights from our 2015 global employee survey, which 78% of employees completed. Members of our CET hosted five listening sessions with over 200 senior leaders. They then conducted discussions on the topics raised, including how we evaluate performance.
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Women in management (%)
2014 | 2015 |
2016 |
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SVP/VP |
29 | 29 | 30 | |||||||||
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40 | 40 | 42 | |||||||||
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45 | 45 | 46 | |||||||||
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Board |
9 | 4 | 13 | |||||||||
Management* |
9,537 | 7,337 | 16,874 | |||||||||
Total |
56,104 | 43,196 | 99,300 |
* | Management: senior managers as defined in the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 which includes persons responsible for planning, directing or controlling the activities of the company, or a strategically significant part of the company, other than the Board, including directors or undertakings included in the consolidated accounts. |
73
GSK employees from 25 countries spent up to six months with 31 non-profit organisations to share their skills.
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To monitor progress, we have also introduced pulse surveys to evaluate the impact of engagement efforts at more regular intervals than our annual survey.
Promoting inclusion and diversity
The diverse perspectives and experiences of our global workforce strengthen our business and help us meet the needs of our patients and consumers.
The percentage of women in management rose to 43% in 2016, and women represented 15% of our Corporate Executive Team (CET) and 31% of our Board (this compares with an average of 26% among FTSE100 boards, according to the Cranfield Board report).
In 2016, more than 200 women began our Accelerating Difference programme, which helps female leaders progress to senior roles. The programme was recognised as best practice in Cranfield Universitys The Female FTSE Board Report 2016 .
We are a global organisation and we want our leaders to represent the varied markets we serve. Five nationalities are currently represented on the CET and the Board.
As part of our efforts to promote an environment where everyone feels included, in 2016, we established a Lesbian, Gay, Bisexual and Transgender (LGBT) Council. The Council is chaired by our President of Pharmaceuticals R&D, endorsed by the CET, and aims to engage and educate employees on LGBT issues. We achieved a 100% score in the Human Rights Campaign Foundations Corporate Equality Index which rates workplaces on LGBT equality in the US.
Making GSK a more accessible place to work for people with disabilities is a priority for us. We are working with the Global Disability Council to develop an online accessibility portal which allows employees to find information on support or adjustments to their working environments. We are committed to removing barriers, increasing understanding and ensuring that those with disabilities have the same opportunities.
Employee volunteering
In 2016, 73 GSK employees from 25 countries contributed £3.4 million worth of skilled services to 31 non-profit partners in 27 countries, through our PULSE Volunteer Partnership. They worked on assignments aligned to worldwide healthcare challenges and the UN Sustainable Development Goals.
Health and wellbeing
As a healthcare company we think hard about how we can best support not only the health of our patients and consumers but also our employees. Through our global energy and resilience training programmes and our innovative and ambitious Partnership for Prevention programme (P4P), we have created strong foundations.
Through P4P we now offer almost 100,000 employees and family members in 75 countries unprecedented access to preventive healthcare services, such as immunisations and cancer screening, at little or no extra cost. In 2016 we extended these services to India, Russia and the Commonwealth of Independent States, keeping us on track to achieve our goal of global coverage by 2018.
Protecting our people
We want to prevent incidents before they occur; however, as a global business operating in more than 150 markets, injuries do occur.
In 2016, we had a reportable injury and illness rate of 0.26 per 100,000 hours worked which, according to Pharmaceutical Safety Group (PSG) data, is comparable to other leading companies in our sector. Sadly, we had one fatality in 2016, a sales representative died as a result of a road traffic incident in India. To try to prevent road incidents we have driver safety programmes in India, Indonesia and Vietnam, with 4,000 people taking part in 2016.
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Our approach
We aim to reduce our environmental impacts across our value chain while extending access to our products, by minimising our carbon footprint, water use and operational waste.
Carbon
In 2016, our operational emissions (Scope 1 and 2) totalled 1.6 million tonnes of CO 2 e; this is broadly the same as the previous year and represents an 18% decrease against our 2010 baseline. We reduced our emissions through a continued focus on energy efficiency, renewable energy and investment in sustainable buildings.
In 2016, we revised our calculation method for our Scope 3 emissions with the current GHG protocol methodology which now includes the impact of purchased services, capital investments, fuel and energy related activities, logistics upstream in the supply chain, and all business travel and commuting. Based on this latest methodology, we increased our 2010 baseline figure to 18.7 million tonnes of CO 2 e from 15 million tonnes of CO 2 e.
In 2015 a , our overall carbon footprint (Scope 1, 2 and 3) increased from 17.8 million tonnes CO 2 e in 2014 to 20.3 million tonnes of CO 2 e due to the Novartis integration. This represents an 8.5% increase to our overall footprint versus our 2010 baseline. Excluding Novartis, our footprint has remained flat from 2010-2015 despite the volume of medicines, vaccines and consumer healthcare products shipped from our factories having increased by approximately 40% over the same period.
Our supply chain represents the largest part of our value chain footprint (51%) followed by the use of our products (30%). Our own operations, logistics and end of life disposal make up the remaining 19%.
As our largest value chain impact, we focus on helping our suppliers make environmental improvements. For example, 188 suppliers (covering £1 billion of our spend on direct raw materials) disclose information through Ecodesk, an online platform to monitor and promote environmental improvements in our supply chain. In addition, more than 350 suppliers use our online sustainability collaboration platform, the GSK Supplier Exchange, to share best practice.
Certain products have a disproportionate effect on our value chain emissions, particularly our Ventolin propellant-based inhalers, which emit greenhouse gases during use. We continue to research solutions to this issue, including changing the way we manufacture, to reduce the amount of propellant used, while maintaining efficacy for patients.
Footnote
a | Our most recently available Scope 3 data is from 2015. We will publish 2016 data online in late 2017. |
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~70%
of our sites have successfully achieved zero waste to landfill by re-purposing materials that would otherwise go to waste, or by using waste-to-energy services.
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Water
Our new Water Stewardship Policy reinforces our commitment to reduce GSKs water impact across the value chain. We continue to look for ways to use water more efficiently and reduce consumption. We used 14.5 million m 3 of water across our operations in 2016, a 23% reduction on 2010 and 3% less than 2015.
The amount we use is just one aspect of our overall water impact across our value chain, which includes factors such as local water scarcity and quality, and health, social, regulatory and reputational risks.
We focus our efforts on a small number of high-impact GSK sites in water-scarce regions, and on the agricultural supply chain for our Horlicks products, which makes up the biggest portion of our total value chain water footprint.
An innovative project in Rajasthan, an arid region of India, is now replenishing the water source for the village of Sawaipura with around a quarter of the amount of water that our three Horlicks factories located across India use in their operations. Together with Alternative Development Initiatives, an Indian NGO, we are also supporting communities around the Horlicks supply chain to improve water management and agricultural yields.
Waste
We aim to reduce our operational waste by 50% by 2020, compared with 2010. In 2016, our operations produced 137 thousand tonnes of waste 4% less than the previous year and 23% below our 2010 baseline. The majority (73%) was recycled or incinerated to recover energy, with only 5% sent to landfill. Around 70% of our sites have now achieved zero waste to landfill by repurposing materials that would otherwise go to waste, or by using waste-to-energy services.
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We continued to make progress in delivering against our strategy as well as the financial goals we have set out in our financial architecture.
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Viability statement Our viability statement sets out our assessment of the prospects of the Group over the next three years and is presented on page 56.
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In 2016, we continued to make progress in delivering against our strategy as well as the financial goals we have set out in our financial architecture. All three of our businesses contributed to the delivery of more broadly-based revenue growth. Our continued focus on the execution of our integration and restructuring programmes accelerated the delivery of the targeted benefits, allowing us to improve margins and operating leverage, while still making substantial investments behind new products, and supply chain improvements, as well as progressing the R&D pipeline.
We have also maintained our focus on financial efficiency and in the allocation of our capital, allowing us to deliver core EPS growth a ahead of sales growth and at the top end of our financial guidance, as well as a significant improvement in our cash generation and a dividend of 80 pence per share.
Financial architecture
Our financial architecture is designed to support the consistent execution of our strategy and to enhance the returns we deliver to shareholders. It is focused on delivering more sustainable sales growth across the company, improving operating leverage, or profitability, and enhancing our financial efficiency. This is with the objective of driving growth in EPS ahead of our sales performance and then converting more of those earnings into cash that can be used to invest in the business or returned to shareholders, wherever we see the most attractive returns.
This clear set of priorities ensures consistency in how capital is allocated across and between the different businesses within GSK, with relative returns from each business benchmarked to relevant external comparatives using a Cash Flow Return on Investment (CFROI) based framework of metrics. Specific capital investments are also benchmarked in a similar way.
Reporting framework
In addition to total or reported results, prepared under IFRS, the Annual Report makes reference to a number of core performance measures which are used by management for planning and reporting purposes. These are non-IFRS measures adjusted for a number of items management believe it is useful to separate so that the key trends driving the performance of the business can be more clearly identified by shareholders. Core results may, however, vary significantly from total results as some of the adjustments may be material, as was the case in 2016.
The items adjusted for between total and core results are consistent each year but those that were most significant in 2016 include re-measurement charges related to the liabilities for future contingent consideration, most significantly the consideration due to Shionogi related to its former interest in dolutegravir, and the value of future put options as well as major restructuring charges.
IFRS requires us to provide for contingent consideration liabilities related to previous business acquisitions on the basis of the estimated present value of any potential future payments. These estimates could have a broad range of outcomes. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with any charges for re-measurement of them reflected immediately in other operating income. GSK will make cash payments in the future to discharge these liabilities but as the liabilities were established on acquisition or through subsequent re-measurement charges to the income statement, the payments will not be charged to future earnings.
Sales growth
All three of our businesses delivered growth in line with or above the medium- term growth expectations we laid out for them at our Capital Markets Day in 2015. Pharmaceuticals sales were up 14% at actual rates and 3% CER (4% pro-forma CER) with growth from new products more than offsetting the decline in Seretide/Advair sales. In addition to strong growth in HIV, the respiratory portfolio returned to growth in 2016, up 13% at actual rates and 2% CER.
Vaccines sales were up 26% at actual rates and 14% CER (12% pro-forma CER), driven by strong execution across the business, particularly around the flu and meningitis franchises, and Bexsero in particular.
Consumer Healthcare delivered a strong performance in the first full year of the joint venture with sales up 19% at actual rates and 9% CER (5% pro-forma CER) as growth from the seven power brands more than offset some tough comparators and headwinds in international markets.
Operating leverage
The total operating margin was 9.3% of sales compared with 43.1% in 2015, the movement primarily reflecting the combination of higher remeasurement charges for the Consumer Healthcare put option and the ViiV Healthcare contingent consideration liability in 2016, and the benefit to 2015 of the profit on the disposal of the Oncology business in that year.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. |
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Our core operating margin improved, driven by increased leverage in all three businesses. The pro-forma core margin a was up 460 basis points in total, with 200 points coming from currency, and 260 points from operational improvements. This was driven by a combination of leverage from stronger growth in the top line, and £1.4 billion (including £200 million of currency benefits) of additional integration and restructuring benefits, as well as continued tight cost control that allowed us to deliver the margin improvements while continuing to make important investments in all three businesses.
Accelerating the delivery of the targeted benefits of the integration and restructuring programme has been a key objective and we are pleased with the progress made this year through a sustained focus across the Group on executing this programme. By the end of 2016 we had delivered annual benefits of £2.8 billion, (excluding £200 million of currency benefits), almost the full target of the programme a year earlier than originally planned. We are confident in delivering the remaining £200 million during 2017 to bring the total benefits delivered to £3 billion of annual savings on a constant currency basis.
Financial efficiency
We continue to focus on improving our financial efficiency and overall funding costs while protecting our credit profile and, in particular, our short-term target credit ratings. Net finance costs were up slightly, mainly due to currency.
Earnings per share
Total EPS was 18.8p (2015 174.3p). The decline primarily reflected the comparison with the £9.2 billion profit from the sale of our marketed Oncology assets to Novartis in 2015, but also the impact in 2016 of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the sterling value of the Groups HIV and Consumer Healthcare businesses.
The impact on the decline in total EPS was partly offset by the benefit of the improved operating performance and reduced restructuring charges in the year.
Core EPS of 102.4p a was up 35% at actual exchange rates and up 12% at constant exchange rates.
Contingent consideration
At the end of 2016, GSK had liabilities for contingent consideration payments of £5.9 billion, of which £5.3 billion related to the estimated present value of future payments to Shionogi by ViiV Healthcare. The payments to Shionogi are calculated each quarter based on a high-teens percentage of the revenues of the relevant products, principally dolutegravir, with the discounted fair value of the total future payments reflecting the current expectations of total future sales of those products. Further details are provided in Note 39, Contingent consideration liabilities.
Free cash flow
Net cash inflow from operating activities was £6.5 billion and free cash flow for the Group was £3.1 billion a , significantly improved on the small outflow we saw in 2015. This was driven by our improved operating performance, including continued tight control of capital expenditure and restructuring expenditure, as well as the benefit of currency tail winds. We continue to make progress towards our objective of rebuilding the cash generating capacity of the Group post the completion of the restructuring and integration programme.
Net debt
Net debt at the end of 2016 was £13.8 billion, £3.1 billion higher than the net debt at the end of 2015. Currency was a significant factor with adverse translation effects driving £2.2 billion of the increase. The remaining increase of £0.9 billion reflected the impact of dividends paid during the year of £4.9 billion, including the special dividend of £1.0 billion declared in 2015, being only partly offset by disposal proceeds of approximately £1.0 billion and free cash flow of £3.1 billion.
2017 guidance
We expect continued progress in 2017, with all three businesses expected to continue to benefit from recent new product launches and from the investments we made during 2016.
The expectation for 2017 core EPS growth is dependent on a number of factors including, in particular, uncertainties relating to the timing and extent of potential generic competition to Advair in the US.
In the event that no generic version of Advair is introduced to the US market in 2017, the Group expects 2017 core EPS growth of 5-7% at CER a . This is based on an expected decline in 2017 in US Advair sales of 15-20%.
In the event of a mid-year introduction of a substitutable generic competitor to Advair in the US, the Group expects full-year 2017 US Advair sales of around £1 billion at CER (US$1.36/£1), with core EPS flat to a slight decline in percentage terms at CER a .
We are not able to give guidance for total results as we cannot reliably forecast certain material elements of our total results such as the future fair value movements on contingent consideration and put options.
Returns to shareholders
In 2016, we maintained our ordinary dividend at 80p per share, the same level as we paid in 2015. This is in line with the commitment we made to shareholders at the time we closed the Novartis transaction in early 2015 to maintain the dividend as we completed the integration and reshaping of the Group, despite the short-term pressures in free cash flow that the restructuring costs would create.
A fuller review of the financial results is set out on pages 55 to 78.
Simon Dingemans
Chief Financial Officer
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We understand our responsibility to pay an appropriate amount of tax while being financially efficient and delivering a sustainable tax rate.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. |
We understand our responsibility to pay an appropriate amount of tax, and fully support efforts to ensure companies are transparent about how their tax affairs are managed. Tax is an important element of the economic contribution we bring to the countries in which we operate. We do not engage in artificial tax arrangements those without business or commercial substance. We do not seek to avoid tax by the use of tax havens or transactions we would not fully disclose to a tax authority.
At the same time, we have a responsibility to our shareholders to be financially efficient and deliver a sustainable tax rate. As part of this approach, we look to align our investment strategies to those countries where we already have substantial economic activity, and where government policies promote tax regimes which are attractive to business investment, transparent in their intent and available to all relevant tax payers such as the UK Patent Box.
In 2016, the Group corporate tax charge was £877 million (2015 £2,154 million) on profits of £1,939 million (2015 £10,526 million) representing an effective tax rate of 45.2% (2015 20.5%). The increase in the total tax rate primarily reflected higher non-deductible remeasurement charges related to the put option liabilities and lower credits from the re-assessment of prior years tax charges. We made cash tax payments of £1,609 million in the year (2015 £2,062 million).
In addition to the taxes we pay on our profits, we pay duties, levies, transactional and employment taxes.
The ongoing alignment of our Group structure to reflect our mix of operations and geographies has helped us maintain an efficient effective tax rate. Our core tax rate for 2016 was 21.2% a (2015 19.5%). The core tax rate for 2017 is expected to be in the range of 21-22% a . Given the Groups momentum, changing earnings mix and the challenging and uncertain tax environment, (due to the factors described below) some moderate upward pressure on the rate is expected over the next few years.
Tax risk is managed by a set of policies and procedures to seek to ensure consistency and compliance with tax legislation. Our Audit & Risk Committee and the Board are responsible for approving our tax policies and risk management.
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We seek to maintain open, positive relationships with governments and tax authorities worldwide and we welcome constructive debate on taxation policy.
There continued to be a significant focus on tax reform during 2016, including the OECDs Base Erosion and Profit Shifting (BEPS) project and European Commission initiatives such as the increased use of fiscal state aid investigations. The OECD BEPS reports clarify the important principle that tax should be paid on profits throughout the supply chain, where the profit making activity takes place.
GSK supports this approach, in particular the implementation of the OECDs recommendations on Country by Country Reporting, including the exchange of this data between tax authorities, as being key to its success. This data, validated against existing information held on taxpayers, will support their ability to ensure multinational groups pay the right amount of tax.
While the scope and timeline for US tax reform remain uncertain at present, GSK would be supportive of any steps to simplify the US tax code and to provide a clear roadmap to make the US tax system more efficient and competitive.
The tax implications of Brexit are dependent on the outcome of negotiations between the UK and EU, and are therefore currently unknown. However, we continue to work closely with the ABPI and BIA to analyse implications for the industry in order to highlight key focus areas for the government as part of its Brexit negotiations. The direct tax implications are expected to be limited for GSK while the indirect tax implications may be more significant, including potential customs duty costs and additional transaction or administrative costs associated with managing import and export obligations on the movement of goods between the UK and EU.
Our approach to tax is set out in detail within the Public Policy positions section of our website. Further details about our corporate tax charges for the year are set out on page 178. |
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In accordance with provision C.2.2 of the 2014 revision of the Code, GSK has assessed the prospects of the Company over a longer period than the 12 months required by the Going Concern provision. The Directors confirm that they have a reasonable expectation that GSK will continue to operate and meets its liabilities, as they fall due, over the next three years. The Directors assessment has been made with reference to GSKs current position and prospects, our strategy, the Boards risk appetite and GSKs principal risks and how these are managed, as detailed on pages 18 and 19 in the Strategic report.
The Board reviews our internal controls and risk management policies and approves our governance structure and code of conduct. It also appraises and approves major financing, investment and licensing decisions, and evaluates and monitors the performance and prospects of GSK as a whole. The focus is largely on improving our long-term financial performance through simplifying the operating model, growing a diversified global business, and delivering more products of value.
The Board reviews GSKs strategy and makes significant capital investment decisions over a long term time horizon, based on a multi-year assessment of return on capital, the performance of business units, and the market opportunity in the pharmaceutical, vaccines and consumer sectors. This approach is aligned to GSKs model of achieving balanced growth by investing in high quality, innovative products for patients, consumers and healthcare providers. However, since many internal and external parameters become increasingly unpredictable over longer time horizons, GSK focuses its detailed, bottom-up Plan on a three year cycle. The Plan is reviewed at least annually by the Directors, who approve business forecasts showing expected financial impact. The Directors believe that a three year assessment period for the Viability statement is most appropriate as it aligns with the Companys well established business planning processes that balance the long term nature of investments in the pharmaceutical, vaccines and consumer sectors with an assessment of the period over which analysis of near term business performance is realistically visible.
The Plan has been stress tested in a series of robust operational and principal risk downside scenarios as part of the Boards review on risk. The downside scenarios consider GSKs cash flows, sustainability of dividends, funding strategy, insurance provision and recovery as well as other key financial ratios over the period. These metrics have been subject to sensitivity analyses, which involve flexing a number of the main assumptions underlying the forecasts both individually and in combination, along with mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risk.
The following hypothetical downside scenarios have been evaluated:
Scenario 1: Business performance risks. These include key performance risks, including lower sales from new products; the possible impact of a generic alternative to Seretide/Advair in the US; greater adverse impact from generic competition to other GSK products; as well as possible supply and manufacturing challenges.
Scenario 2: External and macroeconomic risks. This scenario reflects incremental risks to the business driven by outside factors, such as more intense competition, increased pricing pressure in both the US and Europe as well as the potential impact of material negative changes in the macro-economic and healthcare environment.
Scenario 3: Principal risks. This scenario includes a severe assessment of the potential loss impact from the Principal Risks set out on pages 253 to 262 related to patient safety, product quality, supply chain continuity as well as anti-bribery and corruption, all of which could fundamentally threaten our operations. These risks are managed through mitigating activities described on pages 253 to 262.
Scenario 4: Put option exercise. This scenario evaluates the additional funding requirements assuming the earliest potential exercise of the outstanding put options held by our partners in the HIV and consumer businesses.
The three year review also makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required and the respective level of funding flexibility and headroom.
The results of this stress testing show that certain combinations of these hypothetical scenarios could increase funding demands on GSK and require mitigating changes to the Groups funding strategy. However, in light of the liquidity available to the Group and based on this analysis, the Directors have a reasonable expectation that, even under these most severe stress tests, the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment.
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Presentation of Group results
Our Group financial review discusses the operating and financial performance of the Group, cash flows and our financial position and resources. We compare the results for each year primarily with the results of the preceding year.
Total results
Total reported results represent the Groups overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Groups operational performance. As a result, we also report core results, which is a non-IFRS measure.
Core results
Core results exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations; transaction-related accounting adjustments for significant acquisitions, and other items, including disposals of associates, products and businesses, and other operating income other than royalty income, together with the tax effects of all of these items.
These items are excluded from core results either because their impact can be significant or because their exclusion improves comparabilities and consistency of reporting with the majority of our peer companies. This definition of core results aligns the Groups results better with the majority of our peer companies and how they report earnings.
Core results reporting is utilised as one of the bases for internal performance reporting alongside total results, cash flow generation and a number of other metrics. Core results are presented and discussed in this Group financial review as we believe that core results are more representative of the performance of the Groups operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. For the same reasons, the results of our four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines and Consumer Healthcare are reported and measured on the same basis.
Reconciliations between total and core results, including detailed breakdowns of the key non-core items, are set out on page 66, and are provided to shareholders to ensure full visibility and transparency as they assess the Groups performance.
We also use a number of other adjusted, non-IFRS, measures to report the performance of our business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and may not be directly comparable with similarly described measures used by other companies. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
Pro-forma growth rates
The Novartis transaction completed on 2 March 2015 and so GSKs reported results include the results of the former Novartis Vaccines and Consumer Healthcare businesses and exclude the results of the former GSK Oncology business, both from 2 March 2015. For the Vaccines and Consumer Healthcare segments, pro-forma growth rates are calculated comparing reported turnover and core operating profits for the year ended December 2016 with the turnover and operating profit for the year ended December 2015 adjusted to include the two months of sales of the former Novartis Vaccines and Consumer Healthcare products, respectively.
For the Pharmaceuticals segment, the turnover and operating profit for the year ended December 2015 is adjusted to exclude the two months of sales of the former GSK Oncology business for January and February 2015.
Reconciliations between the reported growth rates and pro-forma growth rates, which are non-IFRS measures, are set out on page 70.
Contingent consideration
GSK has recognised a significant liability for contingent consideration (£5,896 million at 31 December 2016 on a fair value discounted basis) of which £5,304 million represented the estimated present value of future amounts payable to Shionogi relating to ViiV Healthcare, discounted at 8.5%. The payments to Shionogi are calculated based on the sales performance over the life of the relevant products, principally dolutegravir, as described on page 58. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with remeasurement charges reflected immediately in other operating income. These charges are adjusted from total results to present core results. GSK will make cash payments in the future to discharge this liability which will not be recorded in the profit and loss account and future earnings.
Changes to segment reporting
The completion of the Novartis transaction on 2 March 2015 changed the balance of the Group and GSK has changed its segment reporting to reflect this. With effect from 1 January 2016, GSK has reported results under four segments: Pharmaceuticals, which includes HIV, Pharmaceuticals R&D, Vaccines and Consumer Healthcare. In addition, a number of minor product reclassifications between the segments have been made. Comparative information has been restated accordingly.
Free cash flow
Free cash flow, which is a non-IFRS measure, is the net cash inflow from operating activities less capital expenditure, interest and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment and dividends received from joint ventures, associated undertakings and equity investments. It is used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. Free cash flow growth is calculated on a reported basis. A reconciliation of net cash inflow from operations to free cash flow is presented on page 71.
Adjusted free cash flow
Adjusted free cash flow, which is a non-IFRS measure, excludes payments made to settle legal disputes. Such payments could fluctuate significantly between reporting periods and removing them allows the trends in free cash flow to be more easily identified by shareholders. A reconciliation of net cash inflow from operations to adjusted free cash flow is presented on page 71.
Working capital conversion cycle
The working capital conversion cycle is calculated as the number of days sales outstanding plus days inventory outstanding, less days purchases outstanding.
CER growth
In order to illustrate underlying performance, it is our practice to discuss the results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% or AER% represents growth at actual exchange rates.
All growth rates included in this Report are at CER unless otherwise stated.
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Non-controlling interests in ViiV Healthcare
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Trading profit allocations
Because ViiV Healthcare is a subsidiary of the Group, 100% of its operating results (turnover, operating profit, profit after tax) are included within the Group income statement and then a portion of the earnings is allocated to the non-controlling interests owned by the other shareholders, in line with their respective equity shareholdings (Pfizer 11.7% and Shionogi 10%). Each of the shareholders, including GSK, is also entitled to preferential dividends determined by the performance of certain products that each shareholder contributed. As the relative performance of these products changes over time, the proportion of the overall earnings of ViiV Healthcare allocated to each shareholder will change. In particular, the increasing sales of Tivicay and Triumeq have a favourable impact on the proportion of the preferential dividends that is allocated to GSK. GSK was entitled to approximately 80% of the core earnings of ViiV Healthcare for 2016. This does not take account of the cash payments made to Shionogi by ViiV Healthcare which are not recorded in earnings. Remeasurements of the liabilities for the preferential dividends allocated to Pfizer and Shionogi are included within other operating income.
Acquisition-related arrangements
As part of the agreement reached to acquire Shionogis interest in the former Shionogi-ViiV Healthcare joint venture in 2012, ViiV Healthcare agreed to pay additional consideration to Shionogi contingent on the performance of the products being developed by that joint venture, principally dolutegravir. The liability for this contingent consideration was estimated and recognised in the Groups balance sheet at the date of acquisition. Subsequent remeasurements are reflected within other operating income.
Cash payments are made to Shionogi by ViiV Healthcare each quarter which reduce the balance sheet liability for the contingent consideration and as a result are not recorded in the income statement. In 2016, the total cash payments made to Shionogi in respect of the contingent consideration amounted to £417 million. The payments are calculated based on the sales performance of the relevant products in the previous quarter and are reflected in the cash flow statement partly in operating cash flows and partly in purchases of businesses, within investing activities. The tax relief on these payments is reflected in the Groups non-core and total tax charge. The part of each payment relating to the original estimate of the fair value of the contingent consideration on the acquisition of the Shionogi-ViiV Healthcare joint venture in 2012 of £659 million is reported within investing activities in the cash flow statement and the part of each payment relating to the increase in the liability since the acquisition is reported within operating cash flows.
Movements in contingent consideration payable to Shionogi were as follows:
2016
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2015
£m |
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Contingent consideration at beginning of the year |
3,409 | 1,684 | ||||||
Additions |
154 | | ||||||
Remeasurement through income statement |
2,162 | 1,874 | ||||||
Cash payments: operating cash flows |
(351) | (121) | ||||||
Cash payments: purchases of businesses |
(66) | (38) | ||||||
Other movements
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(4) | 10 | ||||||
Contingent consideration at end of the year
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5,304
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3,409
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The additions represented the recognition in 2016 of the preferential dividends payable to Shionogi.
Exit rights
Pfizer may request an IPO of ViiV Healthcare at any time and if either GSK does not consent to such IPO or an offering is not completed within nine months, Pfizer could require GSK to acquire its shareholding. Under the original agreements, GSK had the unconditional right, so long as it made no subsequent distribution to its shareholders, to withhold its consent to the exercise of the Pfizer put options and, as a result, in accordance with IFRS, GSK did not recognise a liability for the put option on its balance sheet. In Q1 2016, GSK notified Pfizer that it had irrevocably given up this right and accordingly recognised the liability for the put option on the Groups balance sheet at an initial value of £1,070 million. Consistent with this revised treatment, at the end of Q1 2016 GSK also recognised liabilities for the future preferential dividends anticipated to become payable to Pfizer and Shionogi on the Groups balance sheet.
The closing balances of the liabilities related to Pfizers shareholding are as follows:
2016
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2015
£m |
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Pfizer put option |
1,319 | | ||||||
Pfizer preferential dividend |
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Under the original agreements, Shionogi could also have requested GSK to acquire its shareholding in ViiV Healthcare in six month windows commencing in 2017, 2020 and 2022. GSK had the unconditional right, so long as it made no subsequent distribution to its shareholders, to withhold its consent to the exercise of the Shionogi put option and, as a result, GSK did not recognise a liability for the put option on its balance sheet. In Q1 2016, GSK notified Shionogi that it had irrevocably given up this right and accordingly recognised the liability for the put option on the Groups balance sheet at an initial value of £926 million. In Q4 2016, Shionogi irrevocably agreed to waive its put option and as a result GSK de-recognised the liability for this put option on the Groups balance sheet directly to equity. The value of the liability was £1,244 million when it was de-recognised.
GSK also has a call option over Shionogis shareholding in ViiV Healthcare, which under the original agreements was exercisable in six month windows commencing in 2027, 2030 and 2032. GSK has now irrevocably agreed to waive the first two exercise windows, but the last six month window in 2032 remains. As this call option is at fair value, it has no value for accounting purposes.
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Group turnover for the year increased 17% at actual rates and 6% CER to £27,889 million, with Pharmaceuticals up 3%, Vaccines up 14% and Consumer Healthcare up 9%, the growth in all three businesses still reflecting the impact of the Novartis transaction which completed on 2 March 2015. On a pro-forma basis, Group turnover was up 5%, with Pharmaceuticals up 4%, Vaccines up 12% and Consumer Healthcare up 5%. Sales of New Pharmaceutical and Vaccine products were £4,453 million, a Sterling increase of £2,465 million.
Group turnover by geographic region
In 2015, we identified a series of New Pharmaceutical and Vaccine products that were expected to deliver at least £6 billion of revenues per annum on a CER basis by 2020. Those products, plus current clinical pipeline asset, Shingrix , are as set out above and, as a group are defined as New Pharmaceutical and Vaccine products. Sales of the New Pharmaceutical Vaccine products are now expected to reach £6 billion of revenues per annum on a CER basis up to two years earlier (2018).
Sales of New Pharmaceutical and Vaccine products were £4,453 million and represented approximately 22% of Pharmaceuticals and Vaccines turnover.
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Pharmaceuticals
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Pharmaceuticals
Pharmaceuticals turnover was £16,104 million, up 14% at actual rates and 3% CER, but adjusting for the disposal of the Oncology business to Novartis, up 4% pro-forma. HIV sales grew 37%. The Respiratory portfolio returned to growth with sales up 2%, continuing the transition globally to newer products. Respiratory sales grew 7% in the US and 3% in International, but declined 10% in Europe. Sales of New Pharmaceutical products were £3,861 million, a Sterling increase of £2,148 million, which more than offset the Sterling decline in Seretide/Advair sales of £196 million. Sales of Established products declined 8%, with declines in all regions, but particularly International, reflecting the loss of exclusivity for Valtrex in Canada, the impact of market reforms and the continued reshaping of the business in China and the impact of biennial price revisions in Japan. The overall impact of pricing to net sales of Pharmaceuticals was around -1%.
US Pharmaceuticals turnover of £4,705 million declined 1% in 2016 on a reported basis and grew 1% on a pro-forma basis. The pro-forma performance reflected a 7% growth in the Respiratory portfolio, partly offset by the impact of generic competition to Avodart , down 63% to £70 million, and Lovaza , down 59% to £43 million. Relenza sales were also down 91% to £7 million following a reallocation of government funding. Sales of new Respiratory products totalled £654 million and the growth of these products exceeded the decline in Advair . Advair sales fell 13% to £1,829 million, representing a 7% volume decline and a 6% negative impact of price. Ventolin sales were up 23% to £421 million, benefiting from competitor supply constraints early in the year, while Flovent sales declined 11% to £378 million, reflecting pricing pressures in the ICS market. Benlysta sales increased 18% to £277 million with ongoing demand growth.
In Europe, Pharmaceuticals turnover declined 8% to £2,867 million on a reported basis and 5% on a pro-forma basis. Respiratory sales declined 10% to £1,383 million reflecting the ongoing transition to the new Respiratory portfolio and generic competition to Seretide which declined 24% (16% volume decline and an 8% negative impact of price) to £835 million. This was partly offset by growth in the new Respiratory products, which recorded sales of £225 million. Established products sales were down 4% to £513 million.
International Pharmaceuticals sales of £4,976 million were down 5% on a reported basis and 4% on a pro-forma basis. Sales in Emerging Markets declined 4% reported and 3% on a pro-forma basis, impacted by the decline in the China business (down 12% primarily as a result of the ongoing reshaping programme and broader Healthcare reforms including price reductions) but also by recent divestments in the International region, and the limitation of trading in Venezuela. In Japan, Pharmaceutical sales were down 5% on a reported basis and 5% pro-forma to £1,425 million, impacted by biennial price revisions on older products as well as supply interruptions to Avodart early in the year. Respiratory sales in Japan grew 3% with strong growth of the new Respiratory products, up 57% to £118 million, more than offsetting the decline in Adoair sales.
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Respiratory
Respiratory sales in 2016 increased 2% to £6,510 million, reflecting the continuing transition of the Respiratory portfolio to newer products. Growth in the new Respiratory products, which recorded combined sales of £1,052 million, including Relvar/Breo Ellipta sales of £620 million, more than offset the decline in Seretide/Advair. Flixotide/Flovent sales decreased 8% to £637 million and Ventolin sales grew 15% to £785 million.
In the US, Respiratory sales increased 7% to £3,306 million (14% volume growth and a 7% negative impact of price). The growth of new Respiratory products more than offset the 13% decline in Advair (7% volume decline and a 6% negative impact of price). The new Ellipta products recorded combined sales of £583 million, including Breo Ellipta sales of £344 million, with Nucala , the treatment for severe asthma, reporting sales of £71 million. Established Respiratory assets included Ventolin , with sales up 23% to £421 million, and Flovent , which declined 11% to £378 million. Ventolin sales benefited from competitor supply constraints early in the year, while Flovent continued to be impacted by ongoing pricing pressures in the ICS market.
European Respiratory sales were down 10% to £1,383 million, with Seretide sales down 24% to £835 million (16% volume decline and an 8% negative impact of price), reflecting continued competition from generics and the transition of the Respiratory portfolio to newer products. The new Respiratory products recorded combined sales of £225 million in 2016, including Relvar Ellipta sales of £140 million.
Respiratory sales in the International region increased 3% to £1,821 million with Emerging Markets up 7% and Japan up 3%. In Emerging Markets, sales of Seretide were down 3% at £476 million, while Ventolin grew 13% to £219 million. In Japan, the growth in the new Respiratory products offset the Adoair decline of 12%.
Cardiovascular, metabolic and urology
Sales in the category were down 11% to £860 million. The Avodart franchise was down 14% to £635 million, primarily due to a 63% decline in the US following the launch of generic competition in Q4 2015. Sales of Eperzan/Tanzeum were £121 million, primarily in the US. Prolia was divested at the end of 2015 and therefore no sales were recorded in 2016, compared with £43 million in 2015.
Immuno-inflammation
Immuno-inflammation sales grew 15% to £340 million. Sales of Benlysta were £306 million, up 19%, with sales in the US of £277 million, up 18%.
Other pharmaceuticals
Sales in other therapy areas decreased 14% to £2,297 million. Dermatology sales declined 12% to £393 million, adversely affected by supply constraints, while Augmentin sales were flat at £563 million. Sales of products for Rare diseases were flat at £423 million, and included sales of Volibris , which were up 1% to £172 million.
Established products
Established products turnover fell 8% to £2,541 million, with Valtrex sales down 37% to £118 million driven by a decline in Canada, down 91% to £5 million, following the loss of exclusivity. Zeffix sales were down 24% to £111 million and Lovaza sales in the US fell 59% to £43 million.
HIV
HIV sales increased 37% to £3,556 million, with the US up 46%, Europe up 29% and International up 21%. The growth in all three regions was driven by Triumeq and Tivicay .
Triumeq and Tivicay sales were £1,735 million and £953 million, respectively. Epzicom/Kivexa sales declined 27% to £568 million, and Selzentry sales declined 9% to £125 million. There were also continued declines in the mature portfolio, mainly driven by generic competition to both Combivir , down 38% to £23 million, and Lexiva , down 26% to £51 million.
62 |
GSK Annual Report 2016 |
|||
Group financial review continued
Vaccines
|
|
2016
£m |
2015
(restated) £m |
Growth
£% |
Growth
CER% |
|||||||||||||||||||
|
||||||||||||||||||||||
Rotarix |
469 | 417 | 12 | 1 | ||||||||||||||||||
Synflorix |
504 | 381 | 32 | 19 | ||||||||||||||||||
Fluarix, FluLaval |
414 | 268 | 54 | 38 | ||||||||||||||||||
Bexsero |
390 | 115 | >100 | >100 | ||||||||||||||||||
Menveo |
202 | 160 | 26 | 16 | ||||||||||||||||||
Boostrix |
470 | 358 | 31 | 18 | ||||||||||||||||||
Infanrix, Pediarix |
769 | 733 | 5 | (5) | ||||||||||||||||||
Hepatitis |
602 | 540 | 11 | 1 | ||||||||||||||||||
Priorix, Priorix Tetra, Varilrix |
300 | 260 | 15 | 5 | ||||||||||||||||||
Cervarix |
81 | 88 | (8 | ) | (14) | |||||||||||||||||
Other |
391 | 336 | 17 | 6 | ||||||||||||||||||
|
||||||||||||||||||||||
|
4,592 |
|
|
3,656 |
|
|
26 |
|
|
14 |
|
|||||||||||
|
||||||||||||||||||||||
Vaccines sales grew 26% at actual rates and 14% CER, but 12% pro-forma to £4,592 million. Growth benefited from the strong performance of Bexsero across all regions, higher demand for Fluarix/FluLaval in the US and International and a tender award for Menveo in International. Further growth was driven by Synflorix due to market expansion in International and a tender award in Europe. Boostrix sales benefited from higher demand in Europe and International. Growth was partly offset by Infanrix/Pediarix due to supply constraints in International, as well as unfavourable CDC stockpile movements for a number of products across the portfolio.
In the US, sales grew by 13% and 12% on a pro-forma basis to £1,599 million. Growth was driven by market and share growth for Bexsero, Menveo and Boostri x, improved supply and higher demand for Fluarix/FluLaval and competitor supply issues that benefited Infanrix/Pediarix . This growth was partly offset by adverse stockpile movements on Menveo and an unfavourable comparison with the benefit to 2015 from CDC stockpile movements on Infanrix/Pediarix , Boostrix and Rotarix .
In Europe, sales grew 18% and 16% on a pro-forma basis to £1,423 million. Growth was driven primarily by Bexsero sales in private market channels in several countries including Spain and Italy, and in the UK following its inclusion in the NHS immunisation programme. Boostrix sales benefited from higher demand and competitor supply issues. Sales increased in Germany driven by improved supply of Hepatitis vaccines and higher demand for Encepur and Rabipur . Sales growth was also helped by a tender award for Synflorix in Poland but Infanrix/Pediarix sales were adversely impacted, mainly in Germany, France and Italy, by a competitors return to the market during the year. Growth was also partly offset by the unfavourable comparison with 2015 when Menveo sales in the UK benefited from a catch-up tender win.
In International, sales grew 10% and 8% on a pro-forma basis to £1,570 million. Growth was driven primarily by Synflorix , due to market expansion in Nigeria, higher demand in Africa and private market demand in Asia. The growth in Menveo sales was driven by a tender award in Argentina and Rotarix sales benefited from higher demand in Brazil and Japan. Further growth in the region was driven by Brazil due to strong demand for Bexsero , Menjugate , and Boostrix. Fluarix/FluLaval sales grew due to higher uptake in Australia. Growth in the region was partly offset by lower sales of Infanrix/Pediarix , due to supply constraints, and lower Hepatitis vaccines sales, due to wholesaler destocking in China following the introduction of new private market distribution regulations.
63 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Consumer Healthcare
|
The Consumer Healthcare business represents the Consumer Healthcare Joint Venture with Novartis together with the GSK Consumer Healthcare listed businesses in India and Nigeria, which are excluded from the Joint Venture. Results do not include the trading performance of the Nigeria beverages business in Q4 2016 following its sale on 30 September 2016.
Sales grew 19% at actual rates and 9% CER to £7,193 million, benefiting significantly from the inclusion of sales of the former Novartis products for the first time for the first two months of the period. Pro-forma growth was 5% of which price contributed 2%, and volume 3%. Strong performances were delivered by the power brands within the Oral health and Wellness categories and across all regions. Sales from innovation within the last three years represented approximately 13% of sales, with a particular contribution for Flonase , which was switched to OTC in Q1 2015. Other notable launches in 2016 included Sensodyne True White and Excedrin Gel-tabs in the US.
US sales grew 9%, 5% pro-forma, to £1,761 million. Sensodyne delivered double-digit growth, benefiting from the launch in 2015 of Repair and Protect and the launch of True White in the first quarter of 2016, together with distribution gains for Pronamel and the newly launched Pronamel Strong & Bright variant. Flonase OTC delivered high single-digit growth, with a strong performance in the first half of 2016, driven by new formats, but impacted in the second half by increasing private label competition. Excedrin grew in double-digits, driven by the Gel-tab launch and new digital campaigns, and Tums also delivered double-digit growth, benefiting from supply improvements. This was partly offset by a decline in Aquafresh sales due to increased competitive pressures and a re-alignment of investment behind power brands.
Sales in Europe grew 12% to £2,191 million and were up 4% on a pro-forma basis, driven primarily by performances within the Wellness and Oral health categories. Voltaren continued to deliver double-digit growth, driven largely by the 12-hour variant and with strong performances across all key markets. Oral health sales grew in mid single-digits, with strong growth in Sensodyne and the Gum health portfolio, partly offset by a flat performance in Aquafresh , due to increased competitive pressures. At a market level, sales grew well in Italy, Scandinavia, the UK and Germany, partly offset by a decline in sales in CIS due to the impact on consumer spending of the weaker economic environment.
International sales of £3,241 million grew 8% with pro-forma growth of 5%. Growth was delivered in many priority markets, primarily through the power brands across the Oral health and Wellness categories. This was partly offset by the impact of the sale of the Nigeria beverages business at the end of Q3 2016 as well as the affect of the restructuring of activity in Venezuela at the end of 2015. Growth of the International region was also affected by the combined impact on the Indian business of the demonetisation implemented in November and a more general slowing of the health food drink category which impacted the performance of the Nutrition category and Horlicks in particular. Elsewhere, strong growth was delivered in the Middle East, Latin America and China. The growth in the Middle East was driven by strong momentum across the power brands, particularly Otrivin , Panadol and Sensodyne . Double-digit performances were delivered in Brazil and Argentina as a result of better pricing and new product launches within Oral health. China delivered high single-digit sales growth with contributions across the portfolio and with Sensodyne and Voltaren in particular benefiting from e-commerce and retail distribution expansion.
64 |
GSK Annual Report 2016 |
|||
Group financial review continued
|
|
The total results of the Group are set out below.
2016 |
2015 | Growth | ||||||||||||||||||||||
£m |
% of
turnover |
£m |
% of
turnover |
£% | CER% | |||||||||||||||||||
Turnover | 27,889 | 100 | 23,923 | 100 | 17 | 6 | ||||||||||||||||||
Cost of sales |
(9,290 | ) | (33.3 | ) | (8,853 | ) | (37.0 | ) | 5 | (1 | ) | |||||||||||||
Selling, general and administration |
(9,366 | ) | (33.6 | ) | (9,232 | ) | (38.6 | ) | 1 | (6 | ) | |||||||||||||
Research and development |
(3,628 | ) | (13.0 | ) | (3,560 | ) | (14.9 | ) | 2 | (6 | ) | |||||||||||||
Royalty income |
398 | 1.4 | 329 | 1.4 | 21 | 16 | ||||||||||||||||||
Other operating income/(expense) |
(3,405 | ) | (12.2 | ) | 7,715 | 32.2 | ||||||||||||||||||
Operating profit | 2,598 | 9.3 | 10,322 | 43.1 | (75) | (86 | ) | |||||||||||||||||
Net finance costs |
(664 | ) | (653 | ) | ||||||||||||||||||||
Profit on disposal of interest in associates |
| 843 | ||||||||||||||||||||||
Share of after tax profits of associates and joint ventures |
5 | 14 | ||||||||||||||||||||||
Profit before taxation | 1,939 | 10,526 | (82) | (92 | ) | |||||||||||||||||||
Taxation |
(877 | ) | (2,154 | ) | ||||||||||||||||||||
Profit after taxation for the year | 1,062 | 8,372 | (87) | (98 | ) | |||||||||||||||||||
Profit attributable to shareholders |
912 | 8,422 | ||||||||||||||||||||||
Earnings per share (p) | 18.8 | 174.3 | (89) | (99 | ) | |||||||||||||||||||
Earnings per ADS (US$) |
0.51 | 5.33 |
Cost of sales
Cost of sales as a percentage of turnover was 33.3%, down 3.7 percentage points in Sterling terms and 2.4 percentage points in CER terms compared with 2015. This reflected improved product mix, particularly the impact of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare and lower restructuring costs as well as an increased contribution from integration and restructuring savings in all three businesses.
These benefits were partly offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, as well as continued investments in the supply chain.
Selling, general and administration
SG&A costs were 33.6% of turnover, 5.0 percentage points lower than in 2015 and 4.3 percentage points lower on a CER basis. This primarily reflected lower restructuring costs as well as the benefits from the Pharmaceuticals restructuring programme and integration benefits in Vaccines and Consumer Healthcare, partly offset by investment in promotional product support, particularly for new launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
Research and development
R&D expenditure was £3,628 million (13% of turnover), 1.9% higher than in 2015 and 5.6% lower on a CER basis. This reflected the benefit from cost reduction programmes in Pharmaceuticals, Consumer Healthcare and Vaccines R&D and lower restructuring costs, partly offset by increased investment, particularly in Pharmaceuticals, reflecting investments in a number of new programmes and the costs of the acquired BMS HIV programme.
Other operating income/(expense)
Net other operating expense of £3,405 million (2015 - £7,715 million income) primarily reflected further accounting charges related to remeasurement of the contingent consideration liability related to the former Shionogi-ViiV Healthcare joint venture, along with remeasurement of the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities first recognised in Q1 2016 for the Pfizer and Shionogi put options and preferential dividends in ViiV Healthcare. These remeasurements were driven by the unwinding of the discount applied to these future liabilities as well as updated trading forecasts and changes in the exchange rate assumptions used, updating them to period-end rates, which have increased the estimated total sterling values of GSKs Consumer Healthcare and ViiV Healthcare businesses.
These charges were partly offset by milestone income of £152 million in relation to the disposal of ofatumumab that was completed in 2015 and gains on a number of other divestments made during the year, including the remaining shares held by the Group in Aspen Pharmacare. The net other operating income of £7,715 million in 2015 included the profit on the disposal of the Oncology business to Novartis of £9,228 million.
65 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Total results continued
|
Operating profit
Total operating profit was £2,598 million in 2016 compared with £10,322 million in 2015 which benefited from the net disposal gains recorded following the disposal of the Oncology business as part of the Novartis transaction.
Operating profit benefited from improved operating leverage driven by sales growth and a more favourable mix across all three businesses, together with lower levels of restructuring costs compared with 2015. However, there were further accounting charges related to remeasurement of the contingent consideration liability related to the former Shionogi-ViiV Healthcare joint venture, along with remeasurement of the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities first recognised in Q1 2016 for the Pfizer and Shionogi put options and preferential dividends in ViiV Healthcare.
Contingent consideration cash payments are made to Shionogi and other companies, which reduce the balance sheet liability and hence are not recorded in the income statement. Total contingent consideration cash payments in 2016 amounted to £431 million (2015 £459 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £417 million (2015 £159 million). In 2015 a milestone payment of £300 million was made to Novartis in relation to the Vaccines acquisition.
Net finance costs
Finance income |
2016 £m |
2015 £m |
||||||
Interest and other income |
|
70 |
|
|
99 |
|
||
Fair value movements
|
|
2
|
|
|
5
|
|
||
|
72
|
|
|
104
|
|
|||
Finance expense |
||||||||
Interest expense
|
|
(701
|
)
|
|
(719
|
)
|
||
Unwinding of discounts on liabilities
|
|
(16
|
)
|
|
(16
|
)
|
||
Remeasurements and fair value movements
|
|
(4
|
)
|
|
(8
|
)
|
||
Other finance expense
|
|
(15
|
)
|
|
(14
|
)
|
||
|
(736
|
)
|
|
(757
|
)
|
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £5 million (2015 £14 million).
Profit before taxation
Taking account of net finance costs and the share of profit of associates, profit before taxation was £1,939 million compared with £10,526 million in 2015.
Taxation
2016
|
2015
|
|||||||
UK current year charge |
|
241 |
|
|
156 |
|
||
Rest of world current year charge |
|
1,326 |
|
|
2,924 |
|
||
Charge in respect of prior periods
|
|
(149
|
)
|
|
(508
|
)
|
||
Total current taxation |
1,418 | 2,572 | ||||||
Total deferred taxation
|
|
(541
|
)
|
|
(418
|
)
|
||
Taxation on total profits
|
|
877
|
|
|
2,154
|
|
A tax charge of £877 million on total profit represented an effective tax rate of 45.2% (2015 20.5%) and reflected the non-deductibility of certain items included within the transaction-related adjustments, particularly the remeasurements of the put options related to ViiV Healthcare and the Consumer Healthcare Joint Venture.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £150 million (2015 (£50) million), including the non-controlling interest allocations of Consumer Healthcare profits of £203 million (2015 £14 million) and the allocation of ViiV Healthcare losses of £83 million (2015 £143 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the year. The allocation also reflected the impact on the contribution of some of the Groups other entities with non-controlling interests primarily as a result of net losses in those entities arising from exchange.
Earnings per share
The total earnings per share was 18.8p, compared with 174.3p in 2015. The decrease primarily reflected the benefit in 2015 from the disposal of the Oncology business to Novartis that closed in March 2015, together with the impact in 2016 of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the Sterling value of the Groups HIV and Consumer Healthcare businesses, partly offset by improved performance and reduced restructuring costs.
Dividends
The Board declared four interim dividends resulting in a total dividend for the year of 80 pence, in line with the dividend declared in 2015. See Note 16 to the financial statements, Dividends.
66 |
GSK Annual Report 2016 |
|||
Group financial review continued
Total results continued
|
Core results reconciliation 31 December 2016
Total results £m |
Intangible asset
amortisation
|
Intangible asset
impairment
|
Major
restructuring
|
Legal
charges
|
Transaction -related £m |
Divestments and other £m |
Core results £m |
|||||||||
Turnover | 27,889 | 27,889 | ||||||||||||||
Cost of sales |
(9,290) | 547 | 7 | 297 | 86 | 2 | (8,351) | |||||||||
Gross profit |
18,599 | 547 | 7 | 297 | 86 | 2 | 19,538 | |||||||||
Selling, general and administration |
(9,366) | 514 | 162 | (7) | (8,697) | |||||||||||
Research and development |
(3,628) | 41 | 13 | 159 | (81) | 28 | (3,468) | |||||||||
Royalty income |
398 | 398 | ||||||||||||||
Other operating income/(expense) |
(3,405) | 3,914 | (509) | - | ||||||||||||
Operating profit | 2,598 | 588 | 20 | 970 | 162 | 3,919 | (486) | 7,771 | ||||||||
Net finance costs |
(664) | 4 | 8 | (652) | ||||||||||||
Share of after tax profits of associates and joint ventures |
5 | 5 | ||||||||||||||
Profit before taxation |
1,939 | 588 | 20 | 974 | 162 | 3,919 | (478) | 7,124 | ||||||||
Taxation |
(877) | (130) | (5) | (217) | (14) | (439) | 173 | (1,509) | ||||||||
Tax rate |
45.2% | 21.2% | ||||||||||||||
Profit after taxation |
1,062 | 458 | 15 | 757 | 148 | 3,480 | (305) | 5,615 | ||||||||
Profit attributable to non-controlling interests | 150 | 487 | 637 | |||||||||||||
Profit attributable to shareholders |
912 | 458 | 15 | 757 | 148 | 2,993 | (305) | 4,978 | ||||||||
Earnings per share |
18.8p | 9.4p | 0.3p | 15.6p | 3.0p | 61.6p | (6.3)p | 102.4p | ||||||||
Weighted average number of shares (millions) |
4,860 | 4,860 | ||||||||||||||
Core results reconciliation 31 December 2015 | ||||||||||||||||
Total
£m |
Intangible
asset amortisation £m |
Intangible
asset impairment £m |
Major
restructuring £m |
Legal
charges £m |
Transaction
£m |
Divestments
and other £m |
Core
results £m |
|||||||||
Turnover | 23,923 | 23,923 | ||||||||||||||
Cost of sales |
(8,853) | 522 | 147 | 563 | 89 | 12 | (7,520) | |||||||||
Gross profit |
15,070 | 522 | 147 | 563 | 89 | 12 | 16,403 | |||||||||
Selling, general and administration | (9,232) | 7 | 1,009 | 221 | 88 | (7,907) | ||||||||||
Research and development |
(3,560) | 41 | 52 | 319 | 52 | (3,096) | ||||||||||
Royalty income |
329 | 329 | ||||||||||||||
Other operating income |
7,715 | 2,061 | (9,776) | | ||||||||||||
Operating profit | 10,322 | 563 | 206 | 1,891 | 221 | 2,238 | (9,712) | 5,729 | ||||||||
Net finance costs | (653) | 5 | 12 | (636) | ||||||||||||
Profit on disposal of associates |
843 | (843) | | |||||||||||||
Share of after tax profits of associates and joint ventures |
14 | (16) | (2) | |||||||||||||
Profit before taxation | 10,526 | 563 | 206 | 1,896 | 221 | 2,238 | (10,559) | 5,091 | ||||||||
Taxation | (2,154) | (161) | (50) | (441) | (21) | (352) | 2,186 | (993) | ||||||||
Tax rate |
20.5% | 19.5% | ||||||||||||||
Profit after taxation | 8,372 | 402 | 156 | 1,455 | 200 | 1,886 | (8,373) | 4,098 | ||||||||
(Loss)/profit attributable to non-controlling interests | (50) | 500 | (10) | 440 | ||||||||||||
Profit attributable to shareholders |
8,422 | 402 | 156 | 1,455 | 200 | 1,386 | (8,363) | 3,658 | ||||||||
Earnings per share |
174.3p | 8.3p | 3.2p | 30.1p | 4.1p | 28.8p | (173.1)p | 75.7p | ||||||||
Weighted average number of shares (millions) |
4,831 | 4,831 |
67 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Total results continued
|
Items adjusted from total results to present core results
Total results are adjusted for a number of items in order to present core results, as explained on page 57. The items are discussed below.
Intangible asset amortisation and impairment
Intangible asset amortisation was £588 million, compared with £563 million in 2015. Intangible asset impairments of £20 million (2015 £206 million) included impairments of R&D and commercial assets. Both of these charges were non-cash items.
Major restructuring and integration
Major restructuring and integration charges of £970 million have been incurred (2015 £1,891 million), reflecting the phasing of planned restructuring projects following the completion of the Novartis transaction in 2015, as well as reduced charges for Pharmaceuticals restructuring projects as this programme enters its later stages. Cash payments made were £1,077 million (2015 £1,131 million) including the settlement of certain charges accrued in previous quarters.
Charges for the combined restructuring and integration programme to date are £3.7 billion, with cash charges of £2.9 billion and cash payments to date of £2.7 billion. The anticipated total cash charges of the combined programme were expected to be up to £3.65 billion and the non-cash charges up to £1.35 billion. The programme delivered incremental cost savings of £1.4 billion in 2016, including a currency benefit of £0.2 billion, and has now delivered approximately £3.0 billion of annual savings (including the currency benefit). The programme remains on track to deliver the originally targeted total annual savings of £3 billion on a constant currency basis during 2017. An estimated £300 million of additional cash charges are expected in 2017 along with some residual non-cash charges.
Legal charges
Legal charges of £162 million (2015 £221 million) included the benefit of the settlement of existing matters as well as provisions for ongoing litigation. Cash payments were £233 million compared with £420 million in 2015.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of £3,919 million (2015 £2,238 million). This primarily reflected accounting charges for the remeasurement of the liability and the unwinding of the discounting effects on the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis, the remeasurement and the unwinding of the discounting effects on the contingent consideration relating to the acquisition of the former Shionogi-ViiV Healthcare Joint Venture and the value attributable to the put options and preferential dividends payable to Pfizer and Shionogi.
Charge/(credit) |
2016 £m |
2015 £m |
||||||
Consumer Healthcare Joint Venture put option |
|
1,133 |
|
|
83 |
|
||
Contingent consideration on former Shionogi-ViiV |
||||||||
Healthcare Joint Venture (including Shionogi preferential dividends) |
2,162 | 1,874 | ||||||
ViiV Healthcare put options and Pfizer preferential dividends |
577 | | ||||||
Other adjustments
|
|
47
|
|
|
281
|
|
||
Total transaction-related charges
|
|
3,919
|
|
|
2,238
|
|
The aggregate impact of unwinding the discount on these future and potential liabilities was £905 million (2015 £757 million), including £464 million on the Consumer Healthcare Joint Venture put option, £334 million on contingent consideration on the former Shionogi-ViiV Healthcare Joint Venture, and £58 million on the ViiV Healthcare put options and preference dividends. The remaining charge of £3,014 million was driven primarily by changes in exchange rate assumptions as well as updates to trading forecasts.
During 2016, GSK and Shionogi made several amendments to the Shareholders Agreement for ViiV Healthcare regarding the Shionogi put option and the GSK call option. The estimated liability for Shionogis put option was initially recognised on GSKs balance sheet at the end of Q1 2016 and de-recognised in December 2016, directly to equity, when it stood at £1,244 million. An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 58.
Divestments and other items
Divestments and other items included equity investment disposals, including the disposal of the remaining Aspen Pharmacare investment, dividends and impairments, milestone income on ofatumumab, a number of other asset disposals, and certain other adjusting items. Divestments and other items in 2015 included the profit on the disposal of the Oncology business to Novartis.
68 |
GSK Annual Report 2016 |
|||
Group financial review continued
|
|
||
We use core results, which is a non-IFRS measure, among other metrics including total results and cash flow generation, to manage the performance of the Group. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. The definition of core results is set out on page 57.
Cost of sales
|
2016 |
|
2015 | Growth | ||||||||||||||||||||
£m |
|
% of
turnover |
|
£m |
|
% of
turnover |
|
£% | CER% | |||||||||||||||
Cost of sales |
(8,351 | ) | (29.9 | ) | (7,520 | ) | (31.4 | ) | 11 | 5 |
Cost of sales as a percentage of turnover was 29.9%, down 1.5 percentage points in Sterling terms and 0.3 percentage points in CER terms compared with 2015. On a pro-forma basis, the cost of sales percentage decreased 1.8 percentage points compared with 2015 and was down 0.6 percentage points in CER terms. This reflected improved product mix, particularly the impact of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare, as well as an increased contribution from integration and restructuring savings in all three businesses, partly offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, as well as continued investments in the supply chain.
Selling, general and administration
|
2016 |
|
2015 | Growth | ||||||||||||||||||||
£m |
|
% of
turnover |
|
£m |
|
% of
turnover |
|
£% | CER% | |||||||||||||||
Selling, general and administration |
(8,697 | ) | (31.2 | ) | (7,907 | ) | (33.1 | ) | 10 | 2 |
SG&A costs were 31.2% of turnover, 1.9 percentage points lower than in 2015 and 1.2 percentage points lower on a CER basis. On a pro-forma basis, SG&A as a percentage of sales reduced by 2.2 percentage points, 1.5 percentage points CER. This primarily reflected tight control of ongoing costs as well as the benefits from the Pharmaceuticals restructuring programme and integration benefits in Vaccines and Consumer Healthcare, partly offset by investment in promotional product support, particularly for new launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
Research and development
|
2016 |
|
2015 | Growth | ||||||||||||||||||||
£m |
|
% of
turnover |
|
£m |
|
% of
turnover |
|
£% | CER% | |||||||||||||||
Research and development |
(3,468 | ) | (12.4 | ) | (3,096 | ) | (12.9 | ) | 12 | 3 |
R&D expenditure was £3,468 million (12.4% of turnover), 12% higher than in 2015 and 3% higher on a CER basis, reflecting increased investment, particularly in Total Pharmaceuticals, which increased 5% CER. The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of phase IIa trials) and Development work (from phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate. Phase IV costs and other administrative expenses are reported in SG&A and are not included in the table below.
|
2016 |
|
2015 | Growth | ||||||||||||
£m | £m | £% | CER% | |||||||||||||
Discovery |
848 | 744 | 14 | 6 | ||||||||||||
Development |
1,275 | 1,136 | 12 | 4 | ||||||||||||
Facilities and central support functions
|
|
505
|
|
|
433
|
|
|
17
|
|
|
9
|
|
||||
Total Pharmaceuticals |
|
2,628 |
|
|
2,313 |
|
|
14 |
|
|
5 |
|
||||
Vaccines R&D |
597 | 525 | 14 | 2 | ||||||||||||
Consumer Healthcare R&D
|
|
243
|
|
|
258
|
|
|
(6
|
)
|
|
(12
|
)
|
||||
Research and development
|
|
3,468
|
|
|
3,096
|
|
|
12
|
|
|
3
|
|
The most significant factor driving Total Pharmaceuticals R&D growth was progression of the ViiV Healthcare HIV portfolio, including programmes acquired from BMS earlier in the year. The increase in Discovery was also driven by progression of the early stage Oncology portfolio and early investment in Bioelectronics. Development growth was primarily due to the start of new Phase III programmes, including HIV, respiratory and anaemia, partly offset by the benefit from R&D cost reduction programmes. The increase in facilities and central support functions costs partly reflected investment in new data warehousing and analytics to transform the way data is harnessed across R&D together with a re-allocation of central support costs.
Royalty income
Royalty income was £398 million (2015 £329 million) primarily reflecting increased royalty income from Gardasil sales as well as the benefit of a catch-up adjustment to prior-year estimates.
Core operating profit
Core operating profit was £7,771 million, up 36% at actual rates and 14% higher in CER terms than in 2015 on a turnover increase of 6%. The core operating margin of 27.9% was 3.9 percentage points higher than in 2015 and 1.9 percentage points higher on a CER basis.
On a pro-forma basis, core operating profit was 17% higher in CER terms compared with 2015 on turnover growth of 5%. The core operating margin of 27.9% was 4.6 percentage points higher than in 2015 and 2.6 percentage points higher in CER terms on a pro-forma basis, reflecting improved operating leverage driven by sales growth and a more favourable mix across all three businesses as well as delivery of restructuring and integration benefits and tight control of ongoing costs, partly offset by continued price pressure, particularly in Respiratory, and supply chain and R&D investments.
69 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Core results continued
|
Contingent consideration cash payments are made to Shionogi and other companies, which reduce the balance sheet liability and hence are not recorded in the income statement. Total contingent consideration cash payments in 2016 amounted to £431 million (2015 £459 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £417 million (2015 £159 million). In 2015 a milestone payment of £300 million was made to Novartis.
Core operating profit by business
2016 |
2015 (restated) |
Growth | ||||||||||||||||||||||
£m |
Margin % |
£m |
Margin % |
£% | CER% | |||||||||||||||||||
Pharmaceuticals |
7,979 | 49.5 | 6,466 | 45.7 | 23 | 6 | ||||||||||||||||||
Pharmaceuticals R&D |
(2,488 | ) | (2,168 | ) | 15 | 6 | ||||||||||||||||||
Pharmaceuticals |
5,491 | 34.1 | 4,298 | 30.4 | 28 | 6 | ||||||||||||||||||
Vaccines |
1,454 | 31.7 | 964 | 26.4 | 51 | 38 | ||||||||||||||||||
Consumer Healthcare |
1,116 | 15.5 | 684 | 11.3 | 63 | 42 | ||||||||||||||||||
8,061 | 28.9 | 5,946 | 24.9 | 36 | 16 | |||||||||||||||||||
Corporate & other unallocated costs |
(290 | ) | (217 | ) | 34 | 58 | ||||||||||||||||||
Core operating profit |
7,771 | 27.9 | 5,729 | 23.9 | 36 | 14 |
Pharmaceuticals
Pharmaceuticals operating profit was £5,491 million, 6% higher in CER terms than in 2015 on a turnover increase of 3%. The operating margin of 34.1% was 3.7 percentage points higher than in 2015 and 1.1 percentage points higher on a CER basis. On a pro-forma basis, the operating margin increased 1.2 percentage points on a CER basis, reflecting a more favourable product mix, primarily driven by the growth in HIV sales, and the cost reduction benefit from the Pharmaceuticals restructuring programme, partly offset by increased investment in new product support, increased investment in R&D in a number of new programmes, the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.
Vaccines
Vaccines operating profit was £1,454 million, 38% higher than in 2015 in CER terms on a turnover increase of 14%. The operating profit margin of 31.7% was 5.3 percentage points higher than in 2015 and 5.6 percentage points higher on a CER basis. On a pro-forma basis, the operating margin improved by 7.3 percentage points and 7.6 points in CER terms primarily driven by improved product mix and enhanced operating leverage from strong sales growth, together with restructuring and integration benefits in cost of sales, SG&A and R&D, and higher royalty income. These were partly offset by SG&A investments to support business growth, a number of inventory adjustments and additional supply chain investments.
Consumer Healthcare
Consumer Healthcare operating profit was £1,116 million, 42% higher than in 2015 in CER terms on a turnover increase of 9%. The operating margin of 15.5% was 4.2 percentage points higher than in 2015 and 3.4 percentage points higher on a CER basis. On a pro-forma basis, the Consumer Healthcare operating margin was 3.7 percentage points higher on a CER basis due to improvements in gross margin, reflecting mix benefits from the power brand strategy and better pricing, as well as a strong contribution from integration synergies benefiting both SG&A and R&D as a percentage of sales.
Net finance costs | ||||||||
|
2016
|
|
2015 | |||||
Finance income
|
|
£m
|
|
|
£m
|
|
||
Interest and other income |
70 | 99 | ||||||
Fair value movements |
2 | 5 | ||||||
|
72
|
|
|
104
|
|
|||
Finance expense
|
||||||||
Interest expense |
(701 | ) | (719 | ) | ||||
Unwinding of discounts on liabilities |
(4 | ) | 1 | |||||
Remeasurements and fair value movements |
(4 | ) | (8 | ) | ||||
Other finance expense |
(15 | ) | (14 | ) | ||||
(724 | ) | (740 | ) |
Net core finance expense was £652 million compared with £636 million in 2015, reflecting the translation effect of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
Share of after tax profits/(losses) and joint ventures
The share of profits of associates and joint ventures was £5 million (2015 £2 million loss).
Core profit before taxation
|
2016 |
|
2015 | Growth | ||||||||||||||||||||
£m |
|
% of
turnover |
|
£m |
|
% of
turnover |
|
£% | CER% | |||||||||||||||
Core profit before tax |
7,124 | 25.5 | 5,091 | 21.3 | 40 | 16 |
Taxation
Tax on core profit amounted to £1,509 million and represented an effective core tax rate of 21.2% (2015 19.5%). The increase in the effective rate primarily reflected the Groups changing earnings mix. See Taxation on page 178 for further details.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £637 million (2015 £440 million), including the non-controlling interest allocations of Consumer Healthcare profits of £288 million (2015 £137 million) and the allocation of ViiV Healthcare profits, which increased to £324 million (2015 £224 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the year. The allocation also reflected the impact on the contribution of some of the Groups other entities with non-controlling interests primarily as a result of net losses in those entities arising from exchange.
Core earnings per share
Core EPS of 102.4p was up 35% at actual rates and 12% in CER terms compared with a 14% CER increase in operating profit, primarily reflecting the increased tax rate compared with 2015 and the greater contribution to growth from businesses in which there are significant non-controlling interests.
70 |
GSK Annual Report 2016 |
|||
Group financial review continued
Pro-forma growth rate reconciliations
|
The following table sets out reconciliations between reported CER growth rates and pro-forma CER growth rates on the stated items of turnover for 2016.
71 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Cash generation and conversion
|
A summary of the consolidated cash flow statement is set out below.
The net cash inflow from operating activities for the year was £6,497 million (2015 £2,569 million). The increase primarily reflected the improved operating performance across all segments and a positive currency benefit. Excluding legal settlements of £233 million (2015 £420 million) adjusted net cash inflow from operating activities was £6,730 million (2015 £2,989 million). In addition, there were payments of restructuring and integration costs of £1,077 million (2015 £1,131 million) and a further tax payment of £125 million (2015 £1,071 million) on the sale of the Oncology business, both of which have been funded from divestment proceeds.
Total cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) in the year were £417 million (2015 £159 million), of which £351 million (2015 £121 million) was recognised in cash flows from operating activities and £66 million (2015 £38 million) was recognised within investing cash flows.
Free cash flow
Free cash flow is the amount of cash generated by the business after meeting our obligations for interest, tax and dividends paid to non-controlling interests, and after capital expenditure on property, plant and equipment and intangible assets.
2016
|
2015
£m |
|||||||
Free cash inflow/(outflow) |
3,087 | (155 | ) | |||||
Adjusted free cash flow
|
|
3,320
|
|
|
265
|
|
Free cash flow was £3,087 million for the year (2015 £155 million outflow). Excluding legal payments, adjusted free cash flow was £3,320 million (2015 £265 million) but this was also after making restructuring and integration payments, the additional tax payment on the sale of the Oncology business and the purchase of HIV Clinical assets for £221 million, which are treated as intangible asset purchases. Excluding these items, which are being funded from divestment proceeds, the adjusted free cash flow would have been £4,743 million (2015 £2,467 million).
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted to £2,352 million (2015 £1,901 million) and disposals realised £453 million (2015 £10,554 million). Cash payments to acquire equity investments of £96 million (2015 £82 million) were made and sales of equity investments realised £683 million (2015 £357 million).
Reconciliation of net cash inflow from operating activities to free cash flow and adjusted free cash flow
A reconciliation of net cash inflow from operating activities, which is
the closest equivalent IFRS measure, to free cash flow is shown below.
2016 £m |
2015 £m |
|||||||
Net cash inflow from operating activities |
6,497 | 2,569 | ||||||
Purchase of property, plant and equipment |
(1,543 | ) | (1,380 | ) | ||||
Purchase of intangible assets |
(809 | ) | (521 | ) | ||||
Proceeds from sale of property, plant and equipment |
98 | 72 | ||||||
Interest paid |
(732) | (762 | ) | |||||
Interest received |
68 | 99 | ||||||
Dividends from associates and joint ventures |
42 | 5 | ||||||
Distributions to non-controlling interests
|
|
(534
|
)
|
|
(237
|
)
|
||
Free cash flow |
3,087 | (155 | ) | |||||
Legal payments
|
|
233
|
|
|
420
|
|
||
Adjusted free cash flow
|
|
3,320
|
|
|
265
|
|
Future cash flow
Over the long term, we expect that future cash generated from operations will be sufficient to fund our operating and debt servicing costs, normal levels of capital expenditure, obligations under existing licensing agreements, expenditure arising from restructuring programmes and other routine outflows including tax, pension contributions and dividends, subject to the Principal risks and uncertainties discussed on pages 253 to 262. We may from time to time have additional demands for finance, such as for acquisitions, including potentially acquiring increased ownership portions of the ViiV Healthcare and the Consumer Healthcare businesses where minority shareholders hold put options, and share repurchases. We have access to multiple sources of liquidity from short and long-term capital markets and financial institutions, in addition to the cash flow from operations, for such needs.
Investment appraisal
We have a formal process for assessing potential investment proposals in order to ensure decisions are aligned with our overall strategy. This process includes an assessment of the cash flow return on any individual investment (CFROI), as well as its net present value (NPV) and internal rate of return (IRR) where the timeline for the project is very long term. We also consider the impact on EPS and our credit profile where relevant.
The discount rate used to perform financial analyses is decided internally, to allow determination of the extent to which investments cover our cost of capital. For specific investments the discount rate may be adjusted to take into account country or other risk weightings.
Working capital
Our working capital programme has continued to make progress with further improvements in the collection of receivables and inventory management.
2016 |
2015 | |||||||
Working capital percentage of turnover (%) |
22 | 23 | ||||||
Working capital conversion cycle (days)
|
|
193
|
|
|
191
|
|
The reported working capital conversion cycle days in 2015 were distorted by a temporary favourable impact of 15 days arising from the Novartis transaction. Excluding this impact, the conversion cycle for 2015 was around 206 days. The resulting reduction of 13 days in 2016 compared with 2015 was predominantly due to a beneficial impact from exchange, reduced receivables days from improved collections and reduced inventory days.
72 |
GSK Annual Report 2016 |
|||
Group financial review continued
Financial position and resources
|
Property, plant and equipment
Our business is science-based, technology-intensive and highly regulated by governmental authorities. We allocate significant financial resources to the renewal and maintenance of our property, plant and equipment to minimise risks of interruption to production and to ensure compliance with regulatory standards. A number of our processes use hazardous materials.
The total cost of our property, plant and equipment at 31 December 2016 was £22,164 million, with a net book value of £10,808 million. Of this, land and buildings represented £4,223 million, plant and equipment £3,481 million and assets in construction £3,104 million. In 2016, we invested £1,544 million in new property, plant and equipment. This was mainly related to a large number of projects for the renewal, improvement and expansion of facilities at various worldwide sites. Property is mainly held freehold. New investment is financed from our liquid resources. At 31 December 2016, we had contractual commitments for future capital expenditure of £496 million and operating lease commitments of £840 million. We believe that our facilities are adequate for our current needs.
We observe stringent procedures and use specialist skills to manage environmental risks from our activities. Environmental issues, sometimes dating from operations now modified or discontinued, are reported under Our planet on page 50 and in Note 46 to the financial statements, Legal proceedings.
Goodwill
Goodwill increased during the year to £5,965 million at 31 December 2016, from £5,162 million. The increase primarily reflected the impact of exchange movements.
Other intangible assets
Other intangible assets include the cost of intangibles acquired from third parties and computer software. The net book value of other intangible assets as at 31 December 2016 was £18,776 million (2015 £16,672 million). The increase in 2016 reflected the impact of exchange movements, development costs capitalised during the year of £240 million, partly offset by the amortisation and impairment of existing intangibles of £796 million and £29 million, respectively.
Investments in associates and joint ventures
We held investments in associates and joint ventures, with a carrying value at 31 December 2016 of £263 million (2015 £207 million). The market value at 31 December 2016 was £502 million (2015 £267 million). The largest of these investments was in Innoviva Inc. which had a book value at 31 December 2016 of £138 million (2015 £112 million). The market value at 31 December 2016 was £278 million. See Note 20 to the financial statements Investments in associates and joint ventures.
73 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Financial position and resources continued
|
Other investments
We held other investments with a carrying value at 31 December 2016 of £985 million (2015 £1,255 million). The decrease in the carrying value during the year was primarily due to the sale of the Groups remaining stake in Aspen Pharmacare Holdings Limited which had a book value at 31 December 2015 of £383 million. The most significant of the investments held at 31 December 2016 was in Theravance Biopharma, Inc. which had a book value at 31 December 2016 of £248 million (2015 £93 million). The other investments included equity stakes in companies with which we have research collaborations, which provide access to biotechnology developments of potential interest and interests in companies that arise from business divestments.
Derivative financial instruments: assets
We had current derivative financial instruments held at fair value of £156 million (2015 £125 million). The majority of this amount related to foreign exchange contracts both designated and not designated as accounting hedges.
Inventories
Inventory of £5,102 million increased from £4,716 million in 2015. The increase primarily reflected the impact of exchange movements.
Trade and other receivables
Trade and other receivables of £6,026 million increased from £5,615 million in 2015, primarily reflecting exchange movements.
Derivative financial instruments: liabilities
We held current derivative financial instruments at fair value of £194 million (2015 £153 million). This primarily related to foreign exchange contracts both designated and not designated as accounting hedges.
Trade and other payables
Trade and other payables amounting to £11,964 million increased from £8,885 million in 2015, reflecting the Pfizer put option related to ViiV Healthcare recognised in the year, an increase in accruals for customer returns and rebates and the impact of exchange movements.
Provisions
We carried deferred tax provisions and other short-term and non-current provisions of £3,434 million at 31 December 2016 (2015 £3,286 million) of which £344 million (2015 £352 million) related to legal and other disputes and £554 million (2015 £816 million) related to the major restructuring programme. Provision has been made for legal and other disputes, indemnified disposal liabilities, employee related liabilities and the costs of the restructuring programme to the extent that at the balance sheet date a legal or constructive obligation existed and could be reliably estimated.
Pensions and other post-employment benefits
We account for pension and other post-employment arrangements in accordance with IAS 19. The deficits, net of surpluses before allowing for deferred taxation were £2,084 million (2015 £1,584 million) on pension arrangements and £1,693 million (2015 £1,387 million) on unfunded post-employment liabilities. The increases in the deficits were predominantly driven by lower discount rates that we used to discount the value of the liabilities, together with an increase in the UK inflation rate assumptions and a stronger US Dollar at the year end, partly offset by special funding contributions to the UK schemes and significant UK asset gains.
Other non-current liabilities
Other non-current liabilities of £8,445 million at 31 December 2016 (2015 £7,107 million) included £7,420 million (2015 £6,287 million) related to the present value of the estimated amount payable by us in the event of full exercise of Novartis right to require us to acquire its 36.5% shareholding in the Consumer Healthcare Joint Venture. Further details are provided in Note 3 Key accounting judgements and estimates.
Contingent consideration liabilities
Contingent consideration liabilities amounted to £5,896 million at 31 December 2016 (2015 £3,855 million), of which £5,304 million (2015 £3,409 million) represented the estimated present value of amounts payable to Shionogi relating to ViiV Healthcare and £545 million (2015 £405 million) represented the estimated present value of contingent consideration payable to Novartis related to the Vaccines acquisition. The liability due to Shionogi included £224 million in respect of preferential dividends of which £154 million was recognised directly in equity in the year. The liability for preferential dividends due to Pfizer at 31 December 2016 was £23 million. An explanation of the accounting treatment of our interests in ViiV Healthcare is set out on page 58.
Net debt
2016 £m |
2015 £m |
|||||||
Cash, cash equivalents and liquid investments
|
|
4,986
|
|
|
5,905
|
|
||
Borrowings repayable within one year
|
|
(4,129
|
)
|
|
(1,308
|
)
|
||
Borrowings repayable after one year
|
|
(14,661
|
)
|
|
(15,324
|
)
|
||
Net debt
|
|
(13,804
|
)
|
|
(10,727
|
)
|
At 31 December 2016, net debt was £13.8 billion, compared with £10.7 billion at 31 December 2015, comprising gross debt of £18.8 billion and cash and liquid investments of £5.0 billion. The increase in net debt primarily reflected a £2.2 billion adverse exchange impact from the translation of non-Sterling denominated debt and exchange on other financing items, dividends paid to shareholders of £4.9 billion including the special dividend of £1.0 billion, partly offset by free cash flow of £3.1 billion and asset disposals of £1.0 billion.
At 31 December 2016, our cash and liquid investments were held as follows:
2016 £m |
2015 £m |
|||||||
Bank balances and deposits
|
|
2,583
|
|
|
3,767
|
|
||
US Treasury and Treasury repo only money market funds
|
|
2,248
|
|
|
624
|
|
||
Liquidity funds
|
|
66
|
|
|
1,439
|
|
||
Government securities
|
|
89
|
|
|
75
|
|
||
|
4,986
|
|
|
5,905
|
|
Cash and liquid investments of £3.2 billion (2015 £4.2 billion) were held centrally at 31 December 2016.
74 |
GSK Annual Report 2016 |
|||
Group financial review continued
Financial position and resources continued
|
The analysis of cash and gross debt after the effects of hedging is as follows.
2016
|
2015 £m |
|||||||||
Cash and liquid investments |
4,986 | 5,905 | ||||||||
Gross debt |
fixed |
(17,288) | (16,129) | |||||||
floating |
(1,496) | (502) | ||||||||
non-interest bearing |
(6) | (1) | ||||||||
Net debt
|
|
(13,804)
|
|
|
(10,727)
|
|
Movements in net debt
2016
|
2015 £m |
|||||||
Net debt at beginning of year |
(10,727) | (14,377) | ||||||
(Decrease)/increase in cash and bank overdrafts |
(1,164) | 1,503 | ||||||
Increase in liquid investments |
| 2 | ||||||
Net (increase in)/repayment of short-term loans |
(148) | 2,412 | ||||||
Exchange movements |
(1,781) | (268) | ||||||
Other movements
|
|
16
|
|
|
1
|
|
||
Net debt at end of year
|
|
(13,804)
|
|
|
(10,727)
|
|
Total equity
At 31 December 2016, total equity had decreased from £8,878 million at 31 December 2015 to £4,963 million. This primarily reflected the recognition of the transaction-related adjustments of £3,919 million, the impact of the dividends paid and an increase in the pension deficit of £500 million, partly offset by the profit for the year and the favourable exchange translation impact from the weaker Sterling rates.
A summary of the movements in equity is set out below.
2016
|
2015
£m |
|||||||
Total equity at beginning of year |
8,878 | 4,936 | ||||||
Total comprehensive income for the year |
2,024 | 7,885 | ||||||
Dividends to shareholders |
(4,850) | (3,874) | ||||||
Ordinary shares issued |
89 | 73 | ||||||
Gain on transfer of net assets into Consumer Healthcare JV |
| 2,891 | ||||||
Consumer Healthcare JV put option |
| (6,204) | ||||||
Loss on transfer of equity investment to investment in associate |
| (229) | ||||||
Changes in non-controlling interests |
32 | 3,370 | ||||||
Recognition of liabilities with non-controlling interests |
(2,172) | | ||||||
De-recognition of liabilities with non-controlling interests |
1,244 | | ||||||
Shares acquired by ESOP Trusts |
(74) | (99) | ||||||
Share-based incentive plans |
319 | 356 | ||||||
Tax on share-based incentive plans |
7 | 10 | ||||||
Distributions to non-controlling interests
|
|
(534)
|
|
|
(237)
|
|
||
Total equity at end of year
|
|
4,963
|
|
|
8,878
|
|
75 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Financial position and resources continued
|
Share purchases
In 2016, the Employee Share Ownership Plan (ESOP) Trusts acquired £74 million of shares in GlaxoSmithKline plc (2015 £99 million). Shares are held by the Trusts to satisfy future exercises of options and awards under the Group share option and award schemes. A proportion of the shares held by the Trusts are in respect of awards where the rules of the scheme require us to satisfy exercises through market purchases rather than the issue of new shares. The shares held by the Trusts are matched to options and awards granted.
At 31 December 2016, the ESOP Trusts held 43 million (2015 30 million) GSK shares against the future exercise of share options and share awards. The carrying value of £286 million (2015 £75 million) has been deducted from other reserves. The market value of these shares was £667 million (2015 £409 million).
During 2016, no shares were repurchased. At 31 December 2016, we held 458.2 million shares as Treasury shares (2015 491.5 million shares), at a cost of £6,451 million (2015 £6,917 million), which has been deducted from retained earnings.
No ordinary shares were purchased in the period 1 January 2017 to 13 March 2017 and the company does not expect to make any ordinary share repurchases in the remainder of 2017.
Commitments and contingent liabilities
Financial commitments are summarised in Note 41 to the financial statements, Commitments. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 32 to the financial statements, Contingent liabilities and Note 31 to the financial statements, Net debt.
Amounts provided for pensions and post-retirement benefits are set out in Note 28 to the financial statements, Pensions and other post-employment benefits. Amounts provided for restructuring programmes and legal, environmental and other disputes are set out in Note 29 to the financial statements, Other provisions.
Contractual obligations and commitments
The following table sets out our contractual obligations and commitments at 31 December 2016 as they fall due for payment.
Total
|
Under 1 yr
|
1-3 yrs
|
3-5 yrs
|
5 yrs+
|
||||||||||||||||
Loans | 18,849 | 4,108 | 3,500 | | 11,241 | |||||||||||||||
Interest on loans |
9,410 | 705 | 1,069 | 992 | 6,644 | |||||||||||||||
Finance lease obligations |
64 | 23 | 34 | 7 | | |||||||||||||||
Finance lease charges |
3 | 2 | 1 | | | |||||||||||||||
Operating lease commitments |
840 | 153 | 223 | 140 | 324 | |||||||||||||||
Intangible assets |
7,199 | 514 | 648 | 1,082 | 4,955 | |||||||||||||||
Property, plant & equipment |
496 | 385 | 111 | | | |||||||||||||||
Investments |
166 | 79 | 53 | 32 | 2 | |||||||||||||||
Purchase commitments |
52 | 23 | 29 | | | |||||||||||||||
Pensions |
874 | 136 | 246 | 246 | 246 | |||||||||||||||
Other commitments
|
143
|
45
|
76
|
22
|
|
|||||||||||||||
Total
|
38,096
|
6,173
|
5,990
|
2,521
|
23,412
|
Commitments in respect of loans and future interest payable on loans are disclosed before taking into account the effect of derivatives.
We have entered into a number of research collaborations to develop new compounds with other pharmaceutical companies. The terms of these arrangements can include upfront fees, equity investments, loans and commitments to fund specified levels of research. In addition, we will often agree to make further payments if future milestones are achieved.
As some of these agreements relate to compounds in the early stages of development, the potential obligation to make milestone payments will continue for a number of years if the compounds move successfully through the development process. Generally, the closer the product is to marketing approval, the greater the probability of success. The amounts shown above within intangible assets represent the maximum that would be paid if all milestones were achieved, and include £6.2 billion which relates to externalised projects in the discovery portfolio. A number of new commitments were made in 2016 under licensing and other agreements, offset by amendments to existing agreements.
In 2016, we reached an agreement with the trustees of the UK pension schemes to make additional contributions, including in 2016, to eliminate the pension deficit identified at the 31 December 2014 actuarial funding valuation. The table above includes this commitment but excludes the normal ongoing annual funding requirement in the UK of approximately £130 million. For further information on pension obligations, see Note 28 to the financial statements, Pensions and other post-employment benefits.
Contingent liabilities
The following table sets out contingent liabilities, comprising discounted bills, performance guarantees, letters of credit and other items arising in the normal course of business, and when they are expected to expire.
Total
|
Under 1 yr
|
1-3 yrs
|
3-5 yrs
|
5 yrs+
|
||||||||||||||||
Guarantees |
172 | 110 | 3 | | 59 | |||||||||||||||
Other contingent liabilities
|
|
109
|
|
|
16
|
|
|
40
|
|
|
6
|
|
|
47
|
|
|||||
Total
|
281
|
126
|
43
|
6
|
106
|
In the normal course of business, we have provided various indemnification guarantees in respect of business disposals in which legal and other disputes have subsequently arisen. A provision is made where an outflow of resources is considered probable and a reliable estimate can be made of the likely outcome of the dispute and this is included in Note 29 to the financial statements, Other provisions.
We provide for the outcome of tax, legal and other disputes when an outflow of resources is considered probable and a reliable estimate of the outflow may be made. At 31 December 2016, other than for those disputes where provision has been made, it was not possible to make a reliable estimate of the potential outflow of funds that might be required to settle disputes where the possibility of there being an outflow was more than remote.
The ultimate liability for such matters may vary significantly from the amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities. This is discussed further in Principal risks and uncertainties on pages 253 to 262 and Notes 14 and 46 to the financial statements, Taxation and Legal proceedings.
76 |
GSK Annual Report 2016 |
|||
Group financial review continued
|
The consolidated financial statements are prepared in accordance with IFRS, as adopted for use in the European Union, and also with IFRS as issued by the IASB, following the accounting policies approved by the Board and described in Note 2 to the financial statements, Accounting principles and policies.
We are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the financial statements. Actual amounts and results could differ from those estimates.
The critical accounting policies relate to the following areas:
| Turnover |
| Taxation (Note 14) |
| Legal and other disputes (Notes 29 and 46) |
| Goodwill and other intangible asset impairments (Notes 18 and 19) |
| Business combinations (Note 38) |
| Pensions and other post-employment benefits (Note 28). |
Information on the judgements and estimates made in these areas is given in Note 3 to the financial statements, Key accounting judgements and estimates.
Turnover
In respect of the Turnover accounting policy, our largest business is US Pharmaceuticals, and the US market has the most complex arrangements for rebates, discounts and allowances. The following briefly describes the nature of the arrangements in existence in our US Pharmaceuticals business:
| We have arrangements with certain indirect customers whereby the customer is able to buy products from wholesalers at reduced prices. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customers contractual discounted price. Accruals for estimating chargebacks are calculated based on the terms of each agreement, historical experience and product growth rates |
| Customer rebates are offered to key managed care and Group Purchasing Organisations (GPO) and other direct and indirect customers. These arrangements require the customer to achieve certain performance targets relating to the value of product purchased, formulary status or pre-determined market shares relative to competitors. The accrual for customer rebates is estimated based on the specific terms in each agreement, historical experience and product growth rates |
| The US Medicaid programme is a state-administered programme providing assistance to certain poor and vulnerable patients. In 1990, the Medicaid Drug Rebate Program was established to reduce State and Federal expenditure on prescription drugs. In 2010, the Patient Protection and Affordable Care Act became law. We participate by providing rebates to states. Accruals for Medicaid rebates are calculated based on the specific terms of the relevant regulations or the Patient Protection and Affordable Care Act |
| Cash discounts are offered to customers to encourage prompt payment. These are accrued for at the time of invoicing and adjusted subsequently to reflect actual experience |
| We record an accrual for estimated sales returns by applying historical experience of customer returns to the amounts invoiced, together with market related information such as stock levels at wholesalers, anticipated price increases and competitor activity. |
A reconciliation of gross turnover to net turnover for the US Pharmaceuticals business, including Puerto Rico, is as follows:
|
2016
|
|
|
2015
(restated)
|
|
|
2014
(restated)
|
|
||||||||||||||||
£m
|
Margin %
|
£m
|
Margin %
|
£m
|
Margin %
|
|||||||||||||||||||
Gross turnover |
13,363 | 100 | 10,093 | 100 | 8,838 | 100 | ||||||||||||||||||
Market driven segments
|
|
(2,749)
|
|
|
(21)
|
|
|
(1,761)
|
|
|
(17)
|
|
|
(1,274)
|
|
|
(14)
|
|
||||||
Government mandated and state programs
|
|
(3,070)
|
|
|
(23)
|
|
|
(2,357)
|
|
|
(23)
|
|
|
(1,697)
|
|
|
(19)
|
|
||||||
Cash discounts
|
|
(261)
|
|
|
(2)
|
|
|
(192)
|
|
|
(2)
|
|
|
(169)
|
|
|
(2)
|
|
||||||
Customer returns
|
|
(98)
|
|
|
(1)
|
|
|
(93)
|
|
|
(1)
|
|
|
(69)
|
|
|
(1)
|
|
||||||
Prior year adjustments
|
|
109
|
|
|
1
|
|
|
142
|
|
|
1
|
|
|
169
|
|
|
2
|
|
||||||
Other items |
(457) | (3) | (298) | (3) | (181) | (2) | ||||||||||||||||||
Total deductions
|
|
(6,526)
|
|
|
(49)
|
|
|
(4,559)
|
|
|
(45)
|
|
|
(3,221)
|
|
|
(36)
|
|
||||||
Net turnover
|
|
6,837
|
|
|
51
|
|
|
5,534
|
|
|
55
|
|
|
5,617
|
|
|
64
|
|
Market driven segments consist primarily of Managed Care and Medicare plans with which GSK negotiates contract pricing that is honoured via rebates and chargebacks. Mandated segments consist primarily of Medicaid and Federal Government programmes which receive government mandated pricing via rebates and chargebacks.
The increased deductions in the market driven segments of the gross turnover to net turnover reconciliation primarily reflected higher rebates and chargebacks on Respiratory products, and on Advair in particular. During 2016, Advair accounted for 27% of US
Pharmaceuticals turnover and approximately 45% of the total deduction for rebates and returns, and the Respiratory portfolio as a whole accounted for approximately 75% of the total deduction in the year. Advair continued to suffer pricing pressure in 2016 as the business sought to transition its Respiratory portfolio to newer products.
The balance sheet accruals for rebates, discounts, allowances and returns for the US Pharmaceuticals and Vaccines businesses are managed on a combined basis. At 31 December 2016, the total accrual amounted to £2,218 million (2015 £1,671 million).
A monthly process is operated to monitor inventory levels at wholesalers for any abnormal movements. This process uses gross sales volumes, prescription volumes based on third party data sources and information received from key wholesalers. The aim of this is to maintain inventories at a consistent level from year to year based on the pattern of consumption.
On this basis, US Pharmaceuticals and Vaccines inventory levels at wholesalers and in other distribution channels at 31 December 2016 were estimated to amount to approximately five weeks of turnover. This calculation uses third party information, the accuracy of which cannot be totally verified, but is believed to be sufficiently reliable for this purpose.
77 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Critical accounting policies continued
|
Legal and other disputes
In respect of the accounting policy for Legal and other disputes, the following briefly describes the process by which we determine the level of provision that is necessary.
In accordance with the requirements of IAS 37, Provisions, contingent liabilities and contingent assets, we provide for anticipated settlement costs where an outflow of resources is considered probable and a reliable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the Group. We may become involved in significant legal proceedings, in respect of which it is not possible to make a reliable estimate of the expected financial effect, if any, that could result from ultimate resolution of the proceedings. In these cases, appropriate disclosure about such cases would be included in the Annual Report, but no provision would be made.
This position could change over time and, therefore, there can be no assurance that any losses that result from the outcome of any legal proceedings will not exceed by a material amount the amount of the provisions reported in the Groups financial statements.
Like many pharmaceutical companies, we are faced with various complex product liability, anti-trust and patent litigation, as well as investigations of its operations conducted by various governmental regulatory agencies. Throughout the year, the General Counsel of the Group, as head of the Groups legal function, and the Senior Vice President and Head of Global Litigation for the Group, who is responsible for all litigation and government investigations, routinely brief the Chief Executive Officer, the Chief Financial Officer and the Board of Directors on the significant litigation pending against the Group and governmental investigations of the Group.
These meetings, as appropriate, detail the status of significant litigation and government investigations and review matters such as the number of claims notified to us, information on potential claims not yet notified, assessment of the validity of claims, progress made in settling claims, recent settlement levels and potential reimbursement by insurers.
The meetings also include an assessment of whether or not there is sufficient information available for us to be able to make a reliable estimate of the potential outcomes of the disputes. Often, external counsel assisting us with various litigation matters and investigations will also assist in the briefing of the Board and senior management. Following these discussions, for those matters where it is possible to make a reliable estimate of the amount of a provision, if any, that may be required, the level of provision for legal and other disputes is reviewed and adjusted as appropriate. These matters are discussed further in Note 46 to the financial statements, Legal proceedings.
|
We report in Sterling and pay dividends out of Sterling cash flows. The role of Treasury is to monitor and manage the Groups external and internal funding requirements and financial risks in support of our strategic objectives. GSK operates on a global basis, primarily through subsidiary companies, and we manage our capital to ensure that our subsidiaries are able to operate as going concerns and to optimise returns to shareholders through an appropriate balance of debt and equity. Treasury activities are governed by policies approved annually by the Board of Directors, and most recently on 21 July 2016. A Treasury Management Group (TMG) meeting, chaired by our Chief Financial Officer, takes place on a monthly basis to review treasury activities. Its members receive management information relating to these activities.
Treasury operations
The objective of our Treasury activity is to minimise the post-tax net cost of financial operations and reduce its volatility in order to benefit earnings and cash flows. We use a variety of financial instruments to finance our operations and derivative financial instruments to manage market risks from these operations. These derivatives, principally comprising interest rate swaps, foreign exchange forward contracts and swaps, are used to swap borrowings and liquid assets into currencies required for Group purposes and to manage exposure to financial risks from changes in foreign exchange rates and interest rates.
We do not hold or issue derivatives for speculative purposes and GSKs Treasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities.
Capital management
Our financial strategy, implemented through the Groups Financial architecture, supports GSKs strategic priorities and it is regularly reviewed by the Board. We manage the capital structure of the Group through an appropriate mix of debt and equity.
GSKs long-term credit rating with Standard and Poors is A+ (stable outlook) and with Moodys Investor Services (Moodys) is A2 (negative outlook). Our short-term credit ratings are A-1 and P-1 with Standard and Poors and Moodys respectively.
Liquidity risk management
Our policy is to borrow centrally in order to meet anticipated funding requirements. Our cash flow forecasts and funding requirements are monitored by the TMG on a monthly basis. Our strategy is to diversify liquidity sources using a range of facilities and to maintain broad access to financial markets.
Each day, we sweep cash from a number of global subsidiaries to central Treasury accounts for liquidity management purposes.
Interest rate risk management
Our objective is to minimise the effective net interest cost and to balance the mix of debt at fixed and floating interest rates over time. The policy on interest rate risk management limits the amount of floating interest payments to a prescribed percentage of operating profit.
78 |
GSK Annual Report 2016 |
|||
Group financial review continued
Treasury policies continued
|
Foreign exchange risk management
Foreign currency transaction exposures arising on external trade flows are not normally hedged. Foreign currency transaction exposures arising on internal trade flows are selectively hedged. Our objective is to minimise the exposure of overseas operating subsidiaries to transaction risk by matching local currency income with local currency costs where possible. GSKs internal trading transactions are matched centrally and we manage inter-company payment terms to reduce foreign currency risk. Foreign currency cash flows can be hedged selectively under the management of Treasury and the TMG. These include hedges of the foreign exchange risk arising from acquisitions and disposals of assets. Where possible, we manage the cash surpluses or borrowing requirements of subsidiary companies centrally using forward contracts to hedge future repayments back into the originating currency.
In order to reduce foreign currency translation exposure, we seek to denominate borrowings in the currencies of our principal assets and cash flows. These are primarily denominated in US Dollars, Euros and Sterling. Borrowings can be swapped into other currencies as required.
Borrowings denominated in, or swapped into, foreign currencies that match investments in overseas Group assets may be treated as a hedge against the relevant assets. Forward contracts in major currencies are also used to reduce exposure to the Groups investment in overseas Group assets. The TMG reviews the ratio of borrowings to assets for major currencies monthly.
Counterparty risk management
We set global counterparty limits for each of our banking and investment counterparties based on long-term credit ratings from Moodys and Standard and Poors. Treasurys usage of these limits is monitored daily by a Corporate Compliance Officer (CCO) who operates independently of Treasury. Any breach of these limits would be reported to the CFO immediately.
The CCO also monitors the credit rating of these counterparties and, when changes in ratings occur, notifies Treasury so that changes can be made to investment levels or to authority limits as appropriate. In addition, relationship banks and their credit ratings are reviewed regularly and a report is presented annually to the TMG for approval.
Strategic report
|
The Strategic report was approved by the Board of Directors on 13 March 2017 and signed on its behalf by:
Simon Dingemans
Chief Financial Officer
13 March 2017
79 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Corporate Governance
|
||||||||
In this section | ||||||||
|
80 | |||||||
|
82 | |||||||
|
86
|
|||||||
|
||||||||
|
88 | |||||||
|
94
|
|||||||
|
||||||||
|
97 | |||||||
|
97
|
|||||||
|
||||||||
|
107 | |||||||
|
107
|
|||||||
|
||||||||
|
108 | |||||||
|
110 | |||||||
|
||||||||
|
||||||||
|
||||||||
|
80 |
GSK Annual Report 2016 |
|||
Chairmans Governance statement
Last year, we reported the steps taken to refresh our non-executive representation on the Board to address a number of planned retirements. This year, the Boards primary focus was on executive succession.
|
Dear Shareholder
I am pleased to present our Corporate Governance Report for 2016.
The Board remains committed to the highest standards of corporate governance and integrity. Our governance structure operates from the Board across the Group, and we believe that it is critical in underpinning our ability to deliver our strategy and to create long-term value for our shareholders.
CEO and executive management succession
Last year, we reported the steps taken to refresh our non-executive representation on the Board to address a number of planned retirements. This year, the Boards primary focus was on executive succession. The review of Talent and Leadership Strategy has been an annual item of Board and Nominations Committee discussion and oversight. When Sir Andrew Witty indicated, in March 2016, his intention to retire from the Board in early 2017, we were well placed to accelerate an orderly CEO succession and transition plan. The process we followed is described in the report of our Nominations Committee on pages 94 to 96.
The Board was unanimous in supporting the appointment of Emma Walmsley, who previously led GSKs Consumer Healthcare business, as our new CEO. It was felt that her leadership skills, history of delivering growth and driving performance and fresh thinking made her an ideal choice.
Under Sir Andrews leadership, GSK has successfully developed market-leading positions in Vaccines and Consumer Healthcare. These provide excellent platforms for sustainable, long-term growth, and we are confident Emma will successfully build on these strengths and further strengthen the Pharmaceuticals business. Since her appointment as CEO Designate in September 2016, and in the run up to assuming the role of CEO on 1 April 2017, she is focusing completely on the transition. She is spending time with Sir Andrew so he can share his knowledge and experience and make key introductions, while also deepening her understanding of the business, especially R&D, Pharmaceuticals and Vaccines. She has also started to meet with major shareholders to listen to their views on GSK. She will share her strategic overview and vision for the Group later in the year. Details of her induction plan are set out on page 91.
A further change was made to our executive representation on the Board when Dr Moncef Slaoui, Chairman, Global Vaccines, indicated his intention to retire from the Board in 2017. In addition, Dr Patrick Vallance, President, R&D, has been appointed to the Board.
I would like to express my gratitude to both Sir Andrew and Moncef for their dedication and service to GSK over the years and their professionalism and support in facilitating an orderly Board succession process.
81 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Review of our Board governance arrangements
The Board keeps the functioning of its governance framework under regular review. During the year, it made the following enhancements:
Science Committee: The Board decided to establish a Science Committee to look at our science, pipeline and R&D capital allocation priorities. It is chaired by Dr Jesse Goodman, one of our designated Scientific and Medical Experts, and its members all have a background in life sciences from either a specialist or commercial perspective. This matter has been under consideration for some time and the timing of its implementation has been driven by the following considerations:
| science and innovation underpins each of our businesses in Pharmaceuticals, Vaccines and Consumer Healthcare; |
| our R&D organisation continues to deliver significant innovation for the Group, with a number of decisions for potential new medicines and vaccines coming up in the next two years. This Committee can help bring a greater focus to the Boards deliberations on R&D at a critical phase for the company; |
| the Board is looking to further increase its scientific capabilities with a search for a third Scientific and Medical Expert and establishing this Committee is in step with this approach. |
Finance Committee: After reviewing the role of our Finance Committee, the Board decided that a specific committee was no longer required. Its responsibilities have been reassigned to the Board or our Audit & Risk Committee.
Culture and values
As Chairman, I am responsible for leading and ensuring we have an effective Board. I also actively encourage a culture and environment in the boardroom that facilitates debate and where our Non-Executive Directors are able to provide constructive challenge to management. I am pleased to advise that I believe the Board is hardworking and engaged, with an appropriate balance of skills and experience. The newer appointees are bringing fresh insights and perspectives to further improve our decision making. Our recent annual Board evaluation exercise was carried out by the Company Secretary and centred on identifying further performance improvements. The evaluation outcomes are set out on page 92. Our 2017 Board evaluation will be undertaken by an independent external Board review specialist. The last such independent evaluation was carried out in 2014.
No less important for myself, in setting the tone of the organisation from the top, is promoting the values-based conduct and behaviours of our people that flow from the Boardroom through every artery of the business.
I seek to ensure that everything that we as a Board do is guided by our commitment to our values and to being in compliance with the local laws and regulations within which we operate. GSKs Code of Conduct (Code) draws together a number of our key policies that lay the foundations of these commitments and provides a working guide for the way in which we apply our values across our global operations.
Indeed, the Board felt it was important to lead by example and has chosen to undertake the same annual training on our Code obligations as our employees. The latest version of the Code, which was updated and strengthened in April 2016, is available in the governance area of www.gsk.com.
UK Corporate Governance Code compliance
I am pleased to report that we were in full compliance with the requirements of the Financial Reporting Councils 2014 UK Corporate Governance Code (UK Code) a copy of the UK Code is available on www.frc.org.uk. The following pages outline our approach to corporate governance.
I commend this report to all of our shareholders.
Philip Hampton
Chairman
13 March 2017
82 |
GSK Annual Report 2016 |
|||
Sir Philip Hampton 63
Non-Executive Chairman
Nationality
British
Appointed
1 January 2015. Deputy Chairman from 1 April 2015 and Non-Executive Chairman from 7 May 2015
Skills and experience
Prior to joining GSK, Sir Philip chaired major FTSE 100 companies, including The Royal Bank of Scotland Group plc and J Sainsbury plc. He has also served as Group Finance Director at Lloyds TSB Group, BT Group plc, BG Group plc, British Gas plc and British Steel plc. Sir Philip was previously appointed an Executive Director of Lazards and a Non-Executive Director at RMC Group Plc and Belgacom SA. Until 2009, he was Chairman of UK Financial Investments Limited, which manages the UK Governments shareholdings in banks.
External appointments
Sir Philip is currently the Senior Independent Director of Anglo American Plc, Chairman of its Remuneration Committee and member of its Audit Committee. Sir Philip is also Chair of the Hampton-Alexander Review on FTSE Women Leaders, an independent review on improving gender balance in FTSE leadership.
Sir Andrew Witty 52
Chief Executive Officer
Nationality
British
Appointed
31 January 2008. Chief Executive Officer from 21 May 2008. Sir Andrew is retiring from the Board on 31 March 2017.
Skills and experience
Sir Andrew joined GSK in 1985. He has worked in the UK, South Africa, the US and Singapore in various senior roles. In 2003, he was appointed President of Europe and joined GSKs Corporate Executive Team. Andrew has served in numerous advisory roles to Governments around the world, including South Africa, Singapore, Guangzhou China and the UK, where he was a member of the Prime Ministers Business Advisory Group from 2010-2015. He was awarded a Knighthood for services to the economy and to the UK pharmaceutical industry in the 2012 New Year Honours List.
External appointments
Sir Andrew is a UK Business Ambassador and serves on the China-Britain Business Council Advisory Council and the EDB International Advisory Committee, Singapore. Sir Andrew is also Co-Chair of a UK EU Life Sciences Steering Group to advise the UK Government on life science priorities in the context of the UK leaving the EU, Visiting Professor to the Institute of Global Health Innovation at Imperial College, London, and Chancellor of the University of Nottingham.
83 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
|
|
|
|
|||||||||
Emma Walmsley 47 | Simon Dingemans 53 | Dr Moncef Slaoui 57 | Dr Patrick Vallance 56 | |||||||||
CEO Designate | Chief Financial Officer | Chairman, Global Vaccines | President, R&D | |||||||||
Nationality |
Nationality |
Nationality |
Nationality |
|||||||||
British
|
British
|
Moroccan, Belgian & American
|
British
|
|||||||||
Appointed |
Appointed |
Appointed |
Appointed |
|||||||||
1 January 2017. Chief Executive Officer from 1 April 2017
|
4 January 2011. Chief Financial Officer from 1 April 2011
|
17 May 2006. Moncef is retiring from the Board on 31 March 2017.
|
1 January 2017
Skills and experience Patrick joined GSK in 2006 as Head of Drug Discovery and was subsequently appointed Senior Vice President, Medicines Discovery and Development. He has been a member of GSKs Corporate Executive Team since 2010 and was appointed President, Pharmaceuticals R&D in January 2012. Patrick joined the GSK Board on 1 January 2017.
Prior to joining GSK, Patrick was a clinical academic and, as Professor of Medicine, led the Division of Medicine at University College London. He has over 20 years experience of research clinical medicine, general internal medicine, cardiovascular medicine and clinical pharmacology. He was elected to the Academy of Medical Sciences in 1999.
External appointments Patrick is a Non-Executive Director of Genome Research Limited and UK Biobank. |
|||||||||
Skills and experience |
Skills and experience |
Skills and experience |
||||||||||
Emma joined GSK in 2010 with responsibility for Consumer Healthcare, Europe and was subsequently appointed President of GlaxoSmithKline Consumer Healthcare. She has been a member of GSKs Corporate Executive Team since 2011 and, in 2015, was appointed CEO of GSK Consumer Healthcare, a joint venture between GSK and Novartis. Emma joined the GSK Board on 1 January 2017 and will formally succeed Sir Andrew Witty as GSK CEO when he retires on 31 March 2017.
Prior to joining GSK, Emma worked with LOreal for 17 years where she held a variety of marketing and general management roles in Paris, London and New York. From 2007, she was based in Shanghai as General Manager, Consumer Products for LOreal China. Emma was a Non-Executive Director of Diageo plc from 1 January to 21 September 2016. She holds an MA in Classics and Modern Languages from Oxford University.
External appointments None |
Prior to joining GSK, Simon had over 25 years of experience in investment banking at SG Warburg and Goldman Sachs. Simon advised GSK for over a decade before his appointment and was closely involved in a number of GSKs key strategic projects.
External appointments Simon is Deputy Chairman of the 100 Group of Finance Directors, having been Chairman from 2014 to early 2017. |
Moncef joined GSK Vaccines in 1988 where he engineered the development of a robust vaccines pipeline. He then led Worldwide Business Development for pharmaceutical products before his appointment to lead R&D in 2006. He was given overall responsibility for GSKs Oncology Business in 2010; for GSK Vaccines in 2011; and for all Global Franchises in 2012. Moncef is Chairman of the Board of Directors of Galvani Bioelectronics, the company launched in November 2016 that GSK jointly owns with Verily Life Sciences.
Moncef has advised the US Presidents Council of Advisors on Science and Technology, was a member of the Board of the Agency for Science, Technology & Research (A*STAR) until January 2011, the PhRMA Foundation Board from 2008 to 2016 and the Advisory Committee to the Director of National Institutes of Health from 2011 to 2016.
He has a PhD in Molecular Biology and Immunology from Université Libre de Bruxelles and has published more than 100 scientific papers and presentations. Prior to joining GSK, Moncef was Professor of Immunology at the University of Mons, Belgium.
External appointments Moncef is a member of the Biotechnology Industry Organization Board in the US. He is also an adviser to the Qatar Foundation, and a member of the Qatar Biomedical Research Institute Scientific Advisory Committee. Moncef serves as a Non-Executive Director for the International AIDS Vaccine Initiative (IAVI) and is a member of the Board of Artizan Biosciences Inc. |
84 |
GSK Annual Report 2016 |
|||
Our Board continued
Manvinder Singh (Vindi) Banga 62
Senior Independent
Non-Executive Director
Nationality
Indian
Appointed
1 September 2015 and as Senior Independent Non-Executive Director from 5 May 2016
Skills and experience
Prior to joining GSK, Vindi spent 33 years at Unilever plc, where his last role (amongst several senior positions) was President of the Global Foods, Home and Personal Care businesses, and he was a member of the Unilever Executive Board. Vindi sat on the Prime Minister of Indias Council of Trade & Industry from 2004 to 2014, and was on the Board of Governors of the Indian Institute of Management (IIM), Ahmedabad. Vindi is also the recipient of the Padma Bhushan, one of Indias highest civilian honours. Between 2015 and 2016, Vindi was a Non-Executive Director of Thomson Reuters Corp and a member of its HR committee.
External appointments
Vindi is a Partner at private equity investment firm Clayton Dubilier & Rice. He is also Chairman of the Supervisory Board of Mauser Group, Chairman of Kalle GmbH, Senior Independent Director of Marks & Spencer Group plc and a member of its Nominations and Remuneration Committees. Vindi is on the Governing Board of the Indian School of Business (ISB), Hyderabad, and is a member of the Indo UK CEO Forum.
Professor Sir Roy Anderson 69
Independent Non-Executive Director & Scientific Expert
Nationality
British
Appointed
1 October 2007
Skills and experience
Professor Sir Roy is a world-renowned medical scientist with advanced knowledge of infectious disease epidemiology, and is currently Professor of Infectious Disease in the Faculty of Medicine, Imperial College, London. He is a Fellow of the Royal Society, the Academy of Medical Sciences and the Royal Statistical Society. He is an Honorary Fellow of the Institute of Actuaries and a Foreign Associate Member of the National Academy of Medicine at the US National Academy of Sciences and the French Academy of Sciences. Professor Sir Roy brings scientific expertise to the Boards deliberations.
External appointments
Professor Sir Roy is a member of the International Advisory Board of Holdingham Group and he is a member of the Science Advisory Board of the Natural History Museum, London. He is also a member of the Vaccine International Advisory Board (VACCIAB) of AJ Pharma Holding Sdn. Bhd in Malaysia, the International Alzheimers Consortium at Harvard University, Boston, and Chairman of the Scientific Advisory Board (SAB) of the Netherlands Centre for One Health (NCOH).
Dr Vivienne Cox 57
Independent Non-Executive Director
Nationality
British
Appointed
1 July 2016
Skills and experience
Vivienne has wide experience of business gained in the energy, natural resources and publishing sectors. She also has a deep understanding of regulatory and government relationships. She worked for BP plc for 28 years, in Britain and Continental Europe, in posts including Executive Vice President and Chief Executive of BPs gas, power and renewable business and its alternative energy unit. Vivienne was previously a Non-Executive Director of BG Group plc and Rio Tinto plc. Vivienne was appointed Commander of the Order of the British Empire in the 2016 New Year Honours for services to the UK Economy and Sustainability.
External appointments
Vivienne is Senior Independent Director of Pearson plc, a Non- Executive Director of Stena International and Chairman of the Supervisory Board of Vallourec, a supplier to the energy industry. She is also Lead Independent Director at the UK Governments Department for International Development.
Lynn Elsenhans 60
Independent Non-Executive Director
Nationality
American
Appointed
1 July 2012
Skills and experience
Lynn has a wealth of experience of running a global business and significant knowledge of the global markets in which GSK operates. She served as Chair, President and Chief Executive Officer of Sunoco Inc. from 2009 to 2012. Prior to joining Sunoco in 2008 as President and Chief Executive Officer, Lynn worked for Royal Dutch Shell, which she joined in 1980, and where she held a number of senior roles, including Executive Vice President, Global Manufacturing from 2005 to 2008.
External appointments
Lynn is a Non-Executive Director of Baker Hughes Inc. and Flowserve Corporation, a Director of the Texas Medical Center, and a Non-Executive Director of The First Tee of Greater Houston. She is also a Trustee of the United Way of Greater Houston.
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Dr Jesse Goodman 65
Independent Non-Executive Director & Scientific Expert
Nationality
American
Appointed
1 January 2016
Skills and experience
Dr Goodman previously served in senior leadership positions at the US Food and Drug Administration (FDA), including most recently as the FDAs Chief Scientist and previously as Deputy Commissioner for Science and Public Health and as Director of the Center for Biologics Evaluation and Research (CBER).
Dr Goodman played a leadership role in developing the FDAs Regulatory Science and Medical Countermeasures Initiatives and has worked collaboratively with industry, academia, government and global public health and regulatory partners to prepare for and respond to major public health threats, including emerging infectious diseases, disasters and terrorism. He led the FDAs response to West Nile Virus and to the 2009 H1N1 influenza pandemic and served on the Senior Leadership Team for the 2010 White House Medical Countermeasure Review. Dr Goodman brings scientific and public health expertise to the Boards deliberations.
External appointments
Dr Goodman, currently Professor of Medicine at Georgetown University, directs the Georgetown University Center on Medical Product Access, Safety and Stewardship (COMPASS) and is an active clinician who serves as Attending Physician in Infectious Diseases. He also serves as President and Member of the Board of the United States Pharmacopeia (USP) and as a member of the Scientific Advisory Board (SAB) of the Coalition for Epidemic Preparedness Innovations (CEPI).
Judy Lewent 68
Independent Non-Executive Director
Nationality
American
Appointed
1 April 2011
Skills and experience
Judy has extensive knowledge of the global pharmaceutical industry and of corporate finance, having joined Merck & Co in 1980 and then served as Chief Financial Officer from 1990 to 2007 when she retired. Judy was previously a Non-Executive Director of Purdue Pharma Inc, Napp Pharmaceutical Holdings Limited and certain Mundipharma International Limited companies until 31 December 2014. Judy previously served as a Non- Executive Director of Dell Inc., Quaker Oats Company and Motorola Inc.
The Board has determined that Judy has recent and relevant financial experience, and agreed that she has the appropriate qualifications and background to be an audit committee financial expert.
External appointments
Judy is a Non-Executive Director of Thermo Fisher Scientific Inc and Motorola Solutions Inc. She is also a Trustee of the Rockefeller Family Trust and Chairperson of the Audit Committee of Rockefeller Financial Services, a life member of the Massachusetts Institute of Technology Corporation and a member of the American Academy of Arts and Sciences.
Urs Rohner 57
Independent Non-Executive Director
Nationality
Swiss
Appointed
1 January 2015
Skills and experience
Urs has a broad range of business and legal experience having served as Chairman on a number of Boards, most recently for Credit Suisse, a world-leading financial services company. Prior to joining Credit Suisse in 2004, Urs served as Chairman of the Executive Board and CEO of ProSieben and ProSiebenSat.1 Media AG. This followed a number of years in private practice at major law firms in Switzerland and the US, having been admitted to the bars of the canton of Zurich in 1986 and the state of New York in 1990.
External appointments
Urs is currently Chairman of the Board of Credit Suisse Group AG and of the Chairmans and Governance Committee. He is also Chairman and member of the Board of Trustees of Credit Suisse Research Institute and Credit Suisse Foundation. Urs was appointed Vice-Chairman of the Governing Board of the Swiss Bankers Association in 2015.
Other Board members Sir Deryck Maughan was Senior Independent Non- Executive Director and a member of the Nominations, Audit & Risk and Remuneration Committees until his retirement from the Board on 5 May 2016.
Dr Stephanie Burns was an Independent Non-Executive Director and a member of the Remuneration and Corporate Responsibility Committees until her retirement from the Board on 5 May 2016.
Dr Daniel Podolsky was an Independent Non-Executive Director and a member of the Audit & Risk and Corporate Responsibility Committees until his retirement from the Board on 5 May 2016.
Hans Wijers was an Independent Non-Executive Director and a member of the Remuneration and Corporate Responsibility Committees until his retirement from the Board on 5 May 2016.
Stacey Cartwright was an Independent Non-Executive Director and a member of the Audit & Risk Committee until her retirement from the Board on 31 December 2016.
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1. | Sir Andrew Witty | |
Chief Executive Officer
|
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2. | Emma Walmsley | |
CEO Designate
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3. | Simon Dingemans | |
Chief Financial Officer
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4. | Patrick Vallance | |
President, R&D
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For biographical details, see pages 82 and 83. |
David Redfern
Chief Strategy Officer
David joined CET as Chief Strategy Officer in 2008 and is responsible for corporate development and strategic planning. He was appointed Chairman of the Board of ViiV Healthcare Ltd. in April 2011 and a Non-Executive Director of Aspen Pharmacare Ltd.
Previously, he was Senior Vice President, Northern Europe with responsibility for GSKs pharmaceutical businesses in that region and, prior to that, was Senior Vice President for Central and Eastern Europe. David joined GSK in 1994.
David has a Bachelor of Science degree from Bristol University in the UK and is a Chartered Accountant.
Claire Thomas
Senior Vice President, Human Resources
Claire was appointed to CET as Senior Vice President, Human Resources in 2008.
Claire joined the company in 1996 as Senior Manager, Human Resources, Sales and Marketing Group, UK Pharmaceuticals before becoming Director of Human Resources for UK Pharmaceuticals in 1997. She was appointed Senior Vice President, Human Resources, Pharmaceuticals Europe in 2001, and Senior Vice President, Human Resources, Pharmaceuticals International in 2006.
Prior to GSK, she worked for Ford Motor Company, holding various positions in Human Resources.
Claire has a Bachelor of Science degree in Economics, Management and Industrial Relations from the University of Wales.
Abbas Hussain
President, Global Pharmaceuticals
Abbas joined CET in 2008 and was appointed President, Global Pharmaceuticals in 2014, having joined the company as President, Emerging Markets & Asia Pacific in 2008. He joined the ViiV Healthcare Ltd Board in October 2009.
Previously, he spent 20 years at Eli Lilly where he held positions including President, Europe. He also worked for Eli Lilly in Australia, the US, India, Turkey and Germany in several roles, including business development, sales and marketing, and management.
He has a degree in Medicinal Chemistry & Pharmacology from Loughborough University and was born in Madras, India.
In January 2017, GSK announced Abbas decision to leave the company later in the year.
Dan Troy
Senior Vice President & General Counsel
Dan joined GSK and CET as Senior Vice President & General Counsel in 2008.
He was previously a Partner at the Washington law firm Sidley Austin LLP, where he principally represented pharmaceutical companies and trade associations on matters related to the US Food and Drug Administration (FDA) and government regulations. Dan was formerly Chief Counsel for the FDA.
Dan holds a B.S. in Industrial and Labor Relations from Cornell University and a J.D. from Columbia University School of Law. He chairs the US Chamber of Commerce Litigation Center.
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Phil Thomson
Senior Vice President, Communications and Government Affairs
Phil joined CET in 2011 and was appointed Senior Vice President, Communications and Government Affairs in 2014. He has responsibility for Media Relations, Investor Relations, Corporate Responsibility, Internal Communications, Product Communications, Government Affairs and GSKs Global Brand and Community Partnerships.
He joined the company as a commercial trainee in 1996, moving from pharmaceutical brand marketing to product communications. In 1999, he became Director of Media Relations and was then Director, Investor Relations from 2001 to 2004, when he returned to Corporate Media Relations as Vice President.
In July 2016, he became a Co-Opted Member of the China-Britain Business Council.
Phil earned his degree in English and History from Durham University.
Roger Connor
President, Global Manufacturing & Supply
Roger joined CET in 2012 and was appointed President, Global Manufacturing & Supply (GMS) in 2013, after working for a year as President Designate, GMS. Roger joined GSK in 1998 from AstraZeneca and worked in a number of finance and manufacturing strategy roles. Prior to his current position, he was Vice President, Office of the CEO and Corporate Strategy, from February 2010.
He holds a degree in Mechanical and Manufacturing Engineering from Queens University Belfast and a Masters in Manufacturing Leadership from Cambridge University. He is also a Chartered Accountant.
Nick Hirons
Senior Vice President, Global Ethics and Compliance
Nick was appointed to CET in 2014 as Senior Vice President, Global Ethics and Compliance, responsible for compliance, risk management and corporate security and investigations.
Nick joined GSK in 1994 as an International Auditor. He was later Head of Audit & Assurance, where he combined five audit functions into an independent team with a common risk-based methodology. In 2013, Nick relocated to China to establish a governance model for our China business that created a consistent approach to compliance.
Nick is a fellow of the Chartered Institute of Management Accountants.
Luc Debruyne
President, Global Vaccines
Brian McNamara
CEO, GSK Consumer Healthcare
Luc joined CET in 2016 as President, Global Vaccines, a role he has held since 2013. He joined GSK in 1991 and worked as a commercial strategy director in R&D, before leading the European Commercial Centre of Excellence in 2005. In 2006, Luc became General Manager of the Netherlands and then in 2010 Senior Vice President and General Manager in Italy. In 2012, he was appointed Senior Vice President, Pharma Europe, prior to his current role. Luc is a member of the International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) Vaccines CEO Roundtable, as well as the Management Committee of the Belgian Federation of Enterprises.
He holds a Masters degree in Physical Education from University of Leuven.
Brian joined CET in 2016, when he was appointed CEO, GSK Consumer Healthcare. Brian joined GSK in March 2015 as Head of Europe and Americas for GSK Consumer Healthcare, following the creation of a joint venture between GSK and Novartis. Previously, he was head of Novartiss OTC division. Brian began his career at Procter and Gamble. He is a board member of the World Self-Medication Industry Association.
He earned an undergraduate degree in Electrical Engineering from Union College in New York and an MBA in Finance from the University of Cincinnati.
Further information During the year Dr Moncef Slaoui was a member of CET and stood down on 31 December 2016 (see page 83).
In January 2017, Luke Miels was appointed President, Global Pharmaceuticals; his start date with GSK is to be confirmed.
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Corporate Governance continued
Corporate governance framework
|
The Board has a coherent corporate governance framework with clearly defined responsibilities and accountabilities. The framework is designed to safeguard and enhance long-term shareholder value and to provide a robust platform to realise the Groups strategy to Grow, Deliver and Simplify. Our internal control and risk management arrangements, which are described on pages 18 to 19 and 98 to 99 and 105 to 106, are an integral part of GSKs governance framework.
For the Board to operate effectively and to give full consideration to key matters, Board Committees have been established as set out below.
|
Details of other regular attendees at Committee meetings, such as the Chairman, CEO and other Executive Directors, are set out in the reports of our Committees. These reports are included later in the Corporate Governance Report. |
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2016 Board programme
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Strategy key: |
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Grow |
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Deliver |
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Simplify |
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Corporate Governance continued
Leadership and effectiveness continued
Key Board roles and responsibilities
|
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Board induction
|
The Company Secretary assists the Chairman in individually designing and facilitating induction programmes for new Directors. They are designed with the purpose of orientating and familiarising new Directors with our industry, organisation, governance and strategy to Grow, Deliver & Simplify. During the year, Emma Walmsley, our CEO Designate, Dr Jesse Goodman, a new US-based Science and Medical Expert, and Dr Vivienne Cox, a highly experienced UK-based Non-Executive Director, were all appointed to the Board.
Each new Director receives a general induction. A personalised induction is then devised which is individually tailored to each new Directors background, education, experience and role.
Customised Executive Director induction
|
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CEO Designate | ||||
Emma Walmsley | ||||
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Maximise handover opportunity with CEO | |||
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Continue to build knowledge of business and external environment |
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Engage broadly across the business and externally in listening mode |
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Define her leadership brand as CEO |
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Finalise her strategy, its narrative and financial plan |
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Define the culture/ways of working for the CET and the wider GSK Group |
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Legal responsibilities and duties of a CEO
|
Board, business awareness and training
To ensure that our Non-Executive Directors develop and maintain a greater insight and understanding of the business, they are invited to attend internal management meetings, including meetings of the CET, Research Advisory Board, the Research & Development Management Team (RDMT), the Portfolio and Discovery Investment Boards, the Global Pharma Operations Committee, the US Commercial Leadership Team and the Risk Oversight and Compliance Council (ROCC). They also meet employees informally during visits to the Groups operations and at receptions held around Board meetings.
The Chairman meets with each Director annually on a one-to-one basis to discuss his or her ongoing training and development requirements. The Board is kept up-to-date on legal, regulatory and governance matters through regular papers and briefings from the Company Secretary and presentations by internal and external advisers.
During 2016, the Board members undertook specific refresher training on GSKs CIA and on the new MAR regulations, and agreed to undertake training on GSKs Code of Conduct .
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Corporate Governance continued
Leadership and effectiveness continued
2016 Internal evaluation of the Board
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2016 Board performance action points
|
Progress against the conclusions of the 2015 Board evaluation review, internally facilitated by our Company Secretary, is set out below.
Action points | Progress/Achievements | |||||
Strategy | | Assist newer Directors with additional background briefing materials ahead of debates on strategy. | Additional materials are now provided on the companys Board portal. | |||
| Arrange more regular discussion of medium and longer term strategy with fresh insights from different perspectives. | The Board agenda was compiled to include more opportunities to consider strategy from different perspectives. | ||||
|
Implement suggestions to further enhance the effectiveness of the annual Board & CET strategy meetings. |
The Board provided positive feedback on the 2016 meetings held at the newly acquired Siena sites.
|
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Executive succession and NED refreshment |
| Further increase the focus on executive succession plans and ensure the effectiveness of the disaster recovery plan. | The Board was well positioned to operate its executive succession plans, that resulted in appointments to the Board and CET. These are described in more detail in the report of the Nominations Committee on pages 94 to 96. | |||
|
Consider alternative suggestions for Non-Executive Director refreshment. |
New approaches to identifying potential scientific and medical experts were utilised during 2016, supported by external recruitment experts.
|
||||
Deep dives and sites visits |
|
Consider further deep dives particularly on: R&D strategy and pipeline, product launches, US pricing, joint ventures, new business models and GMS. |
The 2016 Board meeting programme was adjusted to consider these matters during the year. | |||
| Consider holding one site visit to an operational site each year. |
The joint Board & CET strategy meetings in September 2016 were held in Siena, Italy at the manufacturing and R&D facilities acquired as a result of the Novartis transaction. The Board had the opportunity to meet employees and were able to learn at first-hand how these facilities, people and processes had been integrated into the wider Group.
|
||||
Shareholders | | Review and look to further enhance how the company communicates with shareholders. |
During the year, the Board and Audit & Risk Committee continued, to enhance quarterly reporting to assist shareholders understanding of the companys performance and standing.
|
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Board materials and logistics |
| Continue the drive to make Board/Committee materials more concise and also effective in highlighting issues and concerns. | ||||
| Aim to have less presentation time and more time for discussion and debate at meetings. |
The Chairman, Committee Chairmen and the Company Secretary focused on these issues in the preparations for, and when chairing, meetings during 2016.
|
||||
|
Allow for social time for Board members to get to know each other better given the number of new Board members.
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Corporate Governance continued
Leadership and effectiveness continued
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Attendees | Regular attendee |
Attends as required |
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Chief Executive Officer | ✓ | |||||||||
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Head of Human Resources | ✓ | |||||||||
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Appropriate external advisers | ✓ | |||||||||
|
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Dear shareholder
2016 was a busy year for the Committee.
Our CEO, Sir Andrew Witty, indicated in March 2016, his intention to retire from the Board in early 2017, after nearly 10 years as CEO and almost 32 years with GSK. Our principal focus for 2016 then became the CEO succession process and related executive management succession planning.
CEO and executive management succession
The Committee has for some years annually scrutinised the robustness of succession planning arrangements for the Executive Directors and each executive management role. The annual review of Talent and Leadership Strategy has been a key and regular item of Board and Committee discussion and oversight. The overall aim of this process is for the Board and Committee to seek assurance that there is a continuous and adequate supply of high-quality internal candidates to potentially step up to the Board and CET as required.
The Committee engaged Egon Zehnder and Korn Ferry, who specialise in the recruitment of high calibre Board directors. Using both firms ensured that the review process could be truly global and no companies were inaccessible.
The Committee, with full participation of all the Non-Executive Directors, then spent time considering the future strategic direction of the company and, with input from the executive recruitment firms, compiled a CEO role profile. The profile contained a brief of the requirements and the desired skill-set that a potential successor to Sir Andrew would need. This brief was drafted to emphasise the importance that the Board and Committee placed on the CEO being a great business leader and team builder.
The executive recruitment firms then initiated global searches against this agreed profile across all large global pharmaceutical and healthcare companies. This yielded a pool of internal and external candidates which was reduced to a shortlist of potential candidates. The firms reported regularly to the Committee as the process progressed.
The shortlisted internal and external candidates then met with key Board members first and were subjected to interviews, continuous assessments and reviews over an extended period. Each Non-Executive Director then met each shortlisted candidate at least once.
This culminated in one-to-one discussions between me and each of our Non-Executive Directors to seek their views on the candidates. I was very pleased that each Non-Executive Director made it clear that they considered that the right candidate to succeed Sir Andrew was Emma Walmsley, CEO of GSKs Consumer Healthcare division. The Committee then met to agree a proposal for the Board to recommend Emmas appointment as CEO Designate.
The recommendation received unanimous Board approval and on
20 September 2016 it was announced that Emma would join the Board as an Executive Director with effect from 1 January 2017 and would become CEO with effect from 1 April 2017.
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Nominations Committee Report continued
|
The Committee was well-positioned to appoint Emmas successor and Brian McNamara, Head of Americas and Europe for GSK Consumer Healthcare, succeeded her at the end of September 2016. Brian became a CET member with immediate effect. He joined GSK in March 2015 after the completion of the Novartis transaction.
Since 1 October, Emma has focused her attention completely on her transition into the role of GSKs next CEO. Details of her transition and induction arrangements can be found on page 91.
During the year, the Committee also conducted a search and appointment process for a new Executive Director when Dr Moncef Slaoui, our Chairman, Global Vaccines, indicated in June 2016 his intention to retire from the company in 2017 after over 10 years on the Board and 28 years with GSK. Moncef will step down from the Board on 31 March 2017 and will retire from the company on 30 June 2017.
The Committee recommended Dr Patrick Vallances appointment to the Board and on 19 December the Board approved Patricks appointment. He joined the Board as an Executive Director on
1 January 2017.
In addition, Luc Debruyne, our President, Global Vaccines, since 2013, was appointed a CET member in September 2016 in anticipation of Dr Slaouis retirement from the CET in December 2016.
Luke Miels has been appointed President, Global Pharmaceuticals and will join GSK and the CET later this year from AstraZeneca where he was Executive Vice President of their European business.
Abbas Hussain, President, Global Pharmaceuticals has decided to leave the company after serving nine years on the CET, and he has agreed that he will leave GSK later this year.
Enhancing the Boards scientific capabilities
The Boards scientific capabilities have recently been refreshed with the appointment of Dr Jesse Goodman, the former Chief Scientist for the US FDA, who was appointed to the Board on 1 January 2016. He succeeded Dr Daniel Podolsky, who retired as planned, after 9 years of service at our AGM in May 2016, as our designated US-based Scientific and Medical Expert (SME). The Committee is currently seeking to further enhance the Boards science capabilities by engaging Korn Ferry to conduct a global search for a further Non-Executive Director as an SME.
In addition, a new wholly independent Board Committee, the Science Committee, was established in December 2016 to provide oversight of GSKs R&D pipeline and scientific research strategy. The Committee recommended to the Board that the Science Committee be chaired by Dr Jesse Goodman. Other Non-Executive Directors appointed to the Science Committee included our UK-based SME, Professor Sir Roy Anderson, and Judy Lewent. The SME currently being recruited will also be appointed to the Science Committee. In light of this new Board Committee and to ensure effective continuity, Professor Sir Roy Anderson, who joined the Board in 2007, has agreed to stand for re-election by shareholders before stepping down from the Board at the 2018 AGM. The Board has confirmed that Professor Sir Roy continues to demonstrate the characteristics of independence in carrying out his role on the Board.
New Non-Executive Director appointment
During 2016, in addition to the search for two new Executive Directors and a US-based SME, the Committee searched for another Non-Executive Director. Egon Zehnder were engaged to conduct the search, which used broad selection criteria, and dossiers of potential Non-Executive appointees were considered by the Committee. Candidates were shortlisted for interview on merit, after assessing their relevant qualifications and time commitments. After interviewing selected candidates, the Committee was pleased to recommend to the Board Dr Vivienne Cox as a Non-Executive Director. She was appointed to the Board with effect from 1 July 2016. The Board considered that her many years of international business experience in global manufacturing organisations with challenging technologies would bring fresh insights to the Boards deliberations.
Board appointments and retirements
The ongoing refreshment of the Board has led to the following planned changes.
Director
|
Appointment date
|
Retirement date
|
||
Dr Jesse Goodman
|
1 January 2016
|
|||
Dr Vivienne Cox
|
1 July 2016
|
|||
Emma Walmsley
|
1 January 2017
|
|||
Dr Patrick Vallance
|
1 January 2017
|
|||
Stephanie Burns
|
5 May 2016
|
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Sir Deryck Maughan
|
5 May 2016
|
|||
Dr Daniel Podolsky
|
5 May 2016
|
|||
Hans Wijers
|
5 May 2016
|
|||
Stacey Cartwright
|
31 December 2016
|
|||
Sir Andrew Witty
|
31 March 2017
|
|||
Dr Moncef Slaoui
|
31 March 2017
|
Egon Zehnder and Korn Ferry provide recruitment consultancy services to the Committee, in addition to recruitment and HR services which they provide to the company.
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Corporate Governance continued
Leadership and effectiveness continued
Nominations Committee Report continued
|
Board Committee Chairman and membership changes
During the year, the Committee approved the following changes to the membership of our Board Committees.
Director
|
Committee membership
|
Appointment date
|
Retirement date
|
|||||
Vindi Banga |
Nominations, Audit & Risk and Remuneration Committees member
|
1 January 2016
|
||||||
Professor Sir Roy Anderson and Dr Jesse Goodman
|
Corporate Responsibility Committee members
|
1 May 2016
|
||||||
Dr Vivienne Cox
|
Corporate Responsibility Committee member
|
1 July 2016
|
||||||
Dr Jesse Goodman
|
Science Committee Chairman
|
1 January 2017
|
||||||
Professor Sir Roy Anderson and Judy Lewent
|
Science Committee members
|
1 January 2017
|
||||||
Dr Vivienne Cox
|
Remuneration Committee member
|
1 January 2017
|
||||||
Urs Rohner
|
Nominations Committee member
|
1 January 2017
|
||||||
Stephanie Burns |
Remuneration and Corporate Responsibility Committees member
|
5 May 2016
|
||||||
Sir Deryck Maughan |
Nominations, Audit & Risk and Remuneration Committees member
|
5 May 2016
|
||||||
Dr Daniel Podolsky |
Remuneration and Corporate Responsibility Committees member
|
5 May 2016
|
||||||
Hans Wijers |
Remuneration and Corporate Responsibility Committees member
|
5 May 2016
|
||||||
Stacey Cartwright
|
Audit & Risk Committee member
|
31 December 2016
|
Board composition and diversity
The Committee has sought to balance the composition of the Board and its Committees and to refresh them progressively over time so that it can draw upon the experience of longer serving Directors and benefit from new external perspectives and insights which more recent appointees can bring to the Boards deliberations.
Non-Executive Directors are drawn from a wide range of industries and backgrounds, including pharmaceuticals and R&D, vaccines, consumer products and healthcare, medical research and academia and financial services, and have a wealth of experience of complex organisations with global reach. The majority of our Board have a scientific or mathematical background and are attuned to the industry in which we operate.
We are committed to the diversity of our boardroom just as GSK is committed to equal opportunities for all our employees at all levels of the organisation. The Board and management seek to encourage a diverse and inclusive culture throughout GSK.
A key requirement of an effective board is that it comprises a range and balance of skills, experience, knowledge, gender and independence, with individuals that are prepared to challenge each other and work as a team. This needs to be backed by a diversity of personal attributes, including character, intellect, sound judgement, honesty and courage.
The Committee is responsible for developing measurable objectives to support the implementation of the Boards diversity policy, including gender, and monitoring progress towards the achievement of these objectives. Our diversity policy is in line with Lord Davies new voluntary target of at least 33% female Board level representation by 2020. We currently have 31% women on our Board and 14% on our Corporate Executive Team. Closing this gap between Board and CET gender representation and further increasing the pipeline of female direct reports to the CET is a particular area of attention. Female pipeline development was also a central theme of my review, together with Dame Alexander, across the FTSE 350, which is continuing and developing the valuable work that Lord Davies initiated in 2011.
The representation of women in management positions at GSK is illustrated on page 49 as part of the gender diversity of GSKs global workforce and alongside initiatives to promote diversity and inclusion throughout the organisation. We also support the engagement of executive search firms such as Egon Zehnder and Korn Ferry who have signed up to the Voluntary Code of Conduct on gender diversity and best practice.
We have also noted the recommendation set out in the Parker Review Committees report Beyond One by 21, published in November 2016, that each FTSE 100 board should have least one director of colour by 2021 and have adjusted our diversity policy accordingly to reflect this new target.
Committee evaluation
The Committees annual evaluation was internally facilitated by the Company Secretary on behalf of the Committee Chairman, and supplemented by a questionnaire circulated to Committee members. It was concluded that the Committee continued to operate effectively.
It was agreed for 2017 that the Committee would seek to identify another experienced Scientific and Medical Expert and additional consideration would be given on an ongoing basis to performance and succession planning for the CET and top talent and GSKs performance culture. The Committee would continue to plan for Non-Executive Director retirements based on the evolution of Group strategy.
Philip Hampton
Nominations Committee Chairman
13 March 2017
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Accountability |
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|
|
Judy Lewent
Audit & Risk Committee
|
Role
The Committee reviews and is responsible for:
| financial and internal reporting processes |
| the integrity of the financial statements, including the Annual Report and quarterly results announcements |
| the system of internal controls |
| identification and management of risks and external and internal audit processes |
| initiating audit tenders, the selection and appointment of external auditors, their remuneration and oversight of their work. |
Membership
|
Details of the Committee members financial, accounting or scientific experience and expertise are given in their biographies under Our Board on pages 84 to 85. See page 88 for Committee member attendance levels. |
The Company Secretary is Secretary to the Committee and attends all meetings. The entire Board is invited to attend the Committee meetings and other attendees include:
Attendee
|
Regular
attendee
|
Attends as
required
|
||||||
|
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General Counsel | ✓ | |||||||
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Financial Controller | ✓ | |||||||
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Head of Audit & Assurance | ✓ | |||||||
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Head of Global Ethics and Compliance | ✓ | |||||||
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Chief Medical Officer | ✓ | |||||||
|
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Chief Product Quality Officer | ✓ | |||||||
|
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External auditor | ✓ | |||||||
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In accordance with the FRCs Code, the Board has determined that Judy Lewent has recent and relevant financial experience. The Board has also agreed that Judy Lewent has the appropriate qualifications and background to be an audit committee financial expert as defined by the US Sarbanes-Oxley Act of 2002, and has determined that she is independent within the meaning of the US Securities Exchange Act of 1934, as amended.
In addition, Judy Lewent and Vindi Banga are also members of the Remuneration Committee, which allows them to provide input on the Committees review of the Groups performance and oversight on any risk factors relevant to remuneration matters.
Dear Shareholder
In the following pages of this report, we aim to share insights into the activities undertaken or overseen by the Audit & Risk Committee (the Committee) during the year. The Committee has worked largely to a recurring and structured programme of activities. I devise this programme with the Company Secretary and agree its content with management and the external auditors at the start of each year. It is then adapted as appropriate as the year progresses.
Running and concluding a successful tender of the external audit contract was a significant undertaking for the Committee, supported by management, during the year. This exercise, together with the Committees scrutiny of further enhancements and simplifications to our internal control, risk management and financial reporting systems and processes, is covered below.
External auditors
Conclusion of audit tender: Last year, we advised shareholders that the Committee was putting the external audit contract out to a competitive tender process, which the Committee initiated in July. The process was concluded in December 2016 when the Board appointed the Committees preferred choice of Deloitte LLP (Deloitte) as the companys new auditors. Our current external auditor, PricewaterhouseCoopers LLP (PwC), was not invited to participate in the tender due to the prevailing rules on audit firm rotation. They will continue in office during 2017. Subject to their reappointment by shareholders at our 2017 AGM, they will retire after completing the 2017 audit.
From GSKs 2018 financial year onwards, Deloitte will be appointed in PwCs place, subject to shareholder approval. We wish to thank each firm that participated in the tender for the professionalism and commitment they demonstrated through the process.
A full report on the key steps, governance arrangements and outputs from the audit tender process is given on page 102. The Committees judgement was that Deloitte was best placed to succeed PwC and deliver a high quality audit for GSK.
The Committee is currently overseeing the transition from PwC to Deloitte to ensure that:
| PwC continues to discharge its auditing responsibilities effectively to the end of its time in office; and |
| Deloitte takes the necessary steps to ensure that it is independent of GSK by the time it begins to observe PwC at an appropriate juncture in 2017. |
I look forward to reporting to shareholders on discharging the activities associated with this transition in GSKs 2017 Annual Report.
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The Financial Reporting Council Audit Quality Review:
The Committees confidence in the external auditors delivery of a high quality and effective audit for GSK was reinforced by the outcome of the FRCs Audit Quality Review teams (the AQR) review of PwCs audit of GSKs 2015 financial statements. The GSK audit was selected as part of the AQRs annual inspection of the audit quality of the largest audit firms in the UK. The Committee discussed the results and outcome of the review. The AQRs findings corroborated the results of the Committees own independent evaluation of PwC, which concluded that the external auditor was effective. The Committee received a report from PwC detailing how the 2016 audit would address the small number of findings identified by the AQR team and was satisfied with PwCs planned response.
Competition and Markets Authority compliance statement:
The Committee considers that, during 2016, the company has complied with the mandatory audit processes and audit committee responsibility provisions of the Competition and Markets Authority Statutory Audit Services Order 2014. This report describes the work of the Committee in discharging these responsibilities.
Pre-approval of non-audit services: The Committee reviewed and discussed adapting the companys approach to its existing non-audit services policy, to comply with new requirements set out in the FRCs revised Ethical Standards and the implementation of the EU Audit Regulation for GSKs 2017 financial year. In particular, we agreed changes to our non-audit services pre-approval process in line with the new restrictions on auditors supplying non-audit services to UK listed companies. These changes are outlined on page 104.
Internal framework for control and risk management developments
This is a core discipline for the Committee. In 2016, the following developments in the business units and across the enterprise in the areas of communication, reporting, training and analytics helped strengthen our culture of compliance and risk management.
Anti Bribery And Corruption (ABAC) and Third Party Oversight (TPO) programmes: These are a high priority for the Committee and it has overseen the following areas of progress made during the year:
| ABAC Global Risk Assessment: This new programme was launched to significantly enhance the way our ABAC risk is identified and prioritised across the Group. Existing ABAC data has been centrally pooled by our Global Risk Office to help how our ABAC risk exposure is measured. This has enabled management to target risk mitigation techniques on the companys highest risk activities, business units and regions. |
| TPO programme: This provides a standard framework which governs all third party relationships and has moved from design to deployment phase. This supplier assessment programme operates in a large majority of our Latin America and South East Asia markets. It is applied across our range of third parties and is used in particular to assess suppliers deemed by GSK to be high risk. Risk levels and corrective and preventative action tracking are now managed via an easy-to-use reporting system by our employees who are enrolled in this programme. |
During 2017, the TPO programme is expected to cover our global operations. This will ensure continued risk management improvements in respect of our third party relationships, embedding a basic TPO capability into our Supplier Lifecycle Management software and introducing further buying experience simplifications.
SEC settlement: In 2016, GSK entered into a settlement with the US Securities and Exchange Commission (SEC) in relation to its inquiry into past sales and marketing practices in China. Under this settlement, the company has obligations to provide the SEC with information on the framework and evolution of our ongoing ABAC programme for monitoring purposes. The Committee reviews and considers updates before they are provided to the SEC, as agreed under the settlement.
InfoProtect: To reflect a fast evolving landscape and its potential impacts on this key enterprise risk, our multi-year InfoProtect programme was refreshed in 2016. Heightened attention is being paid to those areas of our business that have the highest risk exposure. Improvements have been prioritised for delivery to achieve the greatest risk reduction and improve the maturity of our information security and privacy processes. Our Chief Information Security Officer (CISO) and our CFO (who has Board-level responsibility for this enterprise risk) continue to ensure our cyber security defences remain strong and effective. The CFO and CISO brief the Committee regularly on developments.
Enhanced governance around reporting: The Committee and Risk Oversight & Compliance Council (ROCC) receive internal control and risk management reports throughout the year. These are based on their respective governance responsibilities within the wider organisational internal risk governance framework. The efficiency and quality of this upward reporting mechanism is crucial in assisting the Committee in properly monitoring GSKs internal framework for control and risk management. During 2016, the Global Risk Office has implemented the following Committee and ROCC reporting improvements into business units and across our risk enterprise exposures.
The Committee reporting schedules have been improved so that risk management reports from the business units are presented to the ROCC after they have been submitted to the Committee. This means that the Committees feedback can be properly incorporated into managements deliberations at the ROCC. In addition, our business units now provide six monthly updates to the ROCC that concentrate on progress against their top three risk management commitments. This simplification has helped foster a more focused discussion at the ROCC on each business units risk management priorities.
To help the Committee improve its understanding of our enterprise risk strategies, GSKs enterprise risk owners are encouraged to provide commentary on the organisations risk tolerance in respect of the specific risk they are responsible for mitigating. In addition, the development of risk performance dashboards for ABAC, Product Quality and Research Practices, has further enhanced the Committees ability to understand and monitor our risk exposure levels on an ongoing basis.
Compliance activities
Building trust by embedding our Values: Our Global Ethics & Compliance (GEC) function continues to embed its Living our Values and Building Trust strategy to help motivate employees to put the companys core values at the heart of every decision they make. In particular, GEC deployed enterprise-wide training for employees to coincide with the release in April 2016 of GSKs updated Code of Conduct. This is at the heart of our compliance programme and focuses on GSKs core values of Patient Focus and Integrity, Respect for People and Transparency.
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In addition to delivering training to our employees across the enterprise, GEC has also introduced the following training tools specifically aimed at team leaders to help reinforce values based conduct in their teams:
| Leader Led Discussion toolkit: This has been launched to enable leaders and teams to have meaningful discussions on the importance of GSKs values and right first time culture. These discussions are informal and short in length, provide opportunities to explore GSKs values and for leaders and their teams to think about what quality means in their part of the companys business. The toolkits use a combination of external events and research such as academic studies around why good employees can sometimes make poor decisions. |
| Values Maturity Assessment: This is a leadership team self-assessment tool which allows teams to assess how well values are embedded into the business and establishes a values improvement plan based on the outcome of the assessment. During 2016, Values Maturity Assessments (VMA) were undertaken by GEC across a third of GSKs business units, in line with a values objective set by the Corporate Executive Team. This VMA roll out is continuing in 2017 across all our business units. |
GM certifications: The General Manager (GM) confirmation process across Pharmaceuticals and Vaccines has continued throughout 2016, requiring GMs to confirm their adherence to GSKs Internal Control Framework. A revised confirmation process was launched in September 2016. It focused on specific risk areas, including TPO, Health Care Professional and government official interactions, embedding ABAC, and other risks associated with pricing and commercial terms. In 2016, Consumer Healthcare implemented a similar process for its GMs to confirm the operation of our internal control framework for key risks and minimum controls.
Corporate Integrity Agreement: The Committee has oversight of the companys responsibilities under a US Corporate Integrity Agreement (CIA) signed with the US Department of Health and Human Services in 2012, which is now in its final year, although commitments with certain States regarding salesforce compensation extend into 2019. During 2016, the Committee continued to receive quarterly CIA compliance and assurance updates from the Head of GEC. It also reviewed and recommended to the Board the adoption of the annual resolutions that confirm adherence to the terms of the CIA for inclusion in the certification reports the company provides to the appropriate US regulatory authorities each year.
Given the success of the GM confirmation and CIA certification processes so far and because the CIA is due to end in 2017, the Committee is keen to retain the best practice compliance disciplines of the CIA. As a result it is assessing GECs proposal to roll-out a tailored Business Unit Confirmation that combines the principles of these two processes. This proposed simplification is designed to provide the Committee with consolidated assurance that our internal control framework requirements are identified and understood, and that any possible gaps are identified and addressed at each of our business units.
Global reporting system platforms
The Committee was pleased to oversee significant progress being made in moving towards more standardised, global systems which support our end-to-end processes. Management continued to deploy upgrades as planned, with a major system deployment completed during the first half of 2016 to schedule and on budget. The remaining deployments under this multi-year programme are being completed during 2017 and early 2018, with an increasing focus on capturing the benefits that these new standardised systems and processes generate for GSK.
My role
Finally, my role as Chair of the Committee continues to be busy and varied. During the year, I had significant interactions with key senior executives and our auditors, and attended a range of management meetings, including those of the ROCC, Consumer Healthcare, Finance GEC and Global Manufacturing & Supply leadership teams. I also led the audit tender process and met the bidding firms audit partners and teams to familiarise myself with their qualities and capabilities and to gain an impression of what it could be like to work with them.
Along with my Board colleagues, I was pleased to visit our manufacturing and R&D facilities in Siena, Italy that had been acquired as part of the Novartis transaction in 2015. We met local senior executives and employees and were able to learn at first-hand how these facilities, people and processes have been integrated into the wider Group. I was also pleased to learn how GSKs internal control and risk management practices have been translated and embedded in the business.
On a personal note I would like to acknowledge Sir Andrews contribution to the company. He has been a visionary leader driving GSKs values during his term as CEO and he led positive change in established industry ways of working. I would like to wish him well in his next endeavours and I very much look forward to working with his successor, Emma Walmsley, when she succeeds him as CEO from 1 April 2017.
Judy Lewent
Audit & Risk Committee Chairman
13 March 2017
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Corporate Governance continued
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What the Committee did during 2016
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Areas of Committee focus
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Items discussed
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Frequency
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Financial reporting |
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Reviewed integrity of draft financial statements, appropriateness of accounting policies and going concern assumptions
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Considered approval process for confirming and recommending that 2015 Annual Report is fair, balanced and understandable
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Reviewed and recommended approval of 2015 Annual Report and Form 20-F
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Reviewed and approved Directors expenses
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Reviewed and recommended approval of quarterly and preliminary results announcements and dividends
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Reviewed significant issues in relation to the quarterly and preliminary results
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Considered evolving market practice on the Viability Statement requirements
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Reviewed and recommended inclusion of the Viability Statement for the 2015 Annual Report
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Reviewed accounting developments and their impacts and key accounting issues
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Reviewed GAAP vs Non-GAAP reporting
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Global internal control & compliance |
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Reviewed Global Pharmaceuticals, Vaccines, R&D, GMS and Consumer Healthcare business unit assurance reports
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Reviewed GSKs internal control framework
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Confirmed compliance with Sarbanes-Oxley Act
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Reviewed Audit & Assurance work during 2015 and approved the planned work for 2016
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Undertook Corporate Integrity Agreement (CIA) training
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Undertook new Market Abuse Regulation training
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Received and renewed CIA compliance and assurance reports
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Reviewed reports on the Operational Excellence programme
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Reviewed the implementation of new systems for Group Support Functions
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Received litigation reports and updates
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Received ABAC investigation status reports
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External auditors |
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Reviewed and approved audit/non-audit expenditure incurred during 2015
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Considered the auditors report on the 2015 annual results
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Performed evidence-based assessment of external auditors and the effectiveness of 2015 external audit
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Considered qualifications, expertise and independence of the external auditors
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Recommended the re-appointment of the external auditor and for the Committee to agree auditors remuneration
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Approved the 2016 audit plan and audit fee proposal and set performance expectations for auditors
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Considered initial results of 2016 audit
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Reviewed and agreed pre-approval of budget for auditors to provide non-audit services for 2017
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Undertook a competitive audit tender process and recommended to the Board two audit firms, including a preferred firm, to be appointed for the audit of the 2018 financial statements
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Risk |
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Reviewed risk management framework compliance
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Reviewed risk elements of Group treasury, pensions, risk and insurance and tax policies
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Received status reports on following enterprise risks: ABAC, Commercialisation, Crisis and Continuity, EHSS, Information Protection, Management and Financial Controls and Reporting, Product Quality and Research Practices
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Received an update on integration following the Novartis transaction
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Received terrorism risk assessment reports
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Received update on Brexit implications
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Received Risk Oversight Compliance Council meeting updates
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Considered emerging risks
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Governance and other matters |
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Confirmed compliance with UK Corporate Governance Code
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Discussed evaluation exercise of Committee, agreed action plan to further improve operation of Committee
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Reviewed the Committees terms of reference
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Met privately and separately with the Heads of Global Ethics & Compliance and Audit & Assurance
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Confirmed that the Committees terms of reference had been adhered to during 2016
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Received corporate governance updates
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Reviewed and approved the approach to the Modern Slavery Act 2015
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Met privately with the external auditors at the end of each meeting
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Committee Activity Key |
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Annually |
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Quarterly |
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Periodically |
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Standing |
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Significant issues relating to the financial statements
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In considering the quarterly financial results announcements and the financial results contained in the 2016 Annual Report, the Committee reviewed the significant issues and judgements made by management in determining those results. The Committee reviewed papers prepared by management setting out the key areas of risk, the actions undertaken to quantify the effects of the relevant issues and the judgements made by management on the appropriate accounting required to address those issues in the financial statements.
The significant issues considered in relation to the financial statements for the year ended 31 December 2016 are set out in the following table, together with a summary of the financial outcomes where appropriate. In addition, the Committee and the external auditors have discussed the significant issues addressed by the Committee during the year and the areas of particular audit focus, as described in the Independent Auditors Report on pages 149 to 157.
Significant issues considered by the Committee in relation to the financial statements
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How the issue was addressed by the Committee
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Going concern basis for the preparation of the financial statements |
The Committee considered the outcome of managements half-yearly reviews of current and forecast net debt positions and the various financing facilities and options available to the Group. Following a review of the risk and potential impact of unforeseen events, the Committee confirmed that the application of the going concern basis for the preparation of the financial statements continued to be appropriate.
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Revenue recognition, including returns and rebates (RAR) accruals |
The Committee reviewed managements approach to the timing of recognition of revenue and accruals for customer returns and rebates. The US Pharmaceuticals and Vaccines accrual for returns and rebates was £2.2 billion at 31 December 2016 and the Committee reviewed the basis on which the accrual had been made and concurred with managements judgements on the amounts involved. A fuller description of the process operated in the US Pharmaceuticals and Vaccines business in determining the level of accrual necessary is set out in Critical accounting policies on page 76.
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Provisions for legal matters, including investigations into the Groups commercial practices |
The Committee received detailed reports on actual and potential litigation from both internal and external legal counsel, together with a number of detailed updates on investigations into the Groups commercial practices. Management outlined the levels of provision and corresponding disclosure considered necessary in respect of potential adverse litigation outcomes and also those areas where it was not yet possible to determine if a provision was necessary, or its amount. At 31 December 2016, the provision for legal matters was £0.3 billion, as set out in Note 29 to the financial statements, Other provisions.
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Provisions for uncertain tax positions |
The Committee considered current tax disputes and areas of potential risk and concurred with managements judgement on the levels of tax contingencies required. At 31 December 2016, the Groups balance sheet included a tax payable liability of £1.3 billion.
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Impairments of intangible assets |
The Committee reviewed managements process for reviewing and testing goodwill and other intangible assets for potential impairment. The Committee accepted managements judgements on the intangible assets that required writing down and the resulting impairment charge of £29 million in 2016. See Note 19 to the financial statements, Other intangible assets for more details.
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Valuation of contingent consideration in relation to ViiV Healthcare |
The Committee considered managements judgement that following the further improved sales performance of Tivicay and Triumeq and the significant weakening of Sterling in the latter part of the year, it was necessary to increase the liability to pay contingent consideration for the acquisition of the former Shionogi-ViiV Healthcare joint venture. At 31 December 2016, the Groups balance sheet included a contingent consideration liability of £5.3 billion in relation to ViiV Healthcare. See Note 39 to the financial statements, Contingent consideration liabilities for more details.
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Consumer Healthcare put option |
The Committee considered managements judgement on the valuation of the liability recognised in respect of Novartis put option over its shareholding in the Consumer Healthcare Joint Venture. This included a review of the unwinding impact of the discounting of the liability and the increase in the liability caused by the significant weakening of Sterling in the latter part of the year.
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ViiV Healthcare put options |
The Committee considered the amendments to the ViiV Healthcare Shareholders Agreement made during the year which resulted in the recognition of the put options held by Shionogi and Pfizer in Q1 2016 and the subsequent de-recognition of the Shionogi put option in Q4 2016. The Committee reviewed and agreed the accounting for the put options and concurred with managements judgement on the valuation of the Pfizer put option of £1,319 million at 31 December 2016.
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Corporate Governance continued
Accountability continued
Audit tendering
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PwC has been the auditor of the company and the Group since the inception of each in 2000. Their performance has been reviewed annually and audit partner rotation requirements have been observed.
As indicated in last years Annual Report, GSK decided to undertake an external audit tender in 2016 with a view to replacing PwC from our 2018 financial year onwards. This was done in the best interests of our shareholders and to comply with the audit firm rotation requirements.
A robust governance structure was implemented, headed by the Audit & Risk Committee (ARC), to manage, support and deliver a successful audit tender process.
Judy Lewent chaired the Executive Steering Committee (ESC), which has overseen the audit tender process, evaluated the audit firms and liaised with the ARC. The other members of the ESC were the CFO, Group Financial Controller and Company Secretary. The Group Financial Controller chaired the Operations Steering Committee, which was made up of finance heads, and coordinated the audit tender process and a cross-functional Planning Team has provided day-to-day support and advice. These levels of governance and their purpose are illustrated in last years Annual Report on page 92.
The key objective of the ARC was to deliver a fair, transparent and successful audit contract tender process with minimum disruption to the business. It endorsed weighted selection criteria and evaluation methodology based on GSKs expectations for the external auditors. These were equally divided into Audit Quality and Service and Audit Team Capability and Competence.
In addition, five critical success factors were prioritised and guided the Committee and the Board in making their final recommendation and decision which comprised:
| Audit Approach and Strategy; |
| High Quality Independent Audit; |
| Effective Partnership; |
| Risk in Transitioning Auditors in and out; and |
| Value for Money |
After a detailed market assessment, a number of audit firms, including some firms outside the Big Four, were approached to participate in this process. Judy Lewent then made the final preselection of Audit Lead Partners before the Request for Proposal and data room were issued and opened to the bidding firms in July 2016. Site meetings took place at GSK House over three days in September 2016, which was an opportunity for our finance and functional leaders to meet with the bidding firms teams face-to-face.
These meetings, which Judy Lewent oversaw with her ESC colleagues, were a means of discussing GSKs audit requirements with each firm to help them develop their proposals, and to evaluate their technical knowledge, strengths and weaknesses and get a feel of what it could be like to work with them. Feedback from GSKs participants was discussed with the Committee and shared with the audit partners prior to the submission of their audit tender proposals in October 2016.
The bidding firms proposals were subject to detailed evaluation with key areas to probe identified for discussion with the audit partners and their teams at their oral presentations to the Committee and other GSK attendees that took place in November 2016. All information from the evaluation stages of the process site meetings, written proposal submissions and oral presentations were shared with and discussed by the ARC at the conclusion of the process. This enabled the ARC to recommend to the Board the appointment of Deloitte as the preferred new auditor from two shortlisted bidding firms, a recommendation which the Board subsequently endorsed.
GSK has now entered the transition phase of the process leading up to Deloitte taking on the external audit contract with effect from 1 January 2018 and an update on these activities will be disclosed in our 2017 Annual Report.
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Auditors appointment
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The detailed criteria the Committee uses for judging the effectiveness of the external auditor and their overriding responsibility to deliver a smooth running, thorough and efficiently executed audit are set out below:
Performance expectations for GSKs external auditor
Specific auditor responsibilities |
Discuss approach and areas of focus in advance with early engagement on understanding the implications of GSKs new operating model
|
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Ensure Sarbanes-Oxley scope and additional procedures are discussed and endorsed by management and communicated on a timely basis within GSK and PwC
|
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Avoid surprises through timely reporting of issues at all levels within the Group
|
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Ensure there is clarity of roles and responsibilities between the auditor and local management
|
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Respond to any issues raised by management on a timely basis
|
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Meet agreed deadlines
|
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Provide continuity and succession planning of key employees of the auditor
|
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Provide sufficient time for management to consider draft auditor reports and respond to requests and queries
|
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Employ consistent communication between local and central audit teams. |
Wider auditor responsibilities |
Provide up-to-date advice on the new Viability statement requirement
|
|
Provide up-to-date knowledge of technical and governance issues, including evolving market practice on the Viability statement requirements
|
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Serve as an industry resource; communicating best practice and industry trends in reporting and integrated reporting
|
||
Adhere to all independence policies (including GSKs policies, the Financial Reporting Councils ISA 240 and applicable Securities and Exchange Commission standards)
|
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Deliver a focused and consistent audit approach globally that reflects local risks and materiality
|
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Liaise with GSKs Audit & Assurance team to avoid duplication of work and Global Ethics and Compliance team to ensure common understanding of audit outcomes
|
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Provide consistency of advice at all levels of the organisation
|
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Ultimately provide a high quality service to the Board, be scrupulous in their scrutiny of the Group and act with utmost integrity. |
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Corporate Governance continued
Accountability continued
Non-audit services
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The Sarbanes-Oxley Act of 2002 prohibits the engagement of the external auditor for the provision of certain services such as legal, actuarial, internal audit outsourcing or financial information systems design. Where the external auditor is permitted to provide non-audit services (such as audit-related, tax and other services), the Committee ensures that auditor objectivity and independence are safeguarded by a policy requiring pre-approval by the Committee for such services. There were no contractual or similar obligations restricting the Groups choice of external auditor.
All non-audit services over £50,000 are put out to competitive tender with financial service providers other than the external auditor, in line with the Groups procurement process, unless the skills and experience of the external auditor make them the only suitable supplier of the non-audit service under consideration. In this case, a request for proposal is submitted by the relevant CET member to the CFO for approval. Non-audit services spending is monitored by the Committee on a quarterly basis and discussed with the Committee Chairman.
The following policy guidelines on engaging the external auditor to provide non-audit services are observed:
| ascertaining that the skills and experience of the external auditor make them a suitable supplier of the non-audit services; |
| ensuring adequate safeguards are in place so that the objectivity and independence of the Group audit are not threatened or compromised; and |
| ensuring that the total fee levels do not exceed 50% of the annual audit fee, except in special circumstances where there would be a clear advantage in the companys auditor undertaking such additional work. |
This policy, which has been maintained for a number of years by the Committee, was reviewed in December 2016 for compliance with the Financial Reporting Councils (FRCs) revised Ethical Standards and the EU Audit Regulation (new regulations). The following three key policy guidelines were considered by the Committee as part of its review:
Fee cap: GSKs existing non-audit services fees cap of 50% of the annual audit fee in GSKs policy is more stringent than the FRCs new fees cap set at 70% of the average of the audit fees for the preceding three year period. GSKs existing policy cap of 50% has been retained.
Prohibitions: GSKs policy has been updated so that the black list of prohibited non-audit services in the new regulations are applied across the Group from 2017. This is subject to those exceptions outside the EU that the Committee can approve.
Pre-approval: The FRCs new guidance for audit committees restricts the category-wide pre-approval process in GSKs policy. This policy has been updated so that, for GSKs 2017 financial year onwards, all non-audit services:
| over £50,000 are pre-approved by the Committee Chairman and CFO as delegated by the Committee; |
| between £25,000 and £50,000 are pre-approved by the Group Financial Controller; and |
| under £25,000 are approved by a designate of the Group Financial Controller. |
Fees paid to the companys auditor and its associates are set out below. Further details are given in Note 8 to the financial statements, Operating profit.
Where possible, other accounting firms are engaged to undertake non-audit services.
Fair, balanced and understandable assessment
|
One of the key compliance requirements of a groups financial statements is for the Annual Report to be fair, balanced and understandable. The coordination and review of Group-wide contributions into the Annual Report follows a well established and documented process, which is performed in parallel with the formal process undertaken by the external auditor.
The Committee received a summary of the approach taken by management in the preparation of GSKs 2016 Annual Report to ensure that it met the requirements of the FRCs Code. This enabled the Committee, and then the Board, to confirm that GSKs 2016 Annual Report taken as a whole is fair, balanced and understandable.
Code of Conduct and reporting lines
We also have a number of well established policies, including a Code of Conduct, which is available on the governance section of our website, and confidential Speak Up reporting lines for the reporting and investigation of unlawful conduct. An updated version of the Code of Conduct was published in April 2016.
Committee evaluation
The Committees annual evaluation was internally facilitated by the Company Secretary, and supplemented by a questionnaire circulated to Committee members on behalf of the Committee Chairman. It was concluded that the Committee continued to operate effectively. In terms of enhancements to the Committees deliberations the following improvement points were agreed:
The Committee would focus on ways to further improve the transparency of the companys reporting to reflect best practice.
The Committee considered its ways of working and agreed enhancements to reflect the Committees changing agenda.
The Committee asked management to continue to improve the crispness of reports it received.
The Committee was keen to continue to receive regular updates on cyber security and to understand how the use of data analytics and technology could help to monitor employee and supplier behaviour against the companys values.
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Internal control framework
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The Board recognises its obligation to present a fair, balanced and understandable assessment of GSKs current position and prospects. The Board is accountable for evaluating and approving the effectiveness of the internal controls, including financial, operational and compliance controls, and risk management processes operated by the Group.
The Internal Control Framework (the Framework) is the means by which the Group ensures compliance with laws and regulations, the reliability of financial reporting and comprehensive risk management. The Framework supports the continuous process of the Boards identification, evaluation and management of the Groups Principal Risks, as required by the Financial Reporting Councils (FRCs) UK Corporate Governance Code (UK Code), and is designed to manage, rather than eliminate, the risk of not achieving business objectives.
A fit for purpose Framework, in conjunction with our values and Speak Up processes, ensures that the risks associated with our business activities are actively and effectively controlled in line with the agreed risk appetite. We believe the Framework provides reasonable, but not absolute, assurance against material misstatement or loss.
To ensure effective governance and promote an ethical culture, the Group has in place the Risk Oversight and Compliance Council (ROCC). This team of senior leaders is authorised by the Board to assist the Audit & Risk Committee (the Committee) in overseeing risk management and internal control activities. It also provides the business units with a framework for risk management and upward escalation of significant risks. Each business unit has a risk board structure which reports to the ROCC. The business unit Risk Management and Compliance Boards (RMCBs) are responsible for promoting the local tone from the top and risk culture, as well as ensuring effective oversight of internal controls and risk management processes.
Each Principal Risk has an assigned risk owner who is a member of senior management. The risk owner is responsible for reporting on the risk management strategy for their respective Principal Risk to the ROCC and the Committee at least once every two years.
The ROCC and the RMCBs are assisted by the Global Ethics and Compliance division (GEC), which is responsible for advancing risk management and the development of practices that drive compliance with policies and support risk-based decision making. GEC actively promotes ethical behaviours through enabling all members of the organisation to operate in accordance with our values, and to comply with applicable laws and regulations.
106 |
GSK Annual Report 2016 |
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Corporate Governance continued
Accountability continued
Internal control framework continued
|
The Audit & Assurance division (A&A), in line with an agreed assurance plan, provides independent assurance to senior management and the Board on how risk is being managed across the Group. This assurance helps senior management and the Board to meet their oversight and advisory responsibilities in fulfilling the Groups strategic objectives and building trust with patients and other stakeholders. A&A has a dual reporting line into the Chief Financial Officer and the Committee.
The Committee receives regular reports from business units, Principal Risk owners, GEC and A&A on areas of significant risk to the Group and on related internal controls. These reports provide an assessment on the internal control environment within each Principal Risk area, including enhancements to strengthen the control environment. Following the consideration of these reports, the Committee concludes on the effectiveness of the control environment and reports to the Board annually.
In accordance with the FRCs UK Code provisions, the Board, through the authority delegated to the Committee, has conducted a robust assessment of the Groups Principal Risks. This includes the consideration of the nature and extent of risk it is willing to take in achieving the Groups strategic objectives. The Board, through the Committee, has maintained oversight to ensure the effectiveness of the internal control environment and risk management processes in operation across the Group for the whole year, and up to the date of the approval of this Annual Report.
The Boards review focuses on the company and its subsidiaries and does not extend to material associated undertakings, joint ventures or other investments, although it considers the risk of the companys participation in these activities. There are established procedures and controls in place to identify entities whose results must be consolidated with the Groups results.
We believe the process followed by the Board, through the Committee, in reviewing regularly the system of internal controls and risk management processes is in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the FRC.
A review of the Groups risk management approach is further discussed in the How we manage risk section of the Strategic report on pages 18 to 19. Our management of each Principal Risk is explained in Principal risks and uncertainties on pages 253 to 262. The Groups viability is discussed in the Group financial review section of the Strategic report on page 56.
107 | GSK Annual Report 2016 |
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Governance and remuneration
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Corporate Governance continued |
Financial statements
|
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Relations with shareholders |
Investor information
|
|
We work to engage effectively with shareholders through our regular communications, the AGM and other investor relations activities.
We announce our financial results on a quarterly basis. The annual results are included in our Annual Report. All shareholders receive an Annual Summary which advises them that our Annual Report and Notice of our Annual General Meeting are available on our website.
During the year, Sir Andrew Witty and Simon Dingemans gave presentations to institutional investors, analysts and the media on the full year results, which are also available via webcast and teleconference. After the first, second and third quarter results, we hold webcast teleconferences for the same audience. Our results are available on our website.
Our Investor Relations (IR) department, with offices in London and Philadelphia, acts as a focal point for communications with investors. The CEO, CFO and the Chairman maintain an active dialogue with institutional shareholders on performance, plans and objectives through a programme of regular meetings. During the year they held over 24 individual meetings with investors and they have also hosted approximately 13 group meetings with investors and potential investors.
The Company Secretary acts as a focal point for communications on corporate governance matters. We also have a small central Corporate Responsibility (CR) team which coordinates strategy, policy development and reporting specifically with respect to CR matters. Meanwhile, the IR department communicates with socially responsible investors and other stakeholders.
The Chairman also meets regularly with institutional shareholders to hear their views and discuss issues of mutual importance, and communicates their views to the other members of the Board. The Senior Independent Non-Executive Director (SID) and all the Non-Executive Directors are available to meet with shareholders.
Governance and remuneration meetings
A cornerstone of our investor calendar is the annual meetings that we hold with our top 30 shareholders, key investment industry bodies and influential proxy advisory firms to discuss corporate governance and remuneration matters. These sessions in December 2016, which were attended by the Chairman, our SID, and our Committee Chairs, covered a broad range of governance issues and were held morning and afternoon to allow UK and overseas investors a convenient opportunity to participate in the discussions.
Philip Hampton, the Chairman, shared updates on key areas of focus for the Board including:
oversight of managements execution of strategy and performance;
R&D delivery and the assessment of the pipeline;
CEO and executive team succession, including CEO transition activities; and
the wider evolution and refreshment of the Board.
Urs Rohner, our Remuneration Committee Chairman, took the opportunity to discuss progress with the Remuneration Committees review of executive remuneration ahead of our Remuneration policy vote at our AGM in May 2017. In addition, Judy Lewent, who chairs our Audit & Risk Committee, and Lynn Elsenhans, who chairs our Corporate Responsibility Committee, provided an overview of the work of their respective committees.
Finally, Vindi Banga, our SID, provided his insights and perspectives into the Boards culture and dynamics, together with his impressions of GSKs senior team, its people and businesses.
Listening to the views of our shareholders and receiving their feedback at and after these sessions held in the run up to the corporate reporting and AGM season helps us to shape key areas of our corporate governance and remuneration disclosures.
|
Annual General Meeting
All shareholders are invited to attend our Annual General Meeting which this year, like last, will be held in May at the QEII Centre, London. It provides an opportunity to put questions to our Board and the Chairmen of each of our Board Committees during the formal AGM proceedings, while providing shareholders the chance to meet informally with our Board directors who will make themselves available before and after the meeting.
|
108 |
GSK Annual Report 2016 |
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Corporate Governance continued
Corporate Responsibility Committee Report
|
|
Lynn Elsenhans Corporate Responsibility Committee Chairman |
Role
The Committee reviews:
| external issues that have the potential for serious impact upon GSKs business |
| reputation management |
| annual governance oversight of GSKs responsible business commitments |
Membership
Committee members
|
Committee member since
|
|
Lynn Elsenhans Chairman |
1 October 2012
|
|
Professor Sir Roy Anderson
|
1 May 2016
|
|
Dr Vivienne Cox
|
1 July 2016
|
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Dr Jesse Goodman
|
1 May 2016
|
|
Dr Stephanie Burns
|
6 December 2007 until 5 May 2016
|
|
Dr Daniel Podolsky
|
1 July 2006 until 5 May 2016
|
|
Hans Wijers
|
10 October 2013 until 5 May 2016
|
|
See page 88 for Committee member attendance levels. |
The Company Secretary is Secretary to the Committee and attends all meetings. Other attendees at Committee meetings may include:
Attendee
|
Regular
|
Attends as
|
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Chief Executive Officer
|
✓ | |||
Company Chairman
|
✓ | |||
Chairman, Global Vaccines
|
✓ | |||
General Counsel
|
✓ | |||
Head of Communications & Government Affairs
|
✓ | |||
Head of Pharmaceuticals
|
✓ | |||
Head of Pharmaceuticals R&D
|
✓ | |||
Head of Human Resources
|
✓ | |||
Head of External & Market Communication
|
✓ | |||
Head of Global Corporate Responsibility
|
✓ | |||
Other Executives
|
✓ | |||
Independent external corporate responsibility adviser
|
✓ |
To augment our engagement with stakeholder opinion, in May 2013, Sophia Tickell was appointed as an independent external adviser to the Committee, a position that she had previously held from March 2009 to July 2011. Ms Tickell has extensive experience in the pharmaceuticals industry in improving health systems productivity, sustainability in energy supply and distribution, climate change policy and short-termism in financial markets.
She is the co-founder and Director of Meteos, from where she directs the Pharma Futures Series, which aims to align better societal and shareholder value. She holds a number of other board and advisory roles.
Ms Tickell attended meetings of the Committee and provided independent advice and guidance on corporate and social responsibility matters to both the Chairman and the CEO.
Dear Shareholder
The Committee acts as custodian of the policies and practices that define and safeguard the reputation of the company and as Chair of the Committee I continue, together with my fellow Committee members, to challenge and shape the companys responsible business agenda.
The Committee members bring a wide range of experience and insight from across different sectors to provide oversight of the companys responsible business opportunities and risks. During the year, long serving Committee members Dr Stephanie Burns and Dr Daniel Podolsky stood down from the Committee when they retired from the Board in May. Hans Wijers, who had served on the Committee for three years, also stood down at the same time when he retired from the Board. We have greatly appreciated the knowledge and insights they have brought to the work of the Committee in that time.
We are pleased to welcome Professor Sir Roy Anderson, Dr Jesse Goodman and Dr Vivienne Cox as new members of the Committee. Roy and Jesse, as world-renowned medical scientists and researchers, have helped to maintain a continuity of scientific advice to the Committees deliberations, while Vivienne brings a deep knowledge of sustainable business practices developed over many years of service, predominantly in the energy and natural resources sectors.
The work of the Committee has this year again focused on issues that are material to GSKs mission, strategy and values. Our discussions have included exploring how the company seeks to balance the need for a return on investment in innovation with the need to price its products appropriately to drive access for a broad range of patients. In addition, we have considered the many ways in which GSK seeks to operate with transparency and integrity from its approach to R&D, to its commercial selling model and relationships with third parties.
This year we have continued to enjoy positive engagement with investors on our Responsible Business approach and performance, with a particular focus on how these are integrated into the Groups business model and strategy to help enhance investment value, create business opportunities and mitigate risk, as well as create broader social and environmental value.
Lynn Elsenhans
Corporate Responsibility Committee Chairman
13 March 2017
109 | GSK Annual Report 2016 |
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Governance and remuneration
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Corporate Responsibility Committee Report continued
|
Main responsibilities
The Committee has a rolling agenda and receives reports from members of the CET and senior managers to ensure that progress in meeting our Responsible Business Commitments within four areas of focus is reviewed on an annual basis:
| Health for all: innovating to address currently unmet health needs; improving access to our products, irrespective of where people live or their ability to pay; and controlling or eliminating diseases affecting the worlds most vulnerable people. |
| Our behaviour: Putting the interests of patients and consumers first, driven by our values in everything we do and backed by robust policies and strong compliance processes. |
| Our people: Enabling our people to thrive and develop as individuals to deliver our mission. |
| Our planet: Growing our business while reducing our environmental impact across the value chain. |
In addition, at each meeting the Committee considers possible emerging issues that may have a bearing on the companys reputation and interaction with its stakeholders. The Committee also reviews and approves the Responsible Business Supplement which is available for reference on www.gsk.com/responsibility.
Work of the Committee during 2016
During 2016, the Committee focused primarily on the matters set out below:
Committee evaluation
The Committees annual evaluation was internally facilitated by the Company Secretary, and supplemented by a questionnaire circulated to Committee members and the Committees adviser on behalf of the Committee Chairman. It was concluded that the Committee continued to operate effectively. In terms of enhancements to the Committees deliberations the following points were agreed:
The Committees programme and meeting agendas would be devised to ensure additional time to allow fuller discussion of issues. Consideration would be given to monitor the Groups CR work using a scorecard approach.
Directors
|
Our Directors powers are determined by UK legislation and our Articles of Association, which contain rules about the appointment and replacement of Directors. They provide that Directors may be appointed by an ordinary resolution of the members or by a resolution of the Directors, provided that, in the latter instance, a Director appointed in this way retires at the first AGM following his or her appointment.
Our Articles also provide that Directors should normally be subject to re-election at the AGM at intervals of three years or annually if they have held office for a continuous period of nine years or more. However, the Board agreed in 2011 that all Directors who wish to continue as members of the Board should seek re-election annually in accordance with the UK Corporate Governance Code.
A Director may cease to be a Director if he or she:
| becomes bankrupt |
| ceases to be a Director by virtue of the Companies Act or the Articles |
| suffers mental or physical ill health and the Board resolves that he or she shall cease to be a Director |
| has missed Directors meetings for a continuous period of six months without permission and the Board resolves that he or she shall cease to be a Director |
| is prohibited from being a Director by law |
| resigns, or offers to resign and the Board accepts that offer |
| is required to resign by the Board. |
110 |
GSK Annual Report 2016 |
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Corporate Governance continued |
Directors continued
|
Directors conflicts of interest
All Directors have a duty under the Companies Act 2006 to avoid a situation in which they have, or could have, a direct or indirect conflict of interest or possible conflict with the company. Our Articles provide a general power for the Board to authorise such conflicts.
The Nominations Committee has been authorised by the Board to grant and regularly review any potential or actual conflict authorisations, which are recorded by the Company Secretary and noted by the Board. Directors are not counted in the quorum for the authorisation of their own actual or potential conflicts.
On an ongoing basis, the Directors are responsible for informing the Company Secretary of any new actual or potential conflicts that may arise or if there are any changes in circumstances that may affect an authorisation previously given. Even when provided with authorisation, a Director is not absolved from his or her statutory duty to promote the success of the company. If an actual conflict arises post-authorisation, the Board may choose to exclude the Director from receipt of the relevant information and participation in the debate, or suspend the Director from the Board, or, as a last resort, require the Director to resign.
The Nominations Committee reviewed the register of potential conflict authorisations in January 2017 and reported to the Board that the conflicts had been appropriately authorised and that the process for authorisation continues to operate effectively. Except as described in Note 35 to the financial statements, Related party transactions, during or at the end of the financial year no Director or Person Closely Associated had any material interest in any contract of significance with a Group company.
Independent advice
The company has an agreed procedure for Directors to take independent legal and/or financial advice at the companys expense where they deem it necessary.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in the Companies Act 2006) are in force for the benefit of Directors and former Directors who held office during 2016 and up to the signing of the Annual Report.
Change of control and essential contracts
We do not have contracts or other arrangements which individually are fundamental to the ability of the business to operate effectively, nor is the company party to any material agreements that would take effect, be altered, or terminate upon a change of control following a takeover bid. We do not have agreements with any Director that would provide compensation for loss of office or employment resulting from a takeover, except that provisions of the companys share plans may cause options and awards granted under such plans to vest on a takeover. Details of the termination provisions in the companys framework for contracts for Executive Directors are given in the full version of the companys 2014 Remuneration policy report which is available at www.gsk.com in the Investors section.
For the purposes of the UK Companies Act 2006, the Directors Report of GlaxoSmithKline plc for the year ended 31 December 2016 comprises pages 79 to 110 of the Corporate Governance Report, the Directors statements of responsibilities on pages 148 and 232 and pages 253 to 282 of Investor Information. The Strategic report sets out those matters required to be disclosed in the Directors Report which are considered to be of strategic importance to the company, as follows:
| risk management objectives and policies (pages 18, 19 and 77 to 78) |
| likely future developments of the company (throughout the Strategic report) |
| research and development activities (pages 20 to 39) |
| diversity and inclusion (page 49) |
| provision of information to, and consultation with, employees (page 48) |
| carbon emissions (page 50) |
The following information is also incorporated into the Directors Report:
The Directors Report has been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. The Directors Report was approved by the Board of Directors on 13 March 2017 and signed on its behalf by:
Philip Hampton
Chairman
13 March 2017
111 | GSK Annual Report 2016 |
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Governance and remuneration
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Financial statements
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Investor information
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Remuneration
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In this section | ||||||||
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112 | |||||||
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115 | |||||||
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2017 Remuneration policy summary
|
137 | |||||||
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138 | |||||||
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112 |
GSK Annual Report 2016 |
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Remuneration report
In developing our new Remuneration policy we have spent considerable time listening to shareholders. The proposed approach provides better alignment, reduced maximum pay levels and greater simplicity.
|
Dear Shareholder
On behalf of the Board of Directors, I am pleased to present to you our Remuneration report for 2016. This includes my annual statement, our Annual report on remuneration, a summary of our 2017 remuneration policy and the 2017 Remuneration policy report, which provides full details of the new policy.
The Annual report on remuneration and this annual statement will be subject to an advisory vote at the Annual General Meeting (AGM) on 4 May 2017. The Remuneration policy report will be subject to a binding vote.
Context for Executive remuneration at GSK
2016 has seen GSK perform strongly with good sales growth across our Pharmaceuticals, Vaccines and Consumer Healthcare businesses, excellent new product momentum, disciplined cost control and further pipeline progress. Our results against our key financial measures were above target, with core earnings per share growth being at the top end of our guidance. In addition, Total Shareholder Return (TSR) growth of 22% was achieved which outperformed the FTSE 100 index over the year.
Remuneration outcomes for 2016
All awards in relation to 2016 were made in accordance with the Remuneration policy approved by shareholders in May 2014. The key decisions made by the Remuneration Committee (the Committee) were as follows:
| The bonus outcomes for the Executive Directors were determined by reference to performance against the agreed financial measures, as well as the Committees assessment of their individual levels of performance. GSK achieved performance in excess of the relevant financial targets for the year. In conjunction with assessments of individual performance, this has resulted in bonus payments being made above target, but below maximum opportunities. Further details of the bonus outcomes for the year are provided on page 119, including enhanced disclosure of the bonus targets for the year and details of the Individual Performance Multipliers (IPMs) that have been applied for each Executive Director. |
| Vesting of the 2014 Performance Share Plan (PSP) awards and the matching awards under the Deferred Annual Bonus Plan (DABP) were based on the agreed measures of relative TSR, adjusted free cash flow and R&D new product performance, each with an equal weighting. Performance was measured over the three years to 31 December 2016. The threshold targets for the TSR and cash flow measures were not met, but the maximum R&D target was achieved, resulting in an overall vesting level of 33.3%. Further details of the vesting outcome for the 2014 PSP and DABP matching awards are provided on page 121. |
113 | GSK Annual Report 2016 |
Strategic report
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Governance and remuneration
|
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Financial statements
|
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Investor information
|
Review of Remuneration policy
During 2016, the Committee reviewed the Remuneration policy with the objective of maintaining alignment with strategic goals and further aligning the policy with best practice. The revised Remuneration policy is designed to:
| Drive the success of the company and the delivery of its business strategy; |
| Create shareholder value; |
| Simplify pay arrangements; |
| Deliver an appropriately competitive package to attract, retain and motivate executive talent; and |
| Further align remuneration arrangements across the senior layers of the organisation. |
As part of the Remuneration policy review, which included reviewing the packages for the new CEO and President, R&D, the Committee carried out an extensive consultation process with a significant number of our major shareholders. The feedback received from shareholders was greatly valued and given careful consideration by the Committee.
The key changes which we proposed to our Remuneration policy, with a focus on increasing alignment with shareholders and reducing maximum incentive opportunities, included:
| Removal of the bonus matching plan; |
| Reduction of maximum potential pay levels; |
| Simplification of the Annual bonus scheme; and |
| Increase to the CEOs Share Ownership Requirement. |
In finalising the proposals and responding to a number of points raised during the shareholder consultation, the Committee were particularly thoughtful about the quantum of the incentives and about how the new policy should be implemented for Emma Walmsley in 2017. Full details of the final changes to the policy are set out in the Remuneration policy report on pages 137 to 146.
Executive Director changes and implementation of Remuneration policy for 2017
New appointments to the Board
As discussed elsewhere in the 2016 Annual Report, Sir Andrew Witty will be stepping down as CEO with effect from 31 March 2017 and will be succeeded by Emma Walmsley. As noted above, the Committee gave careful and detailed consideration to Emmas remuneration package for 2017, taking into account all relevant factors. This included the constructive feedback received from shareholders which resulted in a number of refinements to the original proposals.
Taking into account the fact that this is Emmas first CEO role, reductions have been made to all elements of her remuneration package in comparison to Sir Andrews current arrangements. Her overall package for 2017 will be c.25% less than that received by Sir Andrew. It is the Committees intention to keep Emmas package under review in the coming years subject to her development and performance in the role. We would engage with shareholders regarding any changes within the limits set by the Remuneration policy.
A summary of Emma Walmsleys new package is set out after the end of this letter on page 114. Further details are provided in the Annual report on remuneration.
Dr Patrick Vallance joined the Board in his role as President, R&D on 1 January 2017. He will receive a base salary of £780,000 and his pension arrangements, annual bonus and PSP opportunities will be in accordance with those set out in the Remuneration policy.
Changes to the annual bonus structure for 2017
As part of the Remuneration policy review, the Committee decided to simplify the structure of the annual bonus. The Individual Performance Multiplier has been removed and from 2017, the annual bonus will operate on an additive basis. 70% of the bonus opportunity will be subject to a single profit metric of Core Group PBIT instead of two separate measures of profit which applied in previous years. The remaining 30% will be subject to a scorecard of individual objectives. This ensures that maximum bonus opportunities can only be delivered if maximum targets are achieved in respect of both the financial and individual elements of the plan.
Departing executives
As noted above, Sir Andrew Witty will be stepping down as CEO with effect from 31 March 2017. Dr Moncef Slaoui will also be leaving the Board on 31 March 2017, but will remain with the company until 30 June 2017.
No termination payment will be made to either Executive and all outstanding incentive awards will be treated in accordance with the Remuneration policy. A more detailed summary of the treatment of these awards is provided on page 136 and full details of the payments made will be included in future Annual reports on remuneration.
AGM
Finally, I would like to thank shareholders for their input and engagement during the Remuneration policy review and I welcome all shareholders feedback on this report. We look forward to receiving your support for our new Remuneration policy and Annual report on remuneration at our AGM on 4 May 2017.
Urs Rohner
Remuneration Committee Chairman
13 March 2017
114 |
GSK Annual Report 2016 |
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Remuneration report |
Chairmans annual statement continued
Key changes to our Remuneration policy for 2017
|
|
||||||||
Alignment with shareholders |
Increase in the level of mandatory deferral under the annual bonus from 25% to 50% |
|||||||
Significant increase in Share Ownership Requirement for the CEO from 4x salary to 6.5x salary |
||||||||
|
||||||||
Reduction in overall maximum opportunity
|
The overall maximum incentive opportunity for all Executive Directors has been reduced
|
|||||||
Simplification |
Removal of matching awards under the DABP plan |
|||||||
Alignment of all Executive Directors on-target and maximum bonus opportunities |
||||||||
Change from multiplicative to additive bonus structure
|
||||||||
|
Overview of new CEOs 2017 remuneration package
|
115 | GSK Annual Report 2016 |
Strategic report
|
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Annual report on remuneration |
Governance and remuneration
|
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Financial statements
|
||||||
Investor information
|
2016 at a glance
|
Pay for performance
2016 highlights summary |
The following shows a breakdown of total remuneration paid to Executive Directors in respect of 2016 and 2015:
|
Executive Directors shareholdings (audited) To align the interests of Executive Directors with those of shareholders, they are required to build and maintain significant holdings of shares in GSK over time. Executive Directors are required to continue to satisfy these shareholding requirements for a minimum of 12 months following retirement from the company. CET members are also required to build up a Share Ownership Requirement (SOR) of 2x base salary.
Current shareholdings compared to the SOR are illustrated in the chart opposite. |
|
116 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Total remuneration for 2016 (audited)
|
The total remuneration for 2016 for each Executive Director is set out in the table below:
Notes:
(1) | Further details in respect of the vesting of PSP and DABP awards are provided on pages 130 to 133. |
(2) | The Committee may in specific circumstances, and in line with stated principles, apply clawback/malus, as it determines appropriate. Following due consideration by the Committee, there has been no recovery of sums paid (clawback) or reduction of outstanding awards or vesting levels (malus) applied during 2016 in respect of any of the Executive Directors. |
Deferral of 2016 annual bonus
|
% | £000 | Number of shares | % | £000 | Number of shares | % | $000 | Number of ADS | |||||||||||||||||||||||||||
Amount of bonus deferred | 25 | 542 | 50 | 458 | 25 | 432 | ||||||||||||||||||||||||||||||
Number of shares or ADS purchased | 34,353 | 29,022 | 10,760 |
117 | GSK Annual Report 2016 |
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Governance and remuneration
|
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Financial statements
|
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Investor information
|
Total remuneration for 2016 (audited) continued
|
The following sections provide details of each element of Total remuneration, including how the Committee implemented the approved Remuneration policy in 2016.
Comparator groups for pay and TSR
The Committee used two pay comparator groups for all roles when considering executive pay for 2016. The primary group used for each Executive Director was as follows:
The global pharmaceutical comparator group is also used as the basis for the TSR comparator group, which features in our long-term incentive awards.
(1) | Following a review of the pay comparator group during the year, these comparators have been removed from the group for 2017. |
(2) | AbbVie and Amgen are included for remuneration benchmarking, but are not included in the TSR comparator group. |
When reviewing the CEOs remuneration, the Committee also references pay for a group of leading European companies whose selection is based on their size and complexity.
|
Salary
The table below sets out the base salaries of the Executive Directors over the last two years. As disclosed last year, the salary increases made in 2016 were aligned with those provided to the wider workforce. Details of salary levels for 2017 are provided on page 135.
% | Base salary | |||||
change | 2016 | 2015 | ||||
Sir Andrew Witty | 2.5% | £1,114,500 | £1,087,300 | |||
Simon Dingemans | 2.5% | £735,600 | £717,700 | |||
Dr Moncef Slaoui | 2.5% | $1,242,100 | $1,211,800 |
Benefits
The following table shows a breakdown of the grossed up cash value of the benefits received by the Executive Directors in 2016 and 2015.
Employee benefits include all employee share plans, healthcare, car allowance, personal financial advice and life assurance/death in service cover.
Travel expenses include car, travel and spouse/partner costs associated with accompanying the Executive Director on GSK business, which are deemed to be taxable benefits on the individual.
Other benefits comprise expenses incurred in the ordinary course of business, which are deemed to be taxable benefits on the individual and, as such, have been included in the table below.
|
2016 benefits
|
|
|
2015 benefits
|
|
|||
Sir Andrew Witty (£000) | ||||||||
Employee benefits | 63 | 26 | ||||||
Travel | 23 | 48 | ||||||
Other benefits
|
|
38
|
|
|
36
|
|
||
Total
|
|
124
|
|
|
110
|
|
||
Simon Dingemans (£000) | ||||||||
Employee benefits | 30 | 29 | ||||||
Travel | 38 | 39 | ||||||
Other benefits
|
|
24
|
|
|
14
|
|
||
Total
|
|
92
|
|
|
82
|
|
||
Dr Moncef Slaoui ($000) | ||||||||
Employee benefits | 158 | 216 | ||||||
Travel | 34 | 86 | ||||||
Other benefits (1)
|
|
303
|
|
|
243
|
|
||
Total
|
|
495
|
|
|
545
|
|
(1) | For Dr Moncef Slaoui, other benefits include UK accommodation of $247,875 in 2016 (2015 $225,806). |
118 |
GSK Annual Report 2016 |
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Annual report on remuneration continued
Fixed pay (audited) continued
|
Pensions
Executive Director
|
Pension plan type
|
Member since
|
||
Sir Andrew Witty
|
UK defined benefit (1)
|
1991 (2)
|
||
Simon Dingemans
|
Cash payment in lieu of pension (3)
|
|
||
Dr Moncef Slaoui
|
US and Belgian plans
|
1988
|
(1) | Sir Andrews maximum pension entitlement is two-thirds of final salary. Since 1 April 2013, pensionable salary increases have been limited to 2% p.a. for all members. The plan has been closed to new entrants since 2001. |
(2) | Since becoming a member, Sir Andrew has built up pensionable service through the different tiers of the Glaxo Wellcome Pension Plan. His current pension entitlement is a product of his service and progression within GSK. |
(3) | Simon Dingemans receives a cash payment in lieu of pension of 20% of base salary in line with GSKs defined contribution pension plan rates. |
The following table shows the breakdown of the pension values set out on page 116.
|
Sir Andrew Witty
|
|
|
Simon Dingemans
|
|
|
Dr Moncef Slaoui
|
|
||||||||||||||||||||||||
Pension remuneration values (1)
|
|
2016 £000
|
|
|
2015
£000
|
|
|
2016
£000
|
|
|
2015
£000
|
|
|
2016
$000
|
|
|
2015
$000
|
|
||||||||||||||
UK defined benefit | 520 | 472 | | | | | ||||||||||||||||||||||||||
US defined benefit |
| | | | 742 | 1,191 | ||||||||||||||||||||||||||
Belgian defined benefit (2) |
| | | | 10 | 57 | ||||||||||||||||||||||||||
Employer cash contributions |
| | 147 | 144 | 123 | 68 | ||||||||||||||||||||||||||
Member contributions to defined benefit plans
|
|
|
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Total pension remuneration value | 520 | 458 | 147 | 144 | 875 | 1,316 |
(1) | The pension remuneration figures have been calculated in accordance with the methodology set out in The Large and Medium-sized Companies and Group (Accounts and Reports) (Amendment) Regulations 2013 (Remuneration Regulations). In calculating the defined benefit pension values for 2016, the difference between the accrued pension as at 31 December 2016 and the accrued pension as at 31 December 2015 increased by inflation (0% for UK defined benefit, 1.7% for US defined benefit, 1.7% for Belgian defined benefit) has been multiplied by 20. |
(2) | Amounts have been translated from Euros into US Dollars using an exchange rate of 1.11 for 2016 and 1.12 for 2015. |
For Sir Andrew and Dr Moncef Slaoui, further details regarding the 2016 pension values are set out in the table below.
Accrued pension as at 31 December | ||||||||||||||
Sir Andrew Witty |
|
2016
£ (p.a.) |
|
|
2015
£ (p.a.) |
|
|
Pension remuneration
value for 2016 (£000) |
|
|||||
UK Funded | 71,591 | 71,648 | ||||||||||||
UK Unfunded | 670,500 | 644,459 | ||||||||||||
Total | 742,091 | 716,107 | 520 |
Accrued pension as at 31 December | ||||||||||||||
Dr Moncef Slaoui (1) |
|
2016
$ (p.a.) |
|
|
2015
$ (p.a.) |
|
|
Pension remuneration
value for 2016 ($000) |
|
|||||
US Funded | 15,434 | 14,473 | 14 | |||||||||||
US Unfunded | 439,393 | 396,297 | 728 | |||||||||||
Belgium Funded (2) | 103,230 | 101,010 | 10 | |||||||||||
US 401(k) & ESSP | | | 123 | |||||||||||
Total | 558,057 | 511,780 | 875 |
(1) | Since becoming a member of these plans, Dr Moncef Slaoui has built up pensionable service in the Belgian Plan, and in the US Cash Balance and Supplemental Pension Plans. Annual employer cash contributions were made to the 401(k) Plan and Executive Supplemental Savings Plan (ESSP). His current pension entitlement is a product of his service and progression within GSK. |
(2) | Amounts have been translated from Euros into US Dollars using an exchange rate of 1.11 for 2016 and 1.12 for 2015. |
119 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Pay for performance (audited)
|
Annual bonus | The annual bonus opportunity is based on a formal review of performance against stretching financial targets. This outcome is then adjusted to reflect individual performance by applying an Individual Performance Multiplier (IPM). | |
The IPM is set by the Committee taking into account performance against individual objectives. The multiplier may be set between 0% and 150%.
|
2016 performance against targets
For 2016, the financial measures and weightings were as follows:
Weighting | 2016 performance | |||||||||||
Performance measure |
Sir Andrew Witty | Simon Dingemans | Dr Moncef Slaoui | 2016 Target (1)(2) | Outcome (£) (2) |
Positioning
against target |
||||||
Core Group Operating Profit
|
75%
|
75%
|
|
£6,706m
|
£6,914m
|
103%
|
||||||
Core Group PBIT
|
25%
|
25%
|
25%
|
£6,386m
|
£6,592m
|
103%
|
||||||
Vaccines performance
|
|
|
75%
|
£1,038m
|
£1,207m
|
116%
|
(1) | Threshold and maximum performance targets were set at 90% and 110% of Target respectively. |
(2) | The Core Group Operating Profit and Core Group PBIT targets and outcomes for the purposes of annual bonus differ from Core Group Operating Profit and PBIT disclosed elsewhere in this Annual Report, primarily because both the target and outcome numbers are calculated applying GSK budget exchange rates and not actual exchange rates. |
The following table shows actual bonuses earned compared to opportunity for 2016:
2016 bonus opportunity | 2016 bonus outcome | |||||||||||||
Bonus | Base salary £/$000 | Target (% of salary) | Maximum (% of salary) |
Financial performance outcome (% salary) |
IPM % | Total 2016 (% of salary) |
Total 2016 £/$000 |
|||||||
Sir Andrew Witty
|
£1,115 |
125 |
200 |
162 |
120 |
194 |
£2,167 |
|||||||
Simon Dingemans
|
£736 |
80 |
180 |
104 |
120 |
124 |
£915 |
|||||||
Dr Moncef Slaoui
|
$1,242
|
85
|
200
|
126
|
110
|
139
|
$1,726
|
The table below sets out the matters which the Committee considered in respect of the financial measures and weightings set for the Executive Directors.
120 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Pay for performance (audited) continued
|
In determining the appropriate Individual Performance Multiplier (IPM) that should be applied to the annual bonus outcome for each Executive Director, the Committee took into account performance against a number of key strategic objectives that were set for each individual at the start of the year.
A summary of the principal achievements of each Executive in respect of these objectives is provided in the table below:
Personal performance
|
|
2016 achievements
|
||||
Sir Andrew Witty | | Delivered all key financial objectives ahead of the financial plan. | ||||
| Achieved strong progress in the integration of the Novartis businesses in Consumer and Vaccines. | |||||
| New product sales more than doubled to £4.5 billion. | |||||
| Strong returns on R&D investment during the year with the approval and submission targets for late stage assets exceeded. | |||||
| Delivered sustained pipeline progress with 4 assets filed in H2 2016 ( Shingrix , Closed Triple, Benlysta SC and Sirukumab) and 4 key phase III starts in Q4 for assets in HIV, respiratory and anaemia. | |||||
| Delivered continued improvement in the quality risk profile across all three businesses. | |||||
| Fully implemented the new commercial business model and maintained progress on delivering our responsible business commitments, e.g. topping Access to Medicines Index for the 5th consecutive year. | |||||
| Embedded a number of critical simplification and change programmes, realising benefits from our global platforms. | |||||
| Provided effective leadership to the Group during a year of significant change, while also successfully transitioning towards a new CEO. | |||||
Simon Dingemans | | Delivered strong financial leadership for the Group during 2016. | ||||
| Continued progress on cost savings made. Total annual cost savings now at £3 billion including currency benefit of £0.2 billion and the Group remains on track to deliver the targeted annual savings of £3 billion at CER by 2017. | |||||
| Continued successful implementation of new business operating systems. BISON and IPT successfully went live and legacy systems have been decommissioned. CERPS accounting systems were successfully deployed in 22 markets and MERPS system deployed in nine sites. | |||||
| All but one exit from Novartis transaction related Service Agreements have been completed and Core Commercial cycle integrated into financial planning process. | |||||
Dr Moncef Slaoui | | Led a highly successful year in the Vaccines business overall. | ||||
| Effectively managed the Vaccines leadership succession and transition to the new Head of Vaccines, Luc Debruyne. | |||||
| Finalised the successful creation of Galvani, a bioelectronics joint venture with Verily Life Sciences, with significant opportunity to create value for shareholders. | |||||
| Worked towards the creation of Coalition for Epidemic Preparedness Innovations in support of biopreparedness and established GSKs place on the founding board amongst other major vaccines organisations. | |||||
| Supported GSKs external reputation building in the global public health arena, working directly with WHO, BARDA, Wellcome Trust, UNGA, and AMR. | |||||
Malus and clawback policy
The companys policy on malus and clawback is set out in the companys Remuneration policy report, (page 140) and is also available at www.gsk.com in the Investors section.
From 1 January 2015 in respect of each financial year, the Committee discloses whether it (or the Recoupment Committee) has exercised clawback or malus.
Disclosure will only be made when the matter has been the subject of public reports of misconduct, where it has been fully resolved, where it is legally permissible to disclose and where it can be made without unduly prejudicing the company and therefore shareholders.
In line with these disclosure guidelines, neither the Committee (nor the Recoupment Committee) has exercised malus or clawback during 2016.
121 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Pay for performance (audited) continued
|
Value earned from long-term incentives (LTIs)
In line with the Committees agreed principles, for each measure applicable to the 2014 and 2015 LTI awards, actual performance against targets is reviewed and adjustments made as appropriate to reflect the impact of the Novartis transaction on the business and to ensure that the vesting outcome reflects genuine underlying business performance. The Committee is satisfied that the adjusted targets remain suitably stretching. Further details on any adjustments made will be provided at the time of vesting.
2014 awards with a performance period ended 31 December 2016
The Committee reviewed the performance of the PSP and DABP matching awards granted to Executive Directors against the targets set. The performance achieved in the three years to 31 December 2016 and the vesting levels are set out in the table below.
Total vesting in respect of 2014 awards
|
33.33%
|
122 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Pay for performance (audited) continued
|
Historical vesting for GSKs LTIs
Update on performance of ongoing LTI awards
The Committee also reviewed the performance of the PSP and DABP matching awards granted to Executive Directors in 2015 and 2016. The following charts provide an estimate of the vesting levels taking into account performance to 31 December 2016.
Actual vesting levels will only be determined based on performance over the full three-year performance periods. The indications below should therefore not be regarded as predictions of the final vesting levels.
For threshold performance, 25% of each award will vest in respect of R&D new product and AFCF measures and 30% for the TSR element. The TSR comparator group remains unchanged from that shown on page 121 in respect of the 2014 awards.
2016 long-term incentive awards
The levels of participation in the DABP in respect of 2015 are shown in the table below, together with the maximum matching awards granted in 2016 in respect of the deferrals of 2015 bonuses. The table also shows PSP award levels for 2016.
* | The face values of the awards have been calculated based on a share price of £13.59 for share awards and $39.13 for ADS awards, being the closing prices on 10 February 2016. |
** | The performance period for the 2016 awards is from 1 January 2016 to 31 December 2018. |
*** | DABP matching awards to UK Executives are made in the form of nil-cost options and PSP awards are made in the form of conditional shares. Awards to US Executives are made over ADSs in the form of conditional shares. |
123 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
|
2016 CEO total remuneration positioning
Performance graph
The following graph sets out the performance of the company relative to the FTSE 100 index and to the pharmaceutical performance comparator group for the eight year period to 31 December 2016. These indices were selected for comparison purposes as they reflect both the primary index of which GSK is a constituent and the industry in which it operates.
Historic CEO remuneration |
2016
|
2015
|
2014
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||
Single figure of
remuneration |
6,830 | 6,661 | 3,902 | 7,207 | 4,386 | 6,807 | 4,562 | 5,790 | ||||||||
Annual bonus award (1) (% of maximum)
|
97.2% | 100% | 42% | 88% | 44% | 100% | 59% | 100% | ||||||||
Vesting of LTI awards (% of maximum)
|
33.3% | 37.8% | 13.5% | 31% | 24% | 70% | 35% (2) | 35% (2) |
(1) | 2009 and 2010 bonus amounts include amounts paid under the Operational Efficiency Bonus in place for those years. The overall maximum bonus receivable was still subject to a limit of 200% of base salary. |
(2) | In respect of the 2007 and 2008 PSP awards. Sir Andrew also had outstanding awards over 195,500 and 525,000 share options, granted in 2007 and 2008 respectively, which lapsed in full. These have not been included in the total vesting percentage due to the distorting effect of aggregating conditional shares and share options. |
Percentage change in remuneration of CEO
Sir Andrew Witty | UK Employees | |||||||||||||||
2016
|
% change
|
% change
|
||||||||||||||
Salary | 1,115 | 2.5% | 2.9% | |||||||||||||
Benefits | 124 | 12.7% | 0% | |||||||||||||
Annual bonus | 2,167 | 0% | (4% | ) |
This reflects salary earned in, benefits received in and annual bonus earned in respect of 2016 compared with 2015. For the wider UK employee population, the salary increase includes the annual salary review as well as any additional changes in the year, e.g. on promotion. The increase in benefits for the CEO is not as a result of a change to his benefit arrangements. The CEOs benefits were higher in 2016 than in 2015 primarily as a result of an increased level of financial planning fees. This was partially offset by a lower level of travel. UK employee benefits are unchanged on the previous year as there have been no changes to our benefit policies or levels. It does not reflect any changes to the level of benefits an individual may have received as a result of a change in role, e.g. promotion. The UK population was considered to be the most relevant comparison as it most closely reflects the economic environment encountered by the CEO.
124 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Additional remuneration disclosures
|
Relative importance of spend on pay
The table shows the percentage changes in total employee pay and the Groups dividends paid to shareholders.
2016 | 2015 | |||||||||||
£m | £m | % change | ||||||||||
Total employee pay |
8,212 | 8,030 | 2.3 | |||||||||
Dividends |
4,850 | 3,874 | 25.2 | |||||||||
Share buyback |
| | |
The figures in the table above, which reflect payments made during each year, are as set out on pages 174 and 180. However, dividends declared in respect of 2016 were £3,892 million (2015 £3,872 million plus a special dividend of £969 million), i.e. an increase of 0.5% excluding the special dividend. The company does not expect to make any ordinary share repurchases in 2017.
Total employee pay is based on 99,827 employees, the average number of people employed during 2016 (2015 101,192).
Service contracts
The table below sets out the relevant dates of the Executive Directors service contracts, which are available for review at the companys registered office during office hours. All Executive Directors service contracts contain a 12-month notice period, as set out in the Remuneration policy report.
Date of contract | Effective date | Expiry date | ||||
Sir Andrew Witty | 18.06.08 | 22.05.08 | 31.08.24 | |||
Emma Walmsley (1) | 20.12.16 | 01.10.16 | 30.06.34 | |||
Simon Dingemans | 08.09.10 | 04.01.11 | 30.04.28 | |||
Dr Moncef Slaoui | 21.12.10 | 21.12.10 | 01.08.19 | |||
Dr Patrick Vallance (1) | 19.12.16 | 01.01.17 | 31.03.25 |
(1) | Appointed to the Board on 1 January 2017. |
Shareholder votes on remuneration matters
The table below provides details of the shareholder votes for the most recent resolutions in respect of the Annual remuneration report and Remuneration policy report.
2016 AGM |
Total votes
cast (billion) |
Total votes
for (%) |
Total votes
against (%) |
Votes
withheld (million) |
||||||||||||
Remuneration report |
3.7 | 84.7 | 15.3 | 708 | ||||||||||||
2014 AGM |
Total votes
cast (billion) |
Total votes
for (%) |
Total votes
against (%) |
Votes
withheld (million) |
||||||||||||
Remuneration policy |
3.5 | 97.4 | 2.6 | 100 |
External appointments for Executive Directors
No Executive Directors held remunerated external appointments.
Payments to past Directors (audited)
None.
Payments for loss of office (audited)
None.
Remuneration governance
|
Role of the Committee
The role of the Committee is to set the companys remuneration policy so that GSK is able to recruit, retain and motivate its executives.
The Remuneration policy is regularly reviewed to ensure that it is consistent with the companys scale and scope of operations, supports the business strategy and growth plans and helps drive the creation of shareholder value.
Terms of reference
The Committees full terms of reference are available on the companys website. The terms of reference, which are reviewed at least annually, were last revised in January 2017 to reflect best practice and corporate governance developments.
Governance
The Board considers all of the members of the Committee to be independent Non-Executive Directors in accordance with the UK Corporate Governance Code.
Membership
The membership of the Committee, together with appointment dates, is set out below:
Committee members
|
Committee member since
|
|
Urs Rohner | 1 January 2015 | |
Chairman
|
||
Vindi Banga
|
1 January 2016
|
|
Dr Vivienne Cox
|
1 January 2017
|
|
Judy Lewent
|
1 January 2013
|
|
Dr Stephanie Burns
|
1 May 2013 to 5 May 2016
|
|
Sir Deryck Maughan
|
1 July 2012 to 5 May 2016
|
|
Hans Wijers
|
10 October 2013 to 5 May 2016
|
Committee meetings usually include a closed session, during which only members of the Committee are present. Other individuals may also be invited to attend Committee meetings during the year. Executives and other Committee attendees are not involved in any decisions, and are not present at any discussions regarding their own remuneration.
|
Details of the Committee members skills and experience are given in their biographies under Our Board on pages 84 to 85. See page 88 for Committee member attendance levels. |
125 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Remuneration governance continued
|
The Company Secretary is Secretary to the Committee and attends all meetings. Other attendees at the Committee include:
Committee attendees
Attendee
|
Regular
|
Attends as
|
||
CEO
|
✓
|
|||
CFO
|
✓
|
|||
Head of Human Resources
|
✓
|
|||
Head of Reward
|
✓
|
|||
Committee Adviser Deloitte LLP
|
✓
|
Judy Lewent and Vindi Banga, as members of the Audit & Risk and Remuneration Committees, provide input on the Audit & Risk Committees review of the Groups performance and oversight of any risk factors relevant to remuneration decisions.
Adviser to the Committee
The Committee has access to external advice as required. The Committee carried out a formal review of the independent advisers to the Committee in 2013. As a result of this review, the Committee reappointed Deloitte LLP (Deloitte) to provide it with independent advice on executive remuneration. The Committee Chairman agrees the protocols under which Deloitte provides advice and the Committee is satisfied that the advice they have received from Deloitte has been objective and independent.
Deloitte is a member of the Remuneration Consultants Group and, as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The code of conduct can be found at www.remunerationconsultantsgroup.com.
Deloitte provided independent commentary on matters under consideration by the Committee and updates on market practice and legislative requirements. Deloittes fees for advice provided to the Committee in 2016 were £205,860. Fees were charged on a time and materials basis. Deloitte also provided other consulting, tax and assurance services to GSK during the year. However, the Committee is satisfied that this does not compromise the independence of the advice they have received from Deloitte.
Following the announcement that Deloitte will replace PricewaterhouseCoopers LLP as auditors of the company, Deloitte will no longer be the named advisers to the Remuneration Committee. The company is currently undergoing a tender process with the intention that new advisers will be appointed by 1 July 2017.
Willis Towers Watson provided additional market data to the Committee.
Committee evaluation
The Committees annual evaluation was internally facilitated by the Company Secretary and supplemented by a questionnaire circulated to Committee members on behalf of the Committee Chairman. It was concluded that the Committee continued to operate effectively. In terms of enhancements to the Committees work, it was agreed that it would seek to gain a deeper understanding of the performance systems and culture and the linkage with remuneration arrangements for the Groups top talent.
What the Committee did during 2016
Areas of Committee focus | Items discussed | |||
Remuneration policy The Committee sets the broad structure for the Remuneration policy and determines the remuneration of the Executive Directors, the Chairman and other corporate officers for Board approval.
|
Proposed Remuneration policy for 2017
Engagement with shareholders |
|||
Salary review The Committee periodically reviews and considers the remuneration environment of Executive Directors & CET, approving annual amendments as necessary. |
Remuneration environment (including wider employee trends)
Executive Director and CET benchmarking, competitiveness and GSK comparator groups
Executive Director and CET salary recommendations and increases for 2017
|
|||
Annual bonus The Committee is responsible for setting specific performance measures for the annual bonus. |
CEO, Executive Director & CET 2015 bonus recommendations and 2016 bonus objectives
R&D annual bonus target metric
|
|||
LTI plans The Committee is responsible for approving LTI plan rule changes, grants, assessments of performance, and the vesting of LTI awards for the Executive Directors, CET and below. |
Deferred Annual Bonus Plan rules
LTI performance outcomes and vesting of LTI awards for CET and below
LTI grants for CET and below, including Share Value Plan awards.
|
|||
Governance and other areas of focus The Committee adheres to a robust remuneration governance framework, ensuring alignment between internal actions and external reporting/ compliance requirements. |
Committee evaluation process
Shareholder feedback from Annual Investor Meetings
2015 Remuneration report
Remuneration considerations for 2016
AGM and Remuneration report feedback, the external remuneration environment and performance target disclosure for incentives plans
Chairmans fees
2016 Remuneration report disclosures
|
126 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
2016 Non-Executive Directors fees
|
Chairman and other Non-Executive Directors
The company aims to provide the Chairman and other Non-Executive Directors with fees that are competitive with those paid by other companies of equivalent size and complexity, subject to the limits contained in GSKs Articles of Association.
Chairmans fees
Chairman Philip Hampton is paid a fee of £700,000 per annum, of which he has elected to take 25% in GSK shares.
Non-Executive Directors fees
No changes to Non-Executive Director fees were made during the year and fees remained at the levels set in January 2013. For each Non-Executive Director, a minimum of 25% of fees is delivered as shares deferred until the Non-Executive Director steps down from the Board.
The Non-Executive Directors fees that applied during 2016 are set out in the table below:
Per annum | ||
Standard annual fee
|
£85,000
|
|
Supplemental fees | ||
Chairman of the Audit & Risk Committee
|
£80,000
|
|
Senior Independent Director and Scientific/Medical Experts
|
£30,000
|
|
Chairmen of the Remuneration and Corporate
|
£20,000
|
|
Non-Executive
Director undertaking
intercontinental
|
£7,500 per meeting
|
The table below (audited) sets out the value of fees and benefits received by the Non-Executive Directors in the form of cash and shares or ADS. Further details of the Non-Executive Directors share allocation plan are set out on page 145. Non-Executive Directors fees that are paid other than in GBP are converted using an average exchange rate that is reviewed from time to time.
2016 | 2015 | |||||||||||||||||||||||||||||||||||
Non-Executive Directors emoluments (000) (audited)
|
Fixed fees | Fixed fees | ||||||||||||||||||||||||||||||||||
|
Cash
|
|
|
Shares/ADS
|
|
|
Benefits
(3)
|
|
|
Total pay
|
|
|
Cash
|
|
|
Shares/ADS
|
|
|
Benefits
(3)
|
|
|
Total pay
|
|
|||||||||||||
Professor Sir Roy Anderson
|
|
£92
|
|
|
£31
|
|
|
£7
|
|
|
£130
|
|
|
£98
|
|
|
£32
|
|
|
£10
|
|
|
£140
|
|
||||||||||||
Vindi Banga
|
|
|
|
|
£112
|
|
|
£8
|
|
|
£120
|
|
|
|
|
|
£28
|
|
|
£1
|
|
|
£29
|
|
||||||||||||
Dr Vivienne Cox (1)
|
|
£32
|
|
|
£11
|
|
|
£5
|
|
|
£48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Lynn Elsenhans
|
|
£14
|
|
|
£128
|
|
|
£54
|
|
|
£196
|
|
|
£14
|
|
|
£122
|
|
|
£63
|
|
|
£199
|
|
||||||||||||
Dr Jesse Goodman (1)
|
|
$165
|
|
|
$55
|
|
|
$268
|
|
|
$488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Philip Hampton
|
|
£525
|
|
|
£175
|
|
|
£13
|
|
|
£713
|
|
|
£389
|
|
|
£130
|
|
|
£3
|
|
|
£522
|
|
||||||||||||
Judy Lewent
|
|
$239
|
|
|
$80
|
|
|
$218
|
|
|
$537
|
|
|
$249
|
|
|
$83
|
|
|
$171
|
|
|
$503
|
|
||||||||||||
Urs Rohner
|
|
£84
|
|
|
£28
|
|
|
£22
|
|
|
£134
|
|
|
£85
|
|
|
£28
|
|
|
£19
|
|
|
£132
|
|
||||||||||||
Dr Stephanie Burns (2)
|
|
$51
|
|
|
$27
|
|
|
$21
|
|
|
$99
|
|
|
$91
|
|
|
$91
|
|
|
$77
|
|
|
$259
|
|
||||||||||||
Stacey Cartwright (2)
|
|
£69
|
|
|
£23
|
|
|
£5
|
|
|
£97
|
|
|
£75
|
|
|
£25
|
|
|
£7
|
|
|
£107
|
|
||||||||||||
Sir Deryck Maughan (2)
|
|
$28
|
|
|
$55
|
|
|
$44
|
|
|
$127
|
|
|
|
|
|
$241
|
|
|
$146
|
|
|
$387
|
|
||||||||||||
Dr Daniel Podolsky (2)
|
|
$56
|
|
|
$50
|
|
|
$78
|
|
|
$184
|
|
|
$60
|
|
|
$181
|
|
|
$155
|
|
|
$396
|
|
||||||||||||
Hans Wijers
|
|
£32
|
|
|
£5
|
|
|
£8
|
|
|
£45
|
|
|
£75
|
|
|
£25
|
|
|
£16
|
|
|
£116
|
|
(1) | Dr Jesse Goodman joined the Board from 1 January 2016. In accordance with the Non-Executive Directors Share Allocation Plan, 25% of Dr Jesse Goodmans fees will be retained and will be re-invested in the companys ADSs at a future date, to be mutually agreed. Dr Vivienne Cox joined the Board from 1 July 2016. |
(2) | Dr Stephanie Burns, Sir Deryck Maughan, Dr Daniel Podolsky and Hans Wijers all retired from the Board at the AGM on 5 May 2016. Stacey Cartwright retired from the Board on 31 December 2016. |
(3) | Benefits primarily consist of travel and subsistence costs incurred in the normal course of business, in relation to meetings on Board and Committee matters and other GSK-hosted events which are considered to be taxable. For overseas-based Non-Executive Directors, this includes travel to meetings in the UK. |
127 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Directors interests in shares (audited)
|
The interests of the Directors of the company in office at 31 December 2016 and their persons closely associated (PCA) are shown in the tables below.
Total share plan interests as at 31 December 2016 | ||||||||||||||||||||||||||||||||||||||||||||
Total directors interests as at | Shares/ADS | Options | ||||||||||||||||||||||||||||||||||||||||||
3 March 2017 |
31 December
2016 |
1 January 2016 |
(a)
Unvested and
not subject to performance |
Unvested and
subject to performance |
(a)
Unvested and
not subject to performance |
Unvested and
subject to performance |
Vested but not exercised |
Exercised in the year |
||||||||||||||||||||||||||||||||||||
Executive Directors Shares |
||||||||||||||||||||||||||||||||||||||||||||
Sir Andrew Witty (b,c,d,f,h) | 1,090,542 | 1,034,521 | 859,350 | 70,252 | 1,462,023 | 143,640 | 142,752 | | 50,199 | |||||||||||||||||||||||||||||||||||
Simon Dingemans (b,c,d,f,h) | 323,181 | 263,245 | 179,527 | | 643,346 | 77,523 | 76,811 | | 19,224 | |||||||||||||||||||||||||||||||||||
Dr Moncef Slaoui (c,d,e,g) | 28,475 | 28,473 | 28,300 | | | | | | | |||||||||||||||||||||||||||||||||||
Emma Walmsley (k) | 161,046 | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||
Dr Patrick Vallance (k) | 345,947 | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||
ADS | ||||||||||||||||||||||||||||||||||||||||||||
Dr Moncef Slaoui (c,d,e,g) | 346,846 | 295,974 | 234,270 | 86,519 | 507,421 | | | 3,810 | | |||||||||||||||||||||||||||||||||||
Share allocation plan for Non-Executive Directors | ||||||||||||||||||||||||||||||||||||||||||||
Total directors interests as at | Number of shares or ADS | |||||||||||||||||||||||||||||||||||||||||||
3 March
2017 |
31 December
or date of
|
1 January
2016 or date of appointment |
(i)
Dividends
reinvested |
31 December
2016 |
Paid out |
Allocated & elected |
31 December
2015 |
|||||||||||||||||||||||||||||||||||||
Non-Executive Directors Shares (i) |
||||||||||||||||||||||||||||||||||||||||||||
Professor Sir Roy Anderson | 27,812 | 25,499 | 23,969 | 1,850 | 25,499 | | 1,530 | 23,969 | ||||||||||||||||||||||||||||||||||||
Vindi Banga | 44,825 | 42,705 | 37,303 | 271 | 7,505 | | 5,402 | 2,103 | ||||||||||||||||||||||||||||||||||||
Dr Vivienne Cox | 669 | 323 | | 4 | 323 | | 323 | | ||||||||||||||||||||||||||||||||||||
Philip Hampton | 29,016 | 25,279 | 16,696 | 924 | 18,361 | | 8,583 | 9,778 | ||||||||||||||||||||||||||||||||||||
Urs Rohner | 4,097 | 3,488 | 2,080 | 187 | 3,488 | | 1,408 | 2,080 | ||||||||||||||||||||||||||||||||||||
Dr Stephanie Burns (j) | | 44 | 44 | | | | | | ||||||||||||||||||||||||||||||||||||
Stacey Cartwright (j) | | 9,631 | 8,469 | | 9,510 | | 1,163 | 8,347 | ||||||||||||||||||||||||||||||||||||
Hans Wijers (j) | | 5,223 | 4,845 | | | 5,223 | 378 | 4,845 | ||||||||||||||||||||||||||||||||||||
ADS (i) | ||||||||||||||||||||||||||||||||||||||||||||
Lynn Elsenhans | 20,809 | 18,205 | 14,839 | 1,177 | 17,205 | | 3,366 | 13,839 | ||||||||||||||||||||||||||||||||||||
Dr Jesse Goodman (i) | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Judy Lewent | 20,219 | 19,052 | 17,636 | 626 | 8,886 | | 1,417 | 7,469 | ||||||||||||||||||||||||||||||||||||
Dr Stephanie Burns (j) | | 21,263 | 20,584 | | | 21,198 | 678 | 20,520 | ||||||||||||||||||||||||||||||||||||
Sir Deryck Maughan (j) | | 53,294 | 51,937 | | | 53,294 | 1,357 | 51,937 | ||||||||||||||||||||||||||||||||||||
Dr Daniel Podolsky (j) | | 38,973 | 37,745 | | 38,973 | | 1,228 | 37,745 |
a) | Unvested shares not subject to performance of 70,252 for Sir Andrew represent 25% of the shares awarded at the end of the three year performance periods for the 2012 and 2013 PSP grants, together with subsequent re-invested dividends. These shares are subject to further two-year vesting periods. Sir Andrews unvested options not subject to performance of 143,640 represent bonus deferrals of 142,752 and Share Save options of 888. |
Unvested options not subject to performance of 77,523 for Simon Dingemans represent bonus deferrals of 76,811 and Share Save options of 712. |
Unvested ADS not subject to performance of 86,519 for Dr Moncef Slaoui represent bonus deferrals of 56,646, deferrals under the PSP plan of 22,743 and Share Value Plan awards for his PCA of 7,130. |
b) | Total Directors interests includes shares purchased through the GlaxoSmithKline Share Reward Plan. During 2016, Sir Andrew Witty and Simon Dingemans were each awarded 99 shares under the plan. The total number of shares held within the plan are as follows: |
Share Reward Plan (Shares) | 3 March 2017 | 31 December 2016 | 1 January 2016 | |||||||||
Sir Andrew Witty | 3,616 | 3,541 | 3,132 | |||||||||
Simon Dingemans | 1,423 | 1,375 | 1,100 | |||||||||
Emma Walmsley (k) | 1,016 | N/A | N/A | |||||||||
Dr Patrick Vallance (k) | 2,984 | N/A | N/A |
Dr Moncef Slaoui is not eligible to participate in the Share Reward Plan, as this is only open to UK employees.
128 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Directors interests in shares (audited) continued
|
c) | Total directors interests includes shares or ADS resulting from the deferral of bonus (and the subsequent re-investment of dividends) under the DABP. The totals shown in the table below include bonus deferrals, but exclude any unvested matching awards which are subject to ongoing performance criteria. The amounts represent the gross share and ADS balances prior to the sale of any shares or ADS to satisfy tax liabilities. |
Deferred Annual Bonus Plan (Bonus deferrals) | 3 March 2017 | 31 December 2016 | 1 January 2016 | |||||||||||||
Sir Andrew Witty | Shares | 110,972 | 142,752 | 130,307 | ||||||||||||
Simon Dingemans | Shares | 84,317 | 76,811 | 49,729 | ||||||||||||
Dr Moncef Slaoui | ADS | 46,425 | 56,646 | 50,897 | ||||||||||||
Emma Walmsley (k) | Shares | 73,134 | N/A | N/A | ||||||||||||
Dr Patrick Vallance (k) | Shares | 72,299 | N/A | N/A |
d) | Total directors interests at 3 March 2017 includes any shares or ADS which vested due to performance being met under elements of the DABP and PSP (2014-2016 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 130 to 133 for further details). |
e) | For Dr Moncef Slaoui, total directors interests includes ADS purchased within the 401(k) Plan and the US Executive Supplemental Savings Plan (ESSP), and ADS awarded to Dr Moncef Slaouis PCA under the SVP. The relevant balances are as follows: |
Dr Moncef Slaoui (ADS) | 3 March 2017 | 31 December 2016 | 1 January 2016 | |||||||||||||
US Retirement Savings Plans | 16,839 | 16,452 | 13,431 | |||||||||||||
Share Value Plan | 4,830 | 7,130 | 7,820 |
As an Executive Director, Dr Moncef Slaoui is not eligible to receive awards under the SVP. The SVP awards shown above reflect the holdings of Dr Slaouis PCA, who is also an employee of GSK. The awards are subject to three-year vesting periods and vesting is contingent on continued employment within GSK. Any gains arising on vesting are not included in Dr Moncef Slaouis total remuneration figures. During the year, his PCA was granted 2,300 ADS on 22 September 2016 at a grant price of $43.58 (face value of $100,234). Dr Moncef Slaouis total share plan interests also include PSP awards held by his PCA. These awards are subject to performance criteria relevant to employees below the CET. As at 31 December 2016, his PCA held 6,777 ADS under the PSP, comprising awards made in 2014 (2,384 ADS), 2015 (2,258 ADS) and 2016 (2,135 ADS), all amounts including dividend re-investment. |
f) | Share Save Plan |
For Sir Andrew Witty and Simon Dingemans, the unvested options not subject to performance include holdings of 888 and 712 respectively in the Share Save Plan, in which they participate on the same terms as all other employees. No Share Save options were granted to Sir Andrew Witty during 2016. Simon Dingemans was granted 208 options under the plan on 30 November 2016. |
g) | The ADS vested but unexercised options totalling 3,810 for Dr Moncef Slaoui represent the ADS options held by his PCA. |
129 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Directors interests in shares (audited) continued
|
h) | The following table sets out details of options (including nil-cost options under the DABP) exercised during 2016 by Executive Directors. Dr Moncef Slaoui did not exercise any options during the year. |
Type of award | Date of grant |
Number of shares
under option |
Date of exercise | Grant price |
Market
price at exercise |
Gain on exercise
(000) |
||||||||||||||||||
Sir Andrew Witty |
||||||||||||||||||||||||
DABP deferral |
28.02.13 | 36,442 | 18.03.16 | | £13.82 | £504 | ||||||||||||||||||
DABP matching |
28.02.13 | 13,757 | 18.03.16 | | £13.82 | £190 | ||||||||||||||||||
50,199 | £694 | |||||||||||||||||||||||
Simon Dingemans |
||||||||||||||||||||||||
Share Save |
30.10.13 | 216 | 01.12.16 | £12.47 | £14.69 | | ||||||||||||||||||
DABP deferral |
28.02.13 | 13,799 | 06.05.16 | | £14.50 | £200 | ||||||||||||||||||
DABP matching |
28.02.13 | 5,209 | 06.05.16 | | £14.50 | £76 | ||||||||||||||||||
19,224 | £276 |
In respect of options under the Share Save Plan, the remuneration receivable by an Executive Director is calculated on the date that the options first vest. The remuneration is the difference between the amount the Executive Director is required to pay to buy the shares or ADS and the total value of the shares or ADS on the vesting date. If the Executive Director chooses not to exercise the options on the vesting date, any subsequent increase or decrease in the amount realised will be due to movements in the share or ADS price between the vesting date and the date of exercise. This increase or decrease in value is the result of an investment decision by the Executive Director and, as such, is not recorded as remuneration. |
In respect of nil-cost options under the DABP, the bonus which is deferred by the Director is recorded as remuneration (under annual bonus) for the year to which it relates. The gain recorded on exercise of the nil-cost option comprises this remuneration, the total of the amounts received in re-invested dividends prior to vesting and the gains or losses resulting from movements in the share price between the dates of grant and exercise for the initial bonus amount deferred and the dates of dividend reinvestment and exercise for the re-invested dividends. |
For the matching element of the DABP, the remuneration of the Executive Director is recorded in the year that the performance period ends and represents the number of vested shares multiplied by the price at vesting. The gain recorded on exercise of the nil-cost option comprises the total of this remuneration and the gain or loss resulting from the movement in the share price between vesting and exercise. |
For Sir Andrew Witty: |
| The gain of £503,628 recorded following the exercise of the 36,442 nil-cost options relating to the deferral of bonus earned in respect of 2012 comprises remuneration of £452,400 recorded in 2012 as annual bonus and a net gain of £51,228 relating to the re-investment of dividends prior to vesting and movements in the share price between grant and dividend re-investment dates and the exercise date. |
| The gain of £190,122 recorded following the exercise of the 13,757 nil-cost options relating to the DABP matching award comprises remuneration of £194,111 recorded in 2015 in relation to the DABP (see page 130) and an investment loss of £3,989 relating to the movement in the share price between the vesting and exercise dates. |
For Simon Dingemans: |
| A gain of £480 resulted from the exercise of 216 options granted under the Share Save Plan. |
| The gain of £200,086 recorded following the exercise of the 13,799 nil-cost options relating to the deferral of bonus earned in respect of 2012 comprises remuneration of £171,330 recorded in 2012 as annual bonus and a net gain of £28,756 relating to the re-investment of dividends prior to vesting and movements in the share price between grant and dividend re-investment dates and the exercise date. |
| The gain of £75,531 recorded following the exercise of the 5,209 nil-cost options relating to the DABP matching award comprises remuneration of £73,499 recorded in 2015 in relation to the DABP (see page 130) and an investment gain of £2,032 relating to the movement in the share price between the vesting and exercise dates. |
i) | For Non-Executive Directors, total interests include shares or ADS received as part or all of their fees under the Non-Executive Directors Share Allocation Plan. Note that dividends received on shares or ADS under the plan during 2016 and January 2017 were converted into shares or ADS as at 8 February 2017. In accordance with the share allocation arrangements for Non-Executive Directors, 25% of Dr Jesse Goodmans fees will be retained and will be reinvested in the companys ADS at a future date, to be mutually agreed. |
j) | Dr Stephanie Burns, Sir Deryck Maughan and Hans Wijers all retired from the Board on 5 May 2016. They elected to receive their shares or ADS from the Non-Executive Directors Share Allocation Plan immediately upon retiring from the Board. Dividend entitlements in respect of the Q3 and Q4 2015 and the Q1 2016 dividends were paid in cash in accordance with the plan rules. Dr Daniel Podolsky also retired on 5 May 2016, but has not yet been paid out his GSK ADS under the Non-Executive Directors Share Allocation Plan as he elected to defer payment until after Q1 2017. Stacey Cartwright retired from the Board on 31 December 2016 and elected to receive her GSK shares under the Non-Executive Directors Share Allocation Plan immediately following retirement. |
k) | Emma Walmsley and Dr Patrick Vallance were appointed to the Board from 1 January 2017. |
130 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Directors interests in shares (audited) continued
|
Deferred Annual Bonus Plan matching awards
The following tables provide details for each Executive Director in office at 31 December 2016 in respect of DABP matching awards. Market price at grant and at vesting represent the closing share prices from the business day prior to those dates.
|
Performance period
|
|
||||||||||||||||||
Sir Andrew Witty Shares
|
|
2013-2015
|
|
|
2014-2016
|
|
|
2015-2017
|
|
|
2016-2018
|
|
||||||||
Market price at grant |
£14.54 | £16.43 | £15.20 | £13.59 | ||||||||||||||||
Unvested at 31 December 2015 |
35,947 | 62,857 | 31,503 | | ||||||||||||||||
Granted |
| | | 40,003 | ||||||||||||||||
Face value at grant (000)
|
|
|
|
|
|
|
|
|
|
|
£544
|
|
||||||||
Dividends reinvested |
495 | 4,195 | 2,103 | 2,091 | ||||||||||||||||
Vested |
(13,757) | | | | ||||||||||||||||
Lapsed |
(22,685) | | | | ||||||||||||||||
Unvested at 31 December 2016
|
|
|
|
|
67,052
|
|
|
33,606
|
|
|
42,094
|
|
||||||||
Dividends reinvested |
814 | 408 | 511 | |||||||||||||||||
Vested |
(22,621 | ) | | | ||||||||||||||||
Lapsed |
(45,245 | ) | | | ||||||||||||||||
Unvested at 3 March 2017
|
|
|
34,014
|
|
|
42,605
|
|
|||||||||||||
Vested shares |
||||||||||||||||||||
Number of shares |
13,757 | 22,621 | ||||||||||||||||||
Market price at vesting |
£14.11 | £15.95 | ||||||||||||||||||
Gain: |
(000) | (000) | ||||||||||||||||||
Remuneration for 2015 |
£194 | | ||||||||||||||||||
Remuneration for 2016 |
| £361 | ||||||||||||||||||
Performance period | ||||||||||||||||||||
Simon Dingemans Shares
|
|
2013-2015
|
|
|
2014-2016
|
|
|
2015-2017
|
|
|
2016-2018
|
|
|
2017-2019
|
|
|||||
Market price at grant |
£14.54 | £16.43 | £15.20 | £13.59 | £15.77 | |||||||||||||||
Unvested at 31 December 2015 |
13,611 | 20,791 | 15,327 | | | |||||||||||||||
Granted |
| | | 36,381 | | |||||||||||||||
Face value at grant (000)
|
|
|
|
|
|
|
|
|
|
|
£494
|
|
|
|
|
|||||
Dividends reinvested |
187 | 1,388 | 1,023 | 1,901 | | |||||||||||||||
Vested |
(5,209 | ) | | | | | ||||||||||||||
Lapsed |
(8,589 | ) | | | | | ||||||||||||||
Unvested at 31 December 2016 |
| 22,179 | 16,350 | 38,282 | | |||||||||||||||
Granted |
| | | 29,022 | ||||||||||||||||
Face value at grant (000)
|
|
|
|
|
|
|
|
|
|
|
£458
|
|
||||||||
Dividends reinvested |
269 | 198 | 465 | | ||||||||||||||||
Vested |
(7,483 | ) | | | | |||||||||||||||
Lapsed |
(14,965 | ) | | | | |||||||||||||||
Unvested at 3 March 2017 |
| 16,548 | 38,747 | 29,022 | ||||||||||||||||
Vested shares |
||||||||||||||||||||
Number of shares |
5,209 | 7,483 | ||||||||||||||||||
Market price at vesting |
£14.11 | £15.95 | ||||||||||||||||||
Gain: |
|
(000
|
)
|
|
(000
|
)
|
||||||||||||||
Remuneration for 2015 |
£73 | | ||||||||||||||||||
Remuneration for 2016 |
| £119 |
131 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Directors interests in shares (audited) continued
|
Deferred Annual Bonus Plan matching awards continued
Performance period | ||||||||||||||||||
Dr Moncef Slaoui ADS
|
|
2013-2015
|
|
|
2014-2016
|
|
|
2015-2017
|
|
|
2016-2018
|
|
||||||
Market price at grant | $44.27 | $54.17 | $46.25 | $39.13 | ||||||||||||||
Unvested at 31 December 2015 | 18,325 | 20,073 | 12,500 | | ||||||||||||||
Granted | | | | 20,854 | ||||||||||||||
Face value at grant (000)
|
|
|
|
|
|
|
|
|
|
|
$816
|
|
||||||
Dividends reinvested | 247 | 1,321 | 822 | 1,076 | ||||||||||||||
Vested | (7,011 | ) | | | | |||||||||||||
Lapsed | (11,561 | ) | | | | |||||||||||||
Unvested at 31 December 2016 | | 21,394 | 13,322 | 21,930 | ||||||||||||||
Dividends reinvested | 251 | 156 | 257 | |||||||||||||||
Vested | (7,215 | ) | | | ||||||||||||||
Lapsed
|
(14,430 | ) | | | ||||||||||||||
Unvested at 3 March 2017 | | 13,478 | 22,187 | |||||||||||||||
Vested ADS | ||||||||||||||||||
Number of ADS | 7,011 | 7,215 | ||||||||||||||||
Market price at vesting | $39.14 | $40.57 | ||||||||||||||||
Gain: |
|
(000
|
)
|
|
(000
|
)
|
||||||||||||
Remuneration for 2015 | $274 | | ||||||||||||||||
Remuneration for 2016 | | $293 |
Emma Walmsley and Dr Patrick Vallance were appointed to the Board from 1 January 2017. The following table provides details on their DABP matching awards granted on 15 February 2017.
Granted shares
|
Emma Walmsley | Dr Patrick Vallance | ||||||
Performance period
|
|
2017-2019
|
|
|
2017-2019
|
|
||
Number of shares
|
|
31,945
|
|
|
21,632
|
|
||
Market price at grant |
£15.77 | £15.77 | ||||||
Face value at grant (000)
|
|
£504
|
|
|
£341
|
|
||
Unvested at 3 March 2017
|
|
31,945
|
|
|
21,632
|
|
132 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued |
Directors interests in shares (audited) continued
|
Performance Share Plan awards
The following tables provide details for each Executive Director in office at 31 December 2016 in respect of PSP awards. Market price at grant and at vesting represent the closing share prices on those dates.
133 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Directors interests in shares (audited) continued
|
Performance Share Plan awards continued
Dr Moncef Slaoui ADS |
|
Performance period
|
|
|||||||||||||
|
2013-2015
|
|
|
2014-2016
|
|
|
2015-2017
|
|
|
2016-2018
|
|
|||||
Market price at grant |
|
$44.27 |
|
|
$54.17 |
|
|
$46.25 |
|
|
$39.13 |
|
||||
Unvested at 31 December 2015 |
154,179 | 123,242 | 136,751 | | ||||||||||||
Granted |
| | | 158,714 | ||||||||||||
Face value at grant (000)
|
|
|
|
|
|
|
|
|
|
|
$6,210
|
|
||||
Dividends reinvested |
2,082 | 8,108 | 8,996 | 8,187 | ||||||||||||
Vested |
(58,989) | | | | ||||||||||||
Lapsed
|
|
(97,272)
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested at 31 December 2016
|
|
|
|
|
131,350
|
|
|
145,747
|
|
|
166,901
|
|
||||
Dividends reinvested |
1,539 | 1,708 | 1,955 | |||||||||||||
Vested |
(44,292 | ) | | | ||||||||||||
Lapsed
|
|
(88,597
|
)
|
|
|
|
|
|
|
|||||||
Unvested at 3 March 2017
|
|
|
|
|
147,455
|
|
|
168,856
|
|
|||||||
Vested ADS
|
||||||||||||||||
Number of ADS |
58,989 | 44,292 | ||||||||||||||
Market price at vesting |
$39.76 | $40.92 | ||||||||||||||
Gain: |
|
(000)
|
|
|
(000
|
)
|
||||||||||
Remuneration for 2015 |
$2,345 | | ||||||||||||||
Remuneration for 2016
|
|
|
|
|
$1,812
|
|
134 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Directors and Senior Management
|
Further information is provided on compensation and interests of Directors and Senior Management as a group (the group). For this purpose, the group is defined as the Non-Executive and Executive Directors, other members of the CET and the Company Secretary. For the financial year 2016, the following table sets out aggregate remuneration for the group for the periods during which they served in that capacity.
Remuneration for 2016 | (£) | |||
Total compensation paid |
24,279,911 | |||
Aggregate increase in accrued pension benefits (net of inflation) |
184,582 | |||
Aggregate payments to defined contribution schemes |
974,193 |
During 2016, members of the group (and one PCA who is also an employee of GSK) were awarded shares and ADS under the companys various share plans, as set out in the table below.
Awards | Dividend reinvestment awards | |||||||
Awarded during 2016 | Shares | ADS | Shares | ADS | ||||
Deferred Annual Bonus Plan |
237,822 | 35,614 | 33,451 | 5,281 | ||||
Performance Share Plan |
1,828,527 | 260,411 | 323,503 | 49,964 | ||||
Deferred Investment Awards (a) (b) |
| | 13,493 | 284 | ||||
Share Value Plan (b) |
11,060 | 2,300 | | |
At 3 March 2017, the group and their PCAs had the following interests in shares and ADS of the company. Holdings issued under the various executive share plans are described in Note 43 to the financial statements, Employee share schemes on page 223.
Interests at 3 March 2017 | Shares | ADS | ||||||
Owned |
2,262,806 | 421,300 | ||||||
Unexercised options |
179,582 | 20,170 | ||||||
Deferred Annual Bonus Plan |
1,235,336 | 165,711 | ||||||
Performance Share Plan |
3,821,454 | 708,471 | ||||||
Deferred Investment Awards (a) (b) |
118,012 | 23,907 | ||||||
Share Value Plan (b) |
37,132 | 27,199 |
(a) | Notional shares and ADS. |
(b) | Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan. |
Other share plans and dilution limits
|
All-employee share plans
The Executive Directors participate in various all-employee share plans, including Share Save and Share Reward.
The Share Save Plan is an HM Revenue & Customs approved plan open to all UK employees. Participants may save up to £250 a month from their net salaries for a fixed term of three years and at the end of the savings period they have the option to buy GSK shares at a discount of up to 20% of the market price set at the launch of each savings contract. Sir Andrew Witty and Simon Dingemans each contribute £250 and £225 respectively a month into the Share Save Plan.
The Share Reward Plan is an HM Revenue & Customs approved plan open to all UK employees on the same terms. Participants contribute up to £125 a month from their gross salaries to purchase GSK shares and the company matches the number of GSK shares bought each month under this arrangement. Sir Andrew Witty and Simon Dingemans each contribute the maximum of £125 a month to buy shares under the Share Reward Plan.
Dilution limits
All awards are made under plans which incorporate dilution limits consistent with the guidelines published by the Investment Association. These limits are 10% in any rolling ten year period for all plans and 5% in any rolling ten year period for executive share plans. Estimated dilution from existing awards made over the last ten years up to 31 December 2016 is as follows:
135 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Implementation of Remuneration policy for 2017
|
Salary
The Committee determined the following salary increases taking into account the average increase for the wider workforce:
|
2017
|
|
|
% change
|
|
|||
Wider workforce (1)
|
|
|
|
|
2.5
|
|
||
Sir Andrew Witty
|
|
£1,114,500
|
|
|
0 |
|
||
Dr Moncef Slaoui
|
|
$1,242,100
|
|
|
0
|
|
||
Simon Dingemans
|
|
£754,000
|
|
|
2.5
|
|
||
Emma Walmsley (2)
|
|
£1,003,000
|
|
|
N/A
|
|
||
Dr Patrick Vallance (3)
|
|
£780,000
|
|
|
N/A
|
|
(1) | Based on the average increase budget for employees below the level of CET in the UK. |
(2) | Effective from appointment to the role of CEO on 1 April 2017 and is 10% lower than that received by Sir Andrew Witty. Emma Walmsley was appointed to the Board on 1 January 2017 as CEO Designate with a base salary of £850,000. |
(3) | Effective from appointment to the Board on 1 January 2017. |
Benefits
No significant changes to the provision of benefits are proposed for 2017. For full details of the policy in relation to benefits, please refer to the details in the Remuneration policy report on page 138.
Pension
The table below provides an overview of the pension arrangements for each Executive Director in 2017.
Pension contribution
|
||
Sir Andrew Witty (1)
|
UK defined benefit
|
|
Dr Moncef Slaoui (1)
|
US and Belgian plans
|
|
Simon Dingemans
|
20% of base salary in lieu of pension
|
|
Emma Walmsley (2)
|
20% of base salary and matching contributions
|
|
Dr Patrick Vallance
|
20% of base salary in lieu of pension
|
(1) | Further details provided on page 118. |
(2) | As a member of the defined contribution plan, is eligible to receive a matching award of up to 5% on the first £33,333 of her salary in accordance with the terms of the plan (i.e. £1,667). |
Annual bonus plan
A number of changes have been made to the operation of the Annual bonus plan for 2017 to simplify and align it for all Executive Directors. |
The matching awards have been removed from the Deferred Annual Bonus Plan (DABP) and the percentage of the bonus that will be subject to mandatory deferral into shares for a period of three years has increased from 25% to 50%. |
Financial performance will now be measured by reference to just one profit related measure, Core Group PBIT, with operating profit removed as a measure. Group PBIT has been selected as being the profit measure most aligned to shareholders. |
The calculation of the bonus will now operate on an additive basis, with the removal of the Individual Performance Multiplier and the introduction of a scorecard of individual objectives aligned to the strategic goals of the business for the year.
|
Bonus opportunity | Weighting of | |||||||||||||||
% of salary
|
performance measures
|
|||||||||||||||
Target
|
Maximum
|
Core
|
Scorecard of individual objectives %
|
|||||||||||||
Emma Walmsley
|
||||||||||||||||
Simon Dingemans
|
|
100
|
|
|
200
|
|
70 |
|
30
|
|
||||||
Dr Patrick Vallance
|
Inevitably, targets linked directly to the financial and strategic plan are commercially sensitive. The Committee does not consider it appropriate to disclose annual bonus targets during the year as it may result in competitive harm. However, details of the performance targets will be disclosed on a retrospective basis in the 2017 Annual Report.
As Sir Andrew and Dr Moncef Slaoui will cease to be Executive Directors during the year, in accordance with the Remuneration policy they will receive a pro-rata on-target bonus payment for 2017. The Committee has set role specific objectives for them for this period. As the two individuals will cease to be Executive Directors before the new Remuneration policy is approved, the target bonus opportunities will be as set out in the policy approved by shareholders in 2014 (i.e. 125% of salary for Sir Andrew and 85% of salary for Dr Moncef Slaoui).
Legacy awards matching awards under the DABP
2017 was the last time matching awards were made under the DABP. These awards relate to 2016 bonus outcomes under the 2014 Remuneration policy.
The table below provides details of the level of participation in the DABP in respect of 2016 annual bonus payments and associated matching awards granted.
Sir Andrew Witty and Dr Moncef Slaoui did not receive matching awards in 2017 as they will cease to be Executive Directors during the year. However, their 2016 annual bonus payments were subject to a 25% mandatory deferral.
% of total bonus
|
2017 matching
|
|||||||
Emma Walmsley (1)
|
|
50
|
|
|
31,945
|
|
||
Simon Dingemans
|
|
50
|
|
|
29,022
|
|
||
Dr Patrick Vallance (1)
|
|
50
|
|
|
21,632
|
|
(1) | Matching awards based on bonus earned in respect of 2016 prior to appointment to the Board. |
Performance Share Plan (PSP) awards
It is intended that awards under the PSP will be made later in the year following the approval of the PSP rules at the AGM on 4 May 2017. No awards will be made in 2017 to Sir Andrew Witty and Dr Moncef Slaoui. Awards to the remaining Executive Directors will be made at the following levels.
2017 PSP award
|
||||
Emma Walmsley
|
|
550
|
|
|
Simon Dingemans
|
|
400
|
|
|
Dr Patrick Vallance
|
|
500
|
|
Performance measures
The metrics for the PSP and DABP matching awards remain unchanged. The 2017 awards will continue to be based on three equally weighted measures: R&D new product performance, adjusted free cash flow and relative TSR.
TSR will continue to be measured against global pharmaceutical peers. As in prior years, targets for R&D new products are commercially sensitive at the time of grant. However, the Committee intends to disclose targets in full following the end of the performance period. In addition, the Committee will continue to provide shareholders with interim performance updates for this element over the course of the performance period. The adjusted free cash flow targets will be disclosed to shareholders on a prospective basis at the time of grant, and will thereafter be reported in the 2017 Annual report on remuneration.
136 |
GSK Annual Report 2016 |
|||
Annual report on remuneration continued
Implementation of Remuneration policy for 2017 continued
|
Termination arrangements for Sir Andrew Witty and Dr Moncef Slaoui
As announced in 2016, both Sir Andrew Witty and Dr Moncef Slaoui will leave the Board by mutual agreement on 31 March 2017. Dr Moncef Slaoui will remain an employee of the Group until 30 June 2017.
No termination payments will be made to Sir Andrew Witty and Dr Moncef Slaoui. Defined benefit pension arrangements and outstanding incentive awards will be treated in accordance with the Remuneration policy as approved by shareholders in 2014.
Full disclosure of all payments made upon cessation will be included in the 2017 Annual report on remuneration.
Remuneration element | Summary of treatment | |
2017 Annual bonus |
Will receive an on-target bonus payment pro-rated for the proportion of the financial year worked
|
|
2017 PSP award and DABP matching award |
Will not be granted 2017 PSP awards and no DABP matching awards will be granted in respect of their 2016 bonuses
|
|
2016 and 2015 PSP and DABP matching awards |
Will vest at the normal vesting dates, subject to the achievement of performance conditions assessed at the end of the performance periods
|
|
2016, 2015 and 2014 deferred bonuses |
Awards in respect of bonuses deferred in respect of prior years will vest at the normal vesting dates
|
In addition to the above, both Executive Directors will be required to maintain a shareholding equal to their respective share ownership requirements for at least 12 months after leaving the company.
Non-Executive Director fees for 2017
Non-Executive Director fees were reviewed during the year following the last increase in January 2013.
It was agreed to increase the fees for the Chairmen of the Remuneration and Corporate Responsibility Committees from £20,000 to £30,000. The Chairman of the new Science Committee will also receive a fee of £30,000. All other fees remain unchanged. A minimum of 25% of fees will continue to be delivered as shares deferred until the Non-Executive Director steps down from the Board.
137 | GSK Annual Report 2016 |
Strategic report
|
||||
2017 Remuneration policy summary |
Governance and remuneration
|
|||||
Financial statements
|
||||||
Investor information
|
Remuneration policy review
|
Our first Remuneration policy was approved by our shareholders at our AGM on 7 May 2014. As required under the regulations, shareholders are being asked to approve a new Remuneration policy at our AGM on 4 May 2017 which it is intended will apply for the next three financial years.
During 2016, the Committee reviewed the Remuneration policy to ensure that the Policy continues to:
| Be aligned with best practice; |
| Create shareholder value; and |
| Drive the success of the company and the delivery of its business strategy. |
In addition, changes to the policy have been made to:
| Further align remuneration arrangements across the senior layers of the organisation; |
| Deliver an appropriately competitive package to attract, retain and motivate executive talent; and |
| Simplify pay arrangements. |
The Committee consulted with our largest shareholders in respect of the proposed changes and took shareholders feedback into account when finalising the revised Remuneration policy. The table below provides an overview of the main changes that are proposed in respect of the Remuneration policy.
The full Remuneration policy that shareholders are asked to approve is set out on pages 138 to 146.
Remuneration element
|
Proposed changes to policy
|
Rationale for the change
|
||||||||||
Mandatory deferral of Annual bonus |
Increased from 25% to 50% of any bonus earned. |
Alignment with shareholders: Further aligns executives with the long-term interests of shareholders. |
||||||||||
|
|
|
||||||||||
Simplification of the Annual bonus |
Simplify and align structure for all Executive Directors.
Reduce the level of pay-out for threshold performance to nil. |
Simplification: Consistent approach for all Executive Directors, that can be clearly communicated.
Pay for performance: Ensures that higher levels of bonus pay-out are only received for significant performance. |
||||||||||
|
|
|
||||||||||
Annual bonus and Performance Share Plan (PSP) performance measures |
Provide additional flexibility for the Committee to determine the performance measures used on an annual basis during the three year life of the Remuneration policy.
The Committee would consult with shareholders prior to changing the performance measures used.
|
Flexibility: In the context of the appointment of the new CEO, it is considered appropriate to provide sufficient flexibility to ensure performance metrics chosen over the next three years will remain aligned with the key financial and strategic objectives of the company. |
||||||||||
|
|
|
||||||||||
LTI opportunities |
The matching element of the DABP has been removed.
The maximum LTI opportunity for the CEO will be reduced from 700% to 650% of salary. |
Simplification: Going forward, the PSP will be the only long-term incentive plan that is used.
Reduction in maximum opportunity: Total LTI opportunity for all Executive Directors has been reduced. In 2017, the award to the CEO will be below the maximum opportunity (550% of salary). |
||||||||||
|
|
|
||||||||||
Share Ownership Requirements (SOR) |
Formally include the shareholding guidelines as part of the Remuneration policy.
Increased SOR for CEO to 6.5x salary.
|
Alignment with shareholders: To provide further alignment with shareholders. |
138 |
GSK Annual Report 2016 |
|||
Future policy table
|
Subject to shareholder approval at the companys AGM on 4 May 2017, the Remuneration Policy for each remuneration element will be as outlined in the table below.
Salary
|
No material change
|
Purpose and link to strategy
To provide a core reward for the role.
Set at a level appropriate to secure and retain high calibre individuals needed to deliver the Groups strategic priorities.
Operation
Individuals role, experience, performance and independently sourced data for relevant comparator groups considered when determining salary levels.
Salary increases typically take effect in the first quarter of each year.
Salaries are normally paid in the currency of the Executive Directors home country.
Opportunity
There is no formal maximum limit and, ordinarily, salary increases will be broadly in line with the average increases for the wider GSK workforce.
However, increases may be higher to reflect a change in the scope of the individuals role, responsibilities or experience. Salary adjustments may also reflect wider market conditions in the geography in which the individual operates.
Details of current salary levels are set out in the Annual report on remuneration.
Performance measures
The overall performance of the individual is a key consideration when determining salary increases.
Benefits
|
No material change
|
Purpose and link to strategy
Levels are set to recruit and retain high calibre individuals to execute the business strategy.
Operation
Executive Directors are eligible to receive benefits in line with the policy for other employees which may vary by location. These include, but are not limited to, car allowances, healthcare, life assurance/ death in service (where not provided as part of the individuals pension arrangements), personal financial advice and contractual post-retirement benefits. In line with the policy for other employees, Executive Directors may be eligible to receive overseas relocation allowances and international transfer-related benefits when required. Executive Directors are also eligible to participate in all-employee share schemes (e.g. Share Save and Share Reward Plan), under which they are subject to the same terms as all other employees.
In order to recognise the high business travel requirements of the role, Executive Directors are also entitled to car travel and may be
accompanied by their spouse/partner on business trips. Other benefits include expenses incurred in the ordinary course of business, which are deemed to be taxable benefits on the individual.
Benefit provision is tailored to reflect market practice in the geography in which the Executive Director is based and different policies may apply if current or future Executive Directors are based in a different country.
Opportunity
There is no formal maximum limit as benefits costs can fluctuate depending on changes in provider cost and individual circumstances.
Details of current benefits and costs are set out in the Annual report on remuneration.
Performance measures
None.
Pension
|
No material change
|
Purpose and link to strategy
Pension arrangements provide a competitive level of retirement income.
Operation
Pension arrangements are structured in accordance with the plans operated in the country in which the individual is likely to retire. Where the individual chooses not to become a member of the pension plan, cash in lieu of the relevant pension contribution is paid instead.
Executive Directors in the UK are entitled either to join the defined contribution pension plan or to receive a cash payment in lieu of pension contribution.
Where an individual is a member of a GSK legacy defined benefit plan, a defined contribution plan or an alternative pension plan arrangement and is subsequently appointed to the Board, he or she may remain a member of that plan.
Opportunity
The policy for all current Executive Directors and new external recruits is:
UK:
| 20% of salary contribution to defined contribution plan and further 5% in matched contributions subject to any relevant cap and in line with implementation principles for other members of the plan; |
or |
| 20% of salary cash payment in lieu of pension contribution. |
US:
Eligible for the same benefits as other US senior executives:
| Cash Balance Pension Plan and Supplemental Cash Balance Pension Plan, including Executive Pension Credit, provide maximum contribution of 38% of base salary across all pension plans. |
| GSK 401(k) plan (formerly the US Retirement Savings Plan) and the Executive Supplemental Savings Plan with core contributions of 2% of salary and bonus and matched contributions of 4% of salary and bonus. |
Global:
| Eligible for appropriate equivalent arrangement not in excess of the US/UK arrangements. |
Performance measures
None.
139 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Future policy table continued
|
Annual bonus
|
Change
|
Purpose and link to strategy
To incentivise and recognise execution of the business strategy on an annual basis.
Rewards the achievement of stretching annual financial and strategic business targets and delivery of personal objectives.
Operation
Financial, operational and business targets are set at the start of the year by the Committee and bonus levels are determined by the Committee based on performance against those targets.
Individual objectives are set at the start of the year by the Committee and performance against those objectives is assessed by the Committee.
Executive Directors are required to defer 50% of any bonus earned into shares, or ADS as appropriate, for three years.
Deferred bonus shares are eligible for dividend equivalents up to the date of vesting.
The Committee may apply judgement in making appropriate adjustments to bonus outcomes to ensure they reflect underlying business performance.
Clawback and/or malus provisions apply as described on page 140.
Opportunity
The maximum bonus opportunity for Executive Directors is 200% of salary. For threshold performance, the bonus pay-out will be nil.
For target performance, the bonus payout will be 50% of the maximum opportunity.
Performance measures
Based on a combination of financial targets and individual/strategic performance objectives, with the majority of the bonus assessed against the financial measures. The weighting between different measures will be determined each year according to business priorities.
Further details, including the measures to be used in the financial year, are provided in the Annual report on remuneration.
Selection of annual bonus measures
|
The annual bonus is designed to drive the achievement of GSKs annual financial and strategic business targets and the delivery of personal objectives.
The majority of the annual bonus opportunity is based on a formal review of performance against stretching financial targets with the remainder of the bonus subject to a balanced scorecard of strategic and individual targets which are aligned to the companys key objectives for that financial year.
Performance Share Plan (PSP)
|
Change
|
Purpose and link to strategy
To incentivise and recognise delivery of the longer term business priorities, financial growth and increases in shareholder value compared to other pharmaceutical companies.
In addition, to provide alignment with shareholder interests, a retention element, to encourage long-term shareholding and discourage excessive risk taking.
Operation
Conditional awards are made annually with vesting dependent on the achievement of performance conditions over three years and are subject to an additional two-year holding period.
Awards are eligible for dividend equivalents up to the date of vesting and release.
The Committee may adjust the formulaic vesting outcome (either up or down) to ensure that the overall outcome reflects underlying business performance over the vesting period.
Clawback and/or malus provisions apply as described on page 140.
Opportunity
The normal maximum award limits that may be granted under the PSP to an individual in any one year are set out in the table below:
In 2017, the award to the CEO will be 550% of salary.
|
% of salary
|
|
||
CEO
|
|
650
|
|
|
CFO
|
|
400
|
|
|
Other Executive Directors
|
|
500
|
|
Performance measures
Based on a combination of financial, share price related and strategic performance conditions which are aligned to the companys strategic plan. Up to 30% of awards will vest at threshold performance. Further details, including the performance targets attached to the PSP in respect of each year, are provided in the Annual report on remuneration.
Selection of long-term incentive measures
|
The Committee selects performance measures which focus Executive Directors long-term remuneration on the delivery of GSKs key strategic priorities over the longer term. In addition to setting robust targets, the Committee has implemented a number of safeguards to ensure the targets are met in a sustainable way and performance reflects genuine achievement against targets and therefore represents the delivery of value for shareholders.
For each performance measure, the impact of any acquisition or divestment will be quantified and adjusted for after the event.
Any major adjustment in the calculation of performance measures will be disclosed to shareholders on vesting. The Chairman of the Audit and Risk Committee and other members, who are also members of the Remuneration Committee, provide input on the Audit & Risk Committees review of the Groups performance and oversight of any risk factors relevant to remuneration decisions.
Details of the rationale behind the performance measures selected and how they are calculated are set out in the Annual report on remuneration.
140 |
GSK Annual Report 2016 |
|||
Remuneration policy report continued
Future policy table continued
|
Legacy arrangements Deferred Annual Bonus Plan (DABP)
|
Removed from 2017 onwards
|
Purpose
To incentivise and recognise delivery of longer term business priorities and to provide alignment with shareholder interests and encourage long-term shareholding.
Operation and maximum opportunity
For bonus payments up to and including the bonus in respect of 2016, Executive Directors were required to defer 25% of any bonus earned into shares for three years. They could also voluntarily defer up to an additional 25% of any bonus earned.
These deferred shares were matched up to a maximum of 1:1 subject to the achievement of performance conditions over three years. Matching awards were conditional shares or nil-cost options and eligible for dividend equivalents.
Performance measures
Outstanding matching awards are subject to the same measures as awards made under the PSP in any given year.
Further details of outstanding awards are provided on pages 122 and 135 of the Annual report on remuneration. No matching awards will be made under the DABP in respect of bonus from 2017 onwards.
Share Ownership Requirements
|
Increase in requirement for CEO
|
To align the interests of Executive Directors with those of shareholders, they are required to build and maintain significant holdings of shares in GSK over time. The requirements for each Executive Director are as follows:
% salary | ||||
CEO | 650 | |||
Other Executive Directors | 300 |
Executive Directors are also required to continue to satisfy these requirements for a minimum of 12 months following retirement from the company.
Clawback and malus
|
No change
|
In the event of a triggering event (e.g. significant misconduct by way of violation of regulation, law, or a significant GSK policy, such as the Code of Conduct), the company will have the ability to claw back up to three years annual and deferred bonuses as well as vested and unvested LTIs. In addition, if a participant in the new 2017 PSP or DABP, which shareholders are asked to approve at the 2017 AGM, is subject to an investigation, then the vesting of their awards may be delayed until the outcome of that investigation.
A separate Recoupment Committee has been established to investigate relevant claims of misconduct. The Recoupment Committee exercises this authority for the wider employee base. It comprises of senior executives with relevant oversight and appropriate experience, including the Senior Vice President, Global Ethics and Compliance, and the Senior Vice President & General Counsel.
In respect of each financial year, the Remuneration Committee will disclose whether it (or the Recoupment Committee) has exercised clawback or malus. Disclosure will only be made when the matter has been subject to public reports of misconduct, where it has been fully resolved, where it is legally permissible to disclose and where it can be made without unduly prejudicing the company and therefore shareholders.
Additionally, where there has been continuity of responsibility between initiation of an adverse event and its emergence as a problem, the adverse event should be taken into account in assessing annual bonus awards and LTI vesting levels in the year the problem is identified and for future periods. The Remuneration Committee (or Recoupment Committee) may make appropriate adjustments to individual annual bonuses as well as grant and vesting levels of LTI awards to reflect this.
141 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Approach to recruitment remuneration
|
The Committee determines the remuneration package of new Executive Directors on a case-by-case basis depending on the role, the market from which they will operate and their experience. Total remuneration levels will be set by reference to a relevant pay comparator group and, where appropriate, will allow for future development in the role.
It is expected that new Executive Directors will participate in short and long-term incentive plans on the same basis as existing directors. However, in exceptional circumstances, the Committee reserves the flexibility to set the incentive limit for a new Executive Director at up to an additional 50% of the existing limits.
The Committee retains this flexibility in recognition of the high levels of variable pay in GSKs global pharmaceutical competitors. However, the Committee will only use this flexibility when it is considered to be in the best interests of the company and its investors.
Pension arrangements for any external recruit as an Executive Director will be as set out in the Remuneration policy table on page 138.
Other benefits will be provided in line with the policy for existing Executive Directors.
Where required to meet business needs, relocation support will be provided in line with company policy.
For any internal appointments, entitlements under existing remuneration elements will continue, including pension entitlements and any outstanding awards. However, where not already the case, internal appointments will be required to move to Executive Director contractual terms, including termination provisions.
The Committee is mindful of the sensitivity relating to recruitment packages and, in particular, the buying out of rights relating to previous employment. It will therefore seek to minimise such arrangements. However, in certain circumstances, to enable the recruitment of exceptional talent, the Committee may determine that such arrangements are in the best interests of the company and its shareholders. Such arrangements will, where possible, be on a like-for-like basis with the forfeited remuneration terms. Arrangements will therefore vary depending on the plans and arrangements put in place by the previous employer and may be in the form of cash or shares and may or may not be subject to performance conditions. Explanations will be provided where payments are made as compensation for previous remuneration forfeited.
The remuneration arrangements for any newly appointed Executive Director will be disclosed as soon as practicable after the appointment.
The following policy and principles apply to the roles of Chairman and Non-Executive Director.
Chairman
Fees will be set at a level that is competitive with those paid by other companies of equivalent size and complexity. Fees will be paid partly in shares.
Non-Executive Directors
Fee levels for new Non-Executive Directors will be set on the same basis as for existing Non-Executive Directors of the company. Subject to local laws and regulations, fees will be paid partly in shares.
In the event of a Non-Executive Director with a different role and responsibilities being appointed, fee levels will be benchmarked and set by reference to comparable roles in companies of equivalent size and complexity.
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Loss of office payment policy
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The company does not have a policy of fixed term contracts. Generally, contracts for new appointments will expire in line with the applicable policy on retirement age, which since 2009 has been 65.
Contracts for existing Executive Directors will expire on the dates shown on page 124.
Notice period on termination by the employing company or the Executive Director is 12 calendar months.
The ability to impose a 12-month non-compete period (and a non-solicitation restriction) on an Executive Director is considered important by the company to have the ability to protect the Groups intellectual property and staff. In light of this, the Committee believes that it would not be appropriate to provide for mitigation in the contracts.
Termination of employment
In the event that an Executive Directors employment with the company terminates, the following policies and payments will apply.
Element of Remuneration
|
Loss of office payment policy
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|
Termination payment |
Termination by notice: 12 months annual salary payable on termination by the company (pro-rated where part of the notice period is worked). No termination payment is made in respect of any part of a notice period that extends beyond the contract expiry date. |
|
A bonus element is not normally included in the termination payment. However, the terms of the contracts seek to balance commercial imperatives and best practice. |
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Redundancy: As above, for termination by notice. In the UK, only statutory redundancy pay will apply. In the US, general severance policy does not apply. |
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Retirement, death and ill-health, injury or disability: No termination payment.
|
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LTI awards |
PSP and DABP matching awards are governed by the plan rules as approved by shareholders. For awards made prior to the approval of the 2017 PSP and DABP rules, the following provisions will normally apply: |
|
Termination by notice: Unvested awards will lapse. |
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Redundancy and retirement: Generally, awards will continue to vest over the original timescales, subject to the original performance conditions. Awards made in the last 12 months are forfeited. |
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Death, ill-health, injury, disability or any other reason: Generally, performance will be assessed following the end of the financial year in which cessation of employment occurs and awards will vest up to 12 months following cessation. Awards may be pro-rated for time. |
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For awards made under the approved rules of the 2017 PSP, the following provisions will normally apply: |
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Termination by notice: Unvested awards will lapse. |
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Redundancy, retirement, death, ill-health, injury, disability or any other reason: Generally, awards will continue to vest over the original timescales subject to performance and pro-rated for time. |
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In the event of a change of control, PSP and DABP matching awards will vest, taking into account performance to date and normally taking into account the proportion of the performance period that has elapsed. Alternatively, the awards may be exchanged for new awards.
|
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Annual bonus |
Termination by notice by individual: If an individual serves notice and the termination date falls before 31 December, the bonus is forfeited. |
|
Termination by notice by the company, redundancy, retirement, death, ill-health, injury or disability: If the termination date falls during the financial year, eligible for pro-rated on-target bonus (if employed on 31 December, bonus payable based on actual results).
|
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DABP deferred bonus awards |
DABP deferred bonus awards are governed by the plan rules as approved by shareholders. For awards made prior to the approval of the 2017 DABP rules, the following provisions will normally apply: |
|
Termination by notice: Awards will vest in full on the date of termination or original vesting date as determined at the date of grant
Redundancy, retirement, death, ill-health, injury, disability or any other reason: Generally, awards will vest in full on the original vesting date. |
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For awards made under the approved rules of the 2017 DABP, the following provisions will normally apply: |
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Termination for gross misconduct: Generally, unvested awards will lapse |
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Any other reason: Generally, awards will vest in full on the original vesting date. |
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In the event of a change of control, awards will vest or may be exchanged for new awards.
|
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Benefits |
Generally, benefits will continue to apply until the termination date. The Committee may make payments in connection with an existing legal obligation or in respect of any claim related to the cessation of employment. This may include fees for outplacement assistance, legal and/or professional advice. |
|
Termination by notice by the company and retirement (US executives): In line with the policy applicable to US senior executives, the Chairman, Global Vaccines may become eligible, at a future date, to receive continuing medical and dental insurance after termination/retirement.
|
Termination by mutual agreement
In certain circumstances, it can be in the best interests of the company for the Board to manage proactively succession planning and the development of the senior talent pipeline. In such circumstances, the Board may therefore agree that an Executives departure will be by mutual agreement. In order for this to apply, the Committee will need to be satisfied that the Executive has demonstrated performance in line with expectations, where required they should have contributed to an orderly succession, and they should have completed at least 20 years service with the Group on the termination date. In the case of an Executive Director, they would then be treated as a good leaver for the purposes of GSKs long-term incentive plans. If the termination date falls during the financial year, they would be eligible for a pro-rated on-target bonus and if they are employed on 31 December, the bonus payable would be based on actual results.
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The Committee does not anticipate the exercise of discretion provided by the PSP and DABP plan rules in respect of termination payments in a manner which would benefit an Executive Director. However, there may be unforeseen circumstances where this is in the best interests of the company and its shareholders. Where it is necessary to exercise discretion, explanations will be provided.
Where an Executive Director leaves the company, the Committee will carry out an assessment of the individuals performance and conduct over the time in role. If it is determined that the individuals performance or conduct was contrary to the legitimate expectations of the company, the Committee reserves the right to apply appropriate mechanisms such as clawback or reduction or lapsing of outstanding incentive awards (malus), to ensure that any termination payments are in the best interests of the company and its shareholders (see page 140).
Differences between remuneration policy for Executive Directors and other employees
|
When setting remuneration levels for the Executive Directors, the Committee considers the prevailing market conditions, the competitive environment (through comparison with the remuneration of executives at companies of similar size, complexity and international reach) and the positioning and relativities of pay and employment conditions across the broader GSK workforce.
In particular, the Committee considers the range of base salary rises for the workforces of those parts of GSK where the Executive Directors are employed. This is considered to be the most relevant comparison as these populations reflect most closely the economic environments encountered by the individuals.
The same principles apply to the Remuneration policy for Executive Directors and other employees although the remuneration offered to Executive Directors under this policy has a stronger emphasis on performance-related pay than that offered to other employees of the Group.
| Salary and benefits (including pension) are tailored to the local market. |
| The annual bonus plan applies to the wider employee population and is based on business and individual performance. |
| A combination of performance-related and restricted share plans apply to the wider employee population. |
| All-employee share plans are available to employees in the UK, including the HM Revenue & Customs approved UK Share Save and Share Reward Plans. |
While employees are not formally consulted in respect of the Remuneration policy, the company conducts regular employee surveys which include feedback on remuneration matters.
In the wider organisation, we have aligned our performance and reward systems with our values and since 2014, our performance system formally evaluates employees on both what they need to do and how they do it. Also, for our most senior people we dis-incentivise unethical working practices using a clawback mechanism that allows us to recover performance-related pay.
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Scenarios for future total remuneration
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The charts opposite provide illustrations of the future total remuneration for each of the Executive Directors in respect of the remuneration opportunity granted to each of them in 2017 under the policy. A range of potential outcomes is provided for each Executive Director and the underlying assumptions are set out below.
All scenarios:
| 2017 base salary has been used. |
| 2016 benefits and pension figures have been used for the CFO, i.e. based on actual amounts received in 2016 in respect of the ongoing policy. As the new CEO and President, R&D were not in role during 2016, the benefits value for each is based on the value of benefits (excluding pensions) provided in 2016 to the current CEO and CFO respectively. |
| The amounts shown under value of PSP awards are based on the relevant multiples for 2017. They do not include amounts in respect of dividends reinvested and do not factor in changes to share price over the vesting period. |
Fixed:
| None of the pay for performance (annual bonus and PSP) would be payable. |
Expected:
| For the annual bonus, it is assumed that target performance is achieved. |
| For the PSP awards, threshold levels of vesting are assumed. |
Maximum:
| It is assumed that the annual bonus would be payable at the maximum level and that the awards under the PSP would vest in full. |
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Element
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Purpose and link to strategy
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Operation
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Chairmans fees |
To provide an inclusive flat rate fee that is competitive with those paid by other companies of equivalent size and complexity subject to the limits contained in GSKs Articles of Association. |
There is no formal maximum. However, fees are reviewed annually and set by reference to a review of the Chairmans performance and independently sourced market data.
The Committee is responsible for evaluating and making recommendations to the Board on the fees payable to the Chairman. The Chairman does not participate in discussions in respect of his fees.
Fees can be paid in a combination of cash and/or GSK shares or ADS via the Non-Executive Directors Share Allocation Plan.
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Basic fees |
As above |
As with the Chairman, fees are reviewed annually and set by reference to independently sourced data.
The Chairman and CEO are responsible for evaluating and making recommendations to the Board on the fees payable to the companys Non-Executive Directors.
A minimum of 25% is delivered in the form of GSK shares or ADS. Using the Non-Executive Directors Share Allocation Plan which delivers the shares or ADS to the Non-Executive Director following retirement from the Board.
|
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Supplemental fees |
To compensate Non-Executive Directors (other than the Chairman) for taking on additional Board responsibilities or undertaking intercontinental travel.
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Additional fees for Committee Chairmen, the Senior Independent Non-Executive Director, Science and Medical Experts and intercontinental travel. |
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Benefits |
To facilitate execution of responsibilities and duties required by the role. |
Travel and subsistence costs for Non-Executive Directors are incurred in the normal course of business in relation to meetings on Board and Committee matters and other GSK-hosted events. For overseas-based Non-Executive Directors, this includes travel to meetings in the UK. In the event it is necessary for business purposes, whilst not normal practice, Non-Executive Directors may be accompanied by their spouse or partner to these meetings or events. The costs associated with the above are all met by the company and, in some instances, they are deemed to be taxable and therefore treated as benefits for the Non-Executive Director.
|
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Operation and scope of Remuneration policy
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The proposed Remuneration policy (Policy) is set out on pages 138 to 146 of the 2016 Annual Report and it is intended that the Policy for GSKs Executive and Non-Executive Directors will apply from the close of the companys Annual General Meeting on 4 May 2017 after it has been submitted by the Committee for approval by shareholders.
The Committee has written this Policy principally in relation to the remuneration arrangements for the Executive Directors, whilst taking into account the possible recruitment of a replacement or an additional Executive Director during the operation of this Policy. The Committee intends this Policy to operate for the period set out above in its entirety. However, it may after due consideration, seek to change the Policy during this period, but only if it believes it is appropriate to do so for the long-term success of the company, after consultation with shareholders and having sought shareholder approval at a general meeting.
The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed:
(i) before the AGM on 7 May 2014 (the date the companys first shareholder-approved Directors Remuneration Policy came into effect);
(ii) before the Policy set out above came into effect, provided that the terms of the payment were consistent with the shareholder-approved Remuneration policy in force at the time they were agreed; or
(iii) at a time when the relevant individual was not a Director of the company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the company. For these purposes payments includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares or ADS, the terms of the payment are agreed at the time the award is granted.
Performance Share Plan and Deferred Annual Bonus Plan awards are subject to the terms of the relevant plan rules under which the award has been granted. The Committee may adjust or amend awards only in accordance with the provisions of the plan rules. This includes making adjustments to reflect one-off corporate events, such as a change in the companys capital structure.
The Committee may also make minor amendments to the Policy set out in this report (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for such amendments.
Statement of consideration of shareholder views
The Committee engages in regular dialogue with shareholders and holds annual meetings with GSKs largest investors to discuss and take feedback on its Remuneration Policy and governance matters.
The annual meetings were held in December 2016, at which Urs Rohner, the Committee Chairman, shared updates on remuneration matters in the last 12 months and proposals for 2017 onwards. Further shareholder consultations were carried out in February and March 2017 by the Committee Chairman on the proposed Remuneration policy. The Committee took into account the feedback from shareholders in determining the Policy which shareholders are being asked to approve at the AGM on 4 May 2017.
Basis of preparation
|
The Directors Remuneration Report has been prepared in accordance with the Companies Act 2006 and The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). In accordance with the Regulations, the following parts of the Annual Report on Remuneration are subject to audit: total remuneration figures for Executive Directors including further details for each element of remuneration (salary, benefits, pension, annual bonus and long-term incentive awards); Non-Executive Directors fees and emoluments received in the year; Directors interests in shares, including interests in GSK share plans; payments to past Directors; payments for loss of office; and share ownership requirements and holdings, for which the opinion thereon is expressed on page 156. The remaining sections of the Directors Remuneration Report are not subject to audit nor are the pages referred to from within the audited sections.
The Directors Remuneration Report has been approved by the Board of Directors and signed on its behalf by:
Urs Rohner
Remuneration Committee Chairman
13 March 2017
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Directors statement of responsibilities
The Directors are responsible for preparing the Annual Report, the Remuneration report and the Group financial statements in accordance with applicable law and regulations.
UK company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. In preparing the Group financial statements, the Directors have also elected to comply with IFRS as issued by the International Accounting Standards Board (IASB). Under company law the Directors must not approve the Group financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and its profit or loss for that period.
In preparing those financial statements, the Directors are required to:
| select suitable accounting policies and then apply them consistently; |
| make judgements and accounting estimates that are reasonable and prudent; |
| state that the Group financial statements comply with IFRS as adopted by the European Union and IFRS as issued by the IASB, subject to any material departures disclosed and explained in the Group financial statements; and |
| prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business. |
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the companys transactions and disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Group financial statements and the Remuneration report comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Group financial statements for the year ended 31 December 2016, comprising principal statements and supporting notes, are set out in Financial statements on pages 158 to 231 of this report. The responsibilities of the auditors in relation to the Group financial statements are set out in the Independent Auditors report on pages 149 to 157.
The Group financial statements for the year ended 31 December 2016 are included in the Annual Report, which is published in printed form and made available on our website. The Directors are responsible for the maintenance and integrity of the Annual Report on our website in accordance with UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different.
Each of the current Directors, whose names and functions are listed in the Corporate Governance section of the Annual Report 2016 confirms that, to the best of his or her knowledge:
| the Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and |
| the Strategic report and risk sections of the Annual Report, which represent the management report, include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. |
Disclosure of information to auditors
The Directors in office at the date of this Annual Report have each confirmed that:
| so far as he or she is aware, there is no relevant audit information of which the companys auditors are unaware; and |
| he or she has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the companys auditors are aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Going concern basis
Pages 53 to 78 contain information on the performance of the Group, its financial position, cash flows, net debt position and borrowing facilities. Further information, including Treasury risk management policies, exposures to market and credit risk and hedging activities, is given in Note 42 to the financial statements, Financial instruments and related disclosures. Having assessed the principal risks and other matters considered in connection with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
Internal control
The Board, through the Audit & Risk Committee, has reviewed the assessment of risks and the internal control framework that operates in GSK and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this Annual Report and up to the date of its approval by the Board of Directors.
The UK Corporate Governance Code
The Board considers that GlaxoSmithKline plc applies the principles and complies with the provisions of the UK Corporate Governance Code maintained by the Financial Reporting Council, as described in the Corporate Governance section on pages 80 to 110. The Board further considers that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Groups position and performance, business model and strategy.
As required by the Financial Conduct Authoritys Listing Rules, the auditors have considered the Directors statement of compliance in relation to those points of the UK Corporate Governance Code which are specified for their review.
Annual Report
The Annual Report for the year ended 31 December 2016, comprising the Report of the Directors, the Remuneration report, the Financial statements and additional information for investors, has been approved by the Board of Directors and signed on its behalf by
Philip Hampton
Chairman
13 March 2017
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to the members of GlaxoSmithKline plc
Report on the Group financial statements
|
Our opinion
In our opinion, GlaxoSmithKline plcs Group financial statements:
| give a true and fair view of the state of the Groups affairs at 31 December 2016 and of its profit and cash flows for the year then ended; |
| have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and |
| have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. |
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1 to the Group financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.
What we have audited
The Group financial statements, included within the Annual Report, comprise:
| the consolidated balance sheet at 31 December 2016; |
| the consolidated income statement and consolidated statement of comprehensive income for the year then ended; |
| the consolidated cash flow statement for the year then ended; |
| the consolidated statement of changes in equity for the year then ended; and |
| the notes to the Group financial statements, which include a summary of significant accounting policies and other explanatory information. |
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union and applicable law.
Our audit approach
Context
The context of our audit is set by the Groups activities in 2016. Having reduced the extent of finance transformation in 2015 because of the completion of the three-part transaction with Novartis, the Group increased the pace of change in 2016, with a number of markets migrating onto the Groups common enterprise-wide resource planning platforms (ERP) or moving financial transaction processing and accounting services to business process outsourcing locations (BPO) and to in-house business service centres (BSC) as well as establishing two new BPOs in Europe and one in Asia. The Group also migrated to a new consolidation platform (BISON) and implemented a new system for tracking intercompany inventory transfers and calculating intra-group unrealised profit in inventory (IPT). As a result, transformation of the Groups finance processes is included as an area of focus in our 2016 report.
In addition, the Group has made certain changes in 2016 to its agreements with Pfizer and Shionogi in respect of the non-controlling interest each holds in ViiV Healthcare. These changes, together with remeasurements to ViiV and other acquisition-related liabilities, had a significant impact on the corresponding accounting and valuation judgements and have therefore also been included as an area of focus.
Our other areas of focus have been refined to reflect developments in the Groups business including continued competitive pricing pressure and discounting in the US and the resolution of the investigation into the Groups commercial practices by the SEC-DoJ.
Overview
Materiality
| Overall group materiality: £260 million which represents 4% of profit before tax adding back certain items (adjusted profit before tax) (2015 £200 million). |
Audit scope
| Our audit included full scope audits of 15 reporting components with specific audit procedures performed at a further 45 reporting components. |
| Taken together, the components at which audit work was performed accounted for 71% of consolidated revenue, 71% of consolidated profit before tax and 73% of adjusted profit before tax and covered all components that individually contributed more than 2% of revenue, profit before tax and adjusted profit before tax. |
Areas of focus
| Rebates, discounts, allowances and returns in the US Pharmaceuticals and Vaccines business |
| Carrying value of goodwill and intangible assets |
| Acquisition-related liabilities |
| Uncertain tax positions |
| Litigation |
| Finance transformation |
| Investigations into the Groups commercial practices |
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)).
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud, and the risk of fraud in revenue recognition. Procedures designed and executed to address these risks included use of data enabled auditing techniques to test journal entries and post-close adjustments, testing and evaluating managements key accounting estimates for reasonableness and consistency, undertaking cut-off procedures to verify proper cut-off of revenue and expenses and testing the existence and accuracy of revenue transactions. In addition, we incorporate an element of unpredictability into our audit work each year.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.
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How our audit addressed the area of focus
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Rebates, discounts, allowances and returns in the US Pharmaceuticals and Vaccines business Refer to notes 3 and 27 in the Group financial statements.
The Group makes sales to various customers in the US that fall under certain commercial and government mandated contracts and reimbursement arrangements, of which the most significant are Medicaid and Medicare. The Group also provides a right of return to its customers for certain products.
These arrangements result in deductions to gross sales in arriving at turnover and give rise to obligations for the Group to provide customers with rebates, discounts, allowances and the right of return, which for unsettled amounts are recognised as an accrual.
We focused on this area because rebates, discounts, allowances and returns arrangements are complex and because establishing an appropriate accrual requires significant judgement and estimation by the directors. This judgement is particularly complex in a US healthcare environment in which competitive pricing pressure and product discounting are growing trends. The directors have determined an accrual of £2,218 million to be necessary at 31 December 2016 (31 December 2015 £1,671 million). The increase in the accrual in 2016 is primarily due to foreign exchange rate impacts. Two other factors driving the increased accrual were higher sales, as well as greater discounts due to competitive pressures, particularly in relation to Advair .
|
We obtained managements calculations for accruals under applicable schemes and validated the assumptions used by reference to the Groups stated commercial policies, the terms of the applicable contracts, third party data related to patient enrolment in US government funded benefit schemes and historical levels of product returns.
We compared the assumptions to contracted prices, historical rebates, discounts, allowances and returns levels (where relevant) and to current payment trends. We also considered the historical accuracy of the Groups estimates in previous years and the impact of competitive pricing pressures and greater discounting in the US market more generally. We formed an independent expectation of the largest elements of the accrual at 31 December 2016 using third party data and compared this expectation to the actual accrual recognised by the Group.
Based on the procedures performed, we did not identify any material differences between our independent expectations and the accrual. |
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Acquisition-related liabilities Refer to notes 3, 27, 30, 38, 39 and 42 in the Group financial statements.
In recent years, the Group has completed a number of significant transactions, including:
The three-part transaction with Novartis in 2015;
The establishment of ViiV Healthcare in 2009; and
The acquisition by ViiV Healthcare of the remaining 50% interest in the Shionogi-ViiV Healthcare in 2012.
Each of these transactions resulted in the recognition and measurement of material acquisition-related liabilities, which necessitate significant management judgement at each balance sheet date.
In addition, during February 2016 the Group waived certain rights it had in respect of non-controlling interests held by Pfizer and Shionogi in ViiV Healthcare and the terms of the arrangement with Shionogi were amended again in December 2016.
The most significant of the acquisition-related liabilities are outlined below:
Consumer Healthcare put option: The Group recorded a liability for the present value of the expected redemption price of a written put option over Novartis non-controlling interest in Consumer Healthcare. At 31 December 2016, this liability had a carrying value of £7,420 million (2015 £6,287 million);
ViiV Healthcare contingent consideration: On acquisition of the remaining 50% interest in the Shionogi-ViiV Healthcare joint venture in 2012, £659 million was recorded as contingent consideration. This represented the fair value of expected payments to be made to Shionogi, contingent on future sales of dolutegravir products. This liability is required to be re-measured to its fair value at each reporting date. Since initial recognition, it has been increased in response to actual and future sales significantly exceeding original expectations including the impact of changes in foreign exchange rates. At 31 December 2016, the liability was £5,304 million (2015 £3,409 million); and
ViiV Healthcare put options: In 2009 and 2012, both Pfizer and Shionogi were granted written put options by the Group that enabled each to put its non-controlling interest back to the Group in the future. Up to and including 31 December 2015, no financial liabilities were recorded for these two options as each arrangement contained clauses that enabled the Group to avoid acquiring these interests if certain conditions were met. In February 2016, the Group unilaterally waived certain of its rights. As a result, liabilities with an aggregate value of £2,172 million were recognised. In December 2016, agreement was reached with Shionogi, whereby it agreed to forego its rights to exercise its written put option. As a result, the Groups associated liability of £1,244 million was de recognised during December 2016. At 31 December 2016, the liability in respect of Pfizers written put option had a carrying value of £1,319 million.
In addition to these liabilities, the Group has recorded certain other acquisition-related liabilities at 31 December 2016, including £545 million in relation to contingent consideration payable on the acquisition of Novartis Vaccines business in 2015.
We focused on this area as the carrying value of each of the financial liabilities is material and is determined by management judgements and estimates, including projections of future sales of products, the potential impact of competitor products and the delivery of anticipated synergies. In addition, each valuation is sensitive to changes in other assumptions, including discount rates and tax rates. |
We deployed our valuations specialists in evaluating certain key assumptions, including growth projections and discount rate as well as the integrity and mechanical accuracy of each of managements valuation models. We considered whether reasonably possible changes would have a significant impact on the value recorded. Certain procedures are specific to individual liabilities and included the following:
Consumer Healthcare put option: The redemption price will contractually be based on a multiple (to be agreed between GSK and Novartis) of Consumer Healthcares revenue and profit. We compared the earnings forecast approved by the Consumer Healthcare board of directors and used by management in its model to the actual earnings in 2016 and understood the reasons for changes. We also considered the appropriateness of earnings multiples applied to this forecast and the assumption about option exercise date;
ViiV Healthcare contingent consideration: We compared the projections for the Groups dolutegravir products to third party expectations of growth and considered the potential upside and downside impact of products launched and expected to be launched by the Groups competitors; and
ViiV Healthcare put options: We obtained and reviewed the written agreements between the Group and each of Pfizer and Shionogi. Certain assumptions related to forecast revenue from dolutegravir products used in the valuation of these liabilities are consistent with the ViiV Healthcare contingent consideration. For other components of the valuation, we considered the appropriateness of the assumptions made about forecast growth rates and margins by reference to historical performance and to Board approved budgets and third party forecast data.
Each of these three acquisition-related liabilities is subject to significant estimation uncertainty and the range of possible outcomes is very broad. However, we are comfortable that the value of each liability at 31 December 2016 is reasonable and reflects managements best estimates at this time.
We reviewed the disclosures about each acquisition-related liability, including managements commentary about estimation uncertainty and the range of alternative outcomes. We are satisfied that these disclosures are appropriate. |
152 |
GSK Annual Report 2016 |
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Independent Auditors report continued
Report on the Group financial statements continued
|
Area of focus
|
How our audit addressed the area of focus
|
|
Uncertain tax positions Refer to Notes 3 and 14 in the Group financial statements.
The Group operates in a complex multinational tax environment and there are open tax and transfer pricing matters with UK and overseas tax authorities. In addition, from time to time the Group enters into transactions with complicated accounting and tax consequences, including the three-part transaction with Novartis in 2015. Judgement is required in assessing the level of provisions required in respect of uncertain tax positions. At 31 December 2016, the Group has recorded provisions of £1,892 million in respect of uncertain tax positions (2015 £1,687 million). |
In conjunction with our UK, US, international tax and transfer pricing specialists, we evaluated and challenged managements judgements in respect of estimates of tax exposures and contingencies in order to assess the adequacy of the Groups tax provisions. This included obtaining and evaluating certain third party tax opinions that the Group has obtained to assess the appropriateness of any assumptions used.
In understanding and evaluating managements judgements, we considered the status of recent and current tax authority audits and enquiries, the outturn of previous claims, judgemental positions taken in tax returns and current year estimates and developments in the tax environment. We noted that the assumptions and judgements that are required to formulate the provisions mean that the range of possible outcomes is broad. However, based on the evidence obtained we considered the level of provisioning to be acceptable in the context of the Group financial statements taken as a whole. We considered managements disclosures in this regard and we agree with managements view that a material change to the Groups estimates of tax exposures is not expected within the next 12 months.
|
|
Litigation Refer to Notes 3, 29 and 46 in the Group financial statements.
The pharmaceuticals industry is heavily regulated which increases inherent litigation risk. The Group is engaged in a number of legal actions, including product liability, anti-trust and related private litigation, of which the most significant are disclosed in Notes 29 and 46.
We focused on this area as the eventual outcome of claims is uncertain and the positions taken by the directors are based on the application of material judgement and estimation. Accordingly, unexpected adverse outcomes could significantly impact the Groups reported profit and balance sheet position.
At 31 December 2016, the Group held provisions of £344 million in respect of legal actions (31 December 2015 £352 million). |
We discussed the status of significant known actual and potential litigation with in-house legal counsel. We obtained and substantively tested evidence to support the decisions and rationale for provisions held or the decisions not to record provisions, including correspondence with legal counsel. We also monitored and considered external information sources to identify potential legal actions.
We developed an independent expectation of the litigation provisions based on product litigation history and other available evidence to challenge the valuation and completeness of the provisions recognised by the Group. We obtained confirmations from external legal counsel to confirm our understanding of settled and outstanding litigation and asserted claims. We evaluated significant adjustments to legal provisions recorded during the year to determine if they were indicative of management bias.
As disclosed in Notes 29 and 46 to the Group financial statements, the eventual outcome of legal proceedings is dependent on the outcome of future events and the position taken by the Group is inherently judgemental. We found in the context of the Group financial statements taken as a whole that the judgements made by management were reasonable and the disclosures made in respect of these provisions and contingent liabilities were appropriate.
|
153 | GSK Annual Report 2016 |
Strategic report
|
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Report on the Group financial statements continued
|
Area of focus
|
How our audit addressed the area of focus
|
|
Finance transformation The Group continues to rationalise and simplify its finance processes including the roll-out of an enterprise-wide resource planning system (ERP) and migrations of accounting services to in-house business service centres (BSCs) and to third party business process outsourcing locations (BPOs). In addition, the Group migrated onto new platforms for consolidation and for tracking intercompany inventory transfers and calculating intra-group unrealised profit in inventory in 2016.
These changes represent a financial reporting risk while migrations are happening as controls and processes that have been established and embedded over a number of years are updated and migrated into a new environment. There is an increased risk of breakdown in internal financial controls during the transition and an increased risk of inaccurate or incomplete migration of financial data, which would in turn increase risk of material misstatements to the Group financial statements. |
We centrally managed the work performed by component audit teams at BPOs and BSCs, which consisted of controls and substantive testing, and we conducted oversight visits to key BSC and BPO sites in Group audit scope (namely India, Malaysia, Romania, the US and the UK) to direct the work performed.
We evaluated the design and tested the operating effectiveness of key automated and manual controls both before and after the migration to the centralised processing environment, including IT general controls and controls in respect of data migration between ERP systems. We also substantively tested the accuracy and completeness of data migration into the new ERP along with the controls over this process and we did not note any significant exceptions. Similar procedures were performed for the migrations onto the consolidation and intercompany profit tracking systems. In respect of the latter, because of the significance of the inter-company profit in inventory adjustment we performed detailed testing of the calculation at a component and Group level, supported by validation of key manual controls over this process. We did not note any significant or unresolved exceptions in our testing.
|
|
Investigations into the Groups commercial practices Refer to Notes 3, 29 and 46 in the Group financial statements.
The SEC-DoJ investigation into the Groups commercial practices was concluded in September 2016, resulting in the Group paying a penalty of $20 million. The Group remains subject to an ongoing investigation by the SFO in the UK. At 31 December 2016, the Group concluded that it does not have sufficient clarity on the likely timing of the completion of this investigation nor is it able to make a sufficiently reliable estimate of any fine or penalty that the SFO might impose on the Group on completion of its investigation. As a result, the Group has stated in Note 46 that it is unable to recognise a provision for its estimate of the eventual outcome.
In addition, the Group continues to carry out its own investigations in a number markets to ascertain whether inappropriate commercial practices may have taken place.
We focused on the following risks, which might have a material impact on the Groups financial statements:
That a fine and penalty might be forthcoming in respect of ongoing investigation into the Groups commercial practices by the SFO, which could give rise to the need for a material provision; and
That inappropriate activities have occurred, which could also give rise to material fines or penalties or result in asset impairment. |
We met with the directors, management and in-house legal counsel and spoke with the Groups external advisors to assess the risk of occurrence of inappropriate activities, the status of ongoing investigations and the potential for further fines and penalties. This included understanding and evaluating the Groups internal investigations processes, which assess risks and allegations reported through various channels including whistle-blowing hotlines. We also evaluated the ongoing enhancements and changes that have been made to other control processes and business practices in recent years.
Deploying our forensic specialists, we assessed the scope and findings of the investigative work performed by the Group as well as the risk assessment exercise that management has performed into third party interaction and engagement more broadly. We used the output of this assessment to instruct ten component teams (including certain markets not otherwise included in Group audit scope) to undertake risk-focused audit procedures to address the audit risk that the Group financial statements might be materially misstated due to the potential financial implications of alleged illegal acts.
In respect of the SEC-DoJ investigation, we verified the settlement agreement and payment. In respect of the SFO investigation, we independently circularised external legal counsel engaged by the Group to obtain its views about the status of the investigation and to ascertain the reasonableness of managements assertions in respect of the likely outcome.
Based on these procedures, we were satisfied with the Groups provisioning decisions at 31 December 2016 and with the adequacy of the disclosures given the status of investigations.
|
154 |
GSK Annual Report 2016 |
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Independent Auditors report continued
Report on the Group financial statements continued
|
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls and the industry in which the Group operates.
The Group financial statements are a consolidation of over 500 reporting components. We identified 15 reporting components that, in our view, required an audit of their complete financial information due to their size or risk characteristics. This excludes 13 central adjustment entities audited at a Group level. Specific audit procedures over significant balances and transactions were performed at a further 45 reporting components to give appropriate coverage of all material balances. Where these reporting components are supported by shared financial service centres, these centres were also included in Group audit scope. None of the reporting components not included in our Group audit scope individually contributed more than 2% to consolidated revenue, profit before tax or adjusted profit before tax.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting component units. As a result, 19 overseas components were visited by senior members of the Group audit team, including each of the Groups financially significant components in the US (which are visited at least annually) as well as Belgium, Japan, China, Switzerland, Germany, Ireland and Italy. In addition, we visited four of the overseas shared service centres supporting reporting components in Group audit scope. For those components in Group audit scope where a site visit was not undertaken, our involvement included regular dialogue with our component teams, review of component auditor work papers and participation in certain component audit clearance meetings.
Further specific audit procedures over central functions, the Group consolidation and areas of significant judgement (including taxation, goodwill, intangible assets, treasury, post-retirement benefits and the elimination of unrealised intercompany profit in inventory) were directly led by the Group audit team.
Taken together, the territories and functions where we performed our audit work accounted for 71% of consolidated revenue, 71% of consolidated profit before tax and 73% of adjusted profit before tax. This was before considering the contribution to our audit evidence from performing audit work at the divisional and Group levels, including testing of monitoring controls and disaggregated analytical review procedures, which covers a significant portion of the Groups smaller and lower risk components that were not directly included in our Group audit scope. In addition, we obtained indirect audit evidence over certain out-of-scope components through the procedures we undertook at the Groups shared service centres, encompassing BPOs and BSCs, and over centralised IT infrastructure where these processes are standardised.
155 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Report on the Group financial statements continued
|
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
|
£260 million (2015 £200 million).
|
|
How we determined it |
4% of profit before tax adding back certain items, including the re-measurement charges for Shionogi-ViiV Healthcare contingent consideration (£2,162 million) and Vaccines contingent consideration (£64 million), the re-measurement charges for the Consumer Healthcare (£1,133 million) and ViiV Healthcare (£567 million) put options, major restructuring costs (£974 million), legal costs (£162 million) and impairment of intangible assets (£22 million) and deducting net income relating to the gain on disposal of assets (£525 million).
|
|
Rationale for benchmark applied |
The Groups principal measure of earnings comprises core results, which adds back to statutory results a number of items of income and expenditure including those detailed above. Management uses this measure as it believes that it eliminates the volatility inherent in one-off items. We took this measure into account in determining our materiality, except that we did not adjust profit before tax to add back amortisation of intangible assets and certain other smaller non-core items as in our view these are recurring items which do not introduce volatility to the Groups earnings.
|
We agreed with the Audit & Risk Committee that we would report to it misstatements identified during our audit above £10 million (2015 £10 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules, we are required to review the directors statement, set out on page 148, in relation to going concern. We have nothing to report having performed our review.
Under ISAs (UK & Ireland), we are also required to report to you if we have anything material to add or to draw attention to in relation to the directors statement about whether they considered it appropriate to adopt the going concern basis in preparing the Group financial statements. We have nothing material to add or to draw attention to.
As noted in the directors statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the Group financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the Group financial statements were signed. As part of our audit, we have concluded that the directors use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Groups ability to continue as a going concern.
156 |
GSK Annual Report 2016 |
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Independent Auditors report continued
Other required reporting
|
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
| the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and |
| the Strategic Report and the Directors Report have been prepared in accordance with applicable legal requirements. |
In addition, in light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors Report. We have nothing to report in this respect.
Adequacy of information and explanations received
Under the Companies Act 2006, we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Directors remuneration
Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules, we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the UK Corporate Governance Code. We have nothing to report having performed our review.
157 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Responsibilities for the financial statements and the audit
|
Our responsibilities and those of the directors
As explained more fully in the directors statement of responsibilities set out on page 148, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Companys members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
| whether the accounting policies are appropriate to the Groups circumstances and have been consistently applied and adequately disclosed; |
| the reasonableness of significant accounting estimates made by the directors; and |
| the overall presentation of the financial statements. |
We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report. With respect to the Strategic Report and Directors Report, we consider whether those reports include the disclosures required by applicable legal requirements.
Other matters
|
We have reported separately on the parent company financial statements of GlaxoSmithKline plc for the year ended 31 December 2016.
The parent company has passed a resolution in accordance with section 506 of the Companies Act 2006 that the senior statutory auditors name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
13 March 2017
Notes:
(a) | The maintenance and integrity of the GlaxoSmithKline plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. |
(b) | Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. |
158 |
GSK Annual Report 2016 |
|||
for the year ended 31 December 2016
159 | GSK Annual Report 2016 |
Strategic report
|
||||
Consolidated balance sheet |
Governance and remuneration
|
|||||
Financial statements
|
||||||
Investor information
|
as at 31 December 2016
Notes
|
2016 £m
|
2015 £m
|
||||||
Non-current assets |
||||||||
Property, plant and equipment |
17 | 10,808 | 9,668 | |||||
Goodwill |
18 | 5,965 | 5,162 | |||||
Other intangible assets |
19 | 18,776 | 16,672 | |||||
Investments in associates and joint ventures |
20 | 263 | 207 | |||||
Other investments |
21 | 985 | 1,255 | |||||
Deferred tax assets |
14 | 4,374 | 2,905 | |||||
Other non-current assets |
|
22
|
|
1,199
|
990
|
|||
Total non-current assets
|
42,370
|
36,859
|
||||||
Current assets |
||||||||
Inventories |
23 | 5,102 | 4,716 | |||||
Current tax recoverable |
14 | 226 | 180 | |||||
Trade and other receivables |
24 | 6,026 | 5,615 | |||||
Derivative financial instruments |
42 | 156 | 125 | |||||
Liquid investments |
31 | 89 | 75 | |||||
Cash and cash equivalents |
25 | 4,897 | 5,830 | |||||
Assets held for sale |
|
26
|
|
215
|
46
|
|||
Total current assets |
16,711
|
16,587
|
||||||
Total assets
|
59,081
|
53,446
|
||||||
Current liabilities |
||||||||
Short-term borrowings |
31 | (4,129) | (1,308) | |||||
Contingent consideration liabilities |
39 | (561) | (306) | |||||
Trade and other payables |
27 | (11,964) | (8,885) | |||||
Derivative financial instruments |
42 | (194) | (153) | |||||
Current tax payable |
14 | (1,305) | (1,421) | |||||
Short-term provisions |
|
29
|
|
(848)
|
(1,344)
|
|||
Total current liabilities
|
(19,001)
|
(13,417)
|
||||||
Non-current liabilities |
||||||||
Long-term borrowings |
31 | (14,661) | (15,324) | |||||
Deferred tax liabilities |
14 | (1,934) | (1,522) | |||||
Pensions and other post-employment benefits |
28 | (4,090) | (3,229) | |||||
Other provisions |
29 | (652) | (420) | |||||
Contingent consideration liabilities |
39 | (5,335) | (3,549) | |||||
Other non-current liabilities |
|
30
|
|
(8,445)
|
(7,107)
|
|||
Total non-current liabilities |
(35,117)
|
(31,151)
|
||||||
Total liabilities |
(54,118)
|
(44,568)
|
||||||
Net assets
|
4,963
|
8,878
|
||||||
Equity |
||||||||
Share capital |
33 | 1,342 | 1,340 | |||||
Share premium account |
33 | 2,954 | 2,831 | |||||
Retained earnings |
34 | (5,392) | (1,397) | |||||
Other reserves |
|
34
|
|
2,220
|
2,340
|
|||
Shareholders equity |
1,124
|
5,114
|
||||||
Non-controlling interests |
3,839
|
3,764
|
||||||
Total equity
|
4,963
|
8,878
|
The financial statements on pages 158 to 231 were approved by the Board on 13 March 2017 and signed on its behalf by
Philip Hampton
Chairman
160 |
GSK Annual Report 2016 |
|||
Consolidated statement of changes in equity
for the year ended 31 December 2016
Shareholders equity | ||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Share
|
Share
|
Retained
|
Other
|
Total
|
Non-controlling
£m
|
Total
|
||||||||||||||||||||||
At 1 January 2014 |
1,336 | 2,595 | 913 | 2,153 | 6,997 | 815 | 7,812 | |||||||||||||||||||||
Profit for the year |
| | 2,756 | | 2,756 | 75 | 2,831 | |||||||||||||||||||||
Other comprehensive (expense)/income for the year
|
|
|
|
|
|
|
|
(1,626
|
)
|
|
(140
|
)
|
|
(1,766
|
)
|
|
16
|
|
|
(1,750
|
)
|
|||||||
Total comprehensive income/(expense) for the year
|
|
|
|
|
|
|
|
1,130
|
|
|
(140
|
)
|
|
990
|
|
|
91
|
|
|
1,081
|
|
|||||||
Distributions to non-controlling interests |
| | | | | (205 | ) | (205 | ) | |||||||||||||||||||
Dividends to shareholders |
| | (3,843 | ) | | (3,843 | ) | | (3,843 | ) | ||||||||||||||||||
Changes in non-controlling interests |
| | (58 | ) | | (58 | ) | (28 | ) | (86 | ) | |||||||||||||||||
Forward contract relating to non-controlling interest |
| | | 21 | 21 | | 21 | |||||||||||||||||||||
Ordinary Shares issued |
3 | 164 | | | 167 | | 167 | |||||||||||||||||||||
Ordinary Shares purchased and cancelled or held as Treasury shares | | | (238 | ) | | (238 | ) | | (238 | ) | ||||||||||||||||||
Ordinary Shares acquired by ESOP Trusts |
| | 150 | (245 | ) | (95 | ) | | (95 | ) | ||||||||||||||||||
Write-down of shares held by ESOP Trusts |
| | (450 | ) | 450 | | | | ||||||||||||||||||||
Share-based incentive plans |
| | 326 | | 326 | | 326 | |||||||||||||||||||||
Tax on share-based incentive plans
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
(4
|
)
|
|
|
|
|
(4
|
)
|
|||||||
At 31 December 2014 |
1,339 | 2,759 | (2,074 | ) | 2,239 | 4,263 | 673 | 4,936 | ||||||||||||||||||||
Profit/(loss) for the year |
| | 8,422 | | 8,422 | (50 | ) | 8,372 | ||||||||||||||||||||
Other comprehensive (expense)/income for the year
|
|
|
|
|
|
|
|
(520
|
)
|
|
25
|
|
|
(495
|
)
|
|
8
|
|
|
(487
|
)
|
|||||||
Total comprehensive income/(expense) for the year
|
|
|
|
|
|
|
|
7,902
|
|
|
25
|
|
|
7,927
|
|
|
(42
|
)
|
|
7,885
|
|
|||||||
Distributions to non-controlling interests |
| | | | | (237 | ) | (237 | ) | |||||||||||||||||||
Dividends to shareholders |
| | (3,874 | ) | | (3,874 | ) | | (3,874 | ) | ||||||||||||||||||
Gains on transfer of net assets into Consumer Healthcare |
||||||||||||||||||||||||||||
Joint Venture |
| | 2,891 | | 2,891 | | 2,891 | |||||||||||||||||||||
Consumer Healthcare Joint Venture put option |
| | (6,204 | ) | | (6,204 | ) | | (6,204 | ) | ||||||||||||||||||
Changes in non-controlling interests |
| | | | | 3,370 | 3,370 | |||||||||||||||||||||
Loss on transfer of equity investment to investment in associate | | | (229 | ) | | (229 | ) | | (229 | ) | ||||||||||||||||||
Ordinary Shares issued |
1 | 72 | | | 73 | | 73 | |||||||||||||||||||||
Ordinary Shares acquired by ESOP Trusts |
| | | (99 | ) | (99 | ) | | (99 | ) | ||||||||||||||||||
Write-down of shares held by ESOP Trusts |
| | (175 | ) | 175 | | | | ||||||||||||||||||||
Share-based incentive plans |
| | 356 | | 356 | | 356 | |||||||||||||||||||||
Tax on share-based incentive plans
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
10
|
|
|
|
|
|
10
|
|
|||||||
At 31 December 2015 |
1,340 | 2,831 | (1,397 | ) | 2,340 | 5,114 | 3,764 | 8,878 | ||||||||||||||||||||
Profit for the year |
| | 912 | | 912 | 150 | 1,062 | |||||||||||||||||||||
Other comprehensive income for the year
|
|
|
|
|
|
|
|
284
|
|
|
75
|
|
|
359
|
|
|
603
|
|
|
962
|
|
|||||||
Total comprehensive income for the year
|
|
|
|
|
|
|
|
1,196
|
|
|
75
|
|
|
1,271
|
|
|
753
|
|
|
2,024
|
|
|||||||
Distributions to non-controlling interests |
| | | | | (534 | ) | (534 | ) | |||||||||||||||||||
Dividends to shareholders |
| | (4,850 | ) | | (4,850 | ) | | (4,850 | ) | ||||||||||||||||||
Recognition of liabilities with non-controlling interests |
| | (2,013 | ) | | (2,013 | ) | (159 | ) | (2,172 | ) | |||||||||||||||||
De-recognition of liabilities with non-controlling interests |
| | 1,244 | | 1,244 | | 1,244 | |||||||||||||||||||||
Changes in non-controlling interests |
| | 17 | | 17 | 15 | 32 | |||||||||||||||||||||
Ordinary Shares issued |
2 | 87 | | | 89 | | 89 | |||||||||||||||||||||
Ordinary Shares acquired by ESOP Trusts |
| 36 | 466 | (576 | ) | (74 | ) | | (74 | ) | ||||||||||||||||||
Write-down of shares held by ESOP Trusts |
| | (381 | ) | 381 | | | | ||||||||||||||||||||
Share-based incentive plans |
| | 319 | | 319 | | 319 | |||||||||||||||||||||
Tax on share-based incentive plans
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
7
|
|
|
|
|
|
7
|
|
|||||||
At 31 December 2016
|
|
1,342
|
|
|
2,954
|
|
|
(5,392
|
)
|
|
2,220
|
|
|
1,124
|
|
|
3,839
|
|
|
4,963
|
|
161 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Consolidated cash flow statement |
Financial statements
|
|||||
Investor information
|
for the year ended 31 December 2016
Notes |
2016 £m |
2015 £m |
2014 £m |
|||||||||||||
Cash flow from operating activities |
||||||||||||||||
Profit after taxation for the year |
1,062 | 8,372 | 2,831 | |||||||||||||
Adjustments reconciling profit after tax to operating cash flows |
36 | 7,044 | (3,741 | ) | 3,453 | |||||||||||
Cash generated from operations |
8,106 | 4,631 | 6,284 | |||||||||||||
Taxation paid |
(1,609) | (2,062 | ) | (1,108 | ) | |||||||||||
Net cash inflow from operating activities |
6,497 | 2,569 | 5,176 | |||||||||||||
Cash flow from investing activities |
||||||||||||||||
Purchase of property, plant and equipment |
(1,543) | (1,380 | ) | (1,188 | ) | |||||||||||
Proceeds from sale of property, plant and equipment |
98 | 72 | 39 | |||||||||||||
Purchase of intangible assets |
(809) | (521 | ) | (563 | ) | |||||||||||
Proceeds from sale of intangible assets |
283 | 236 | 330 | |||||||||||||
Purchase of equity investments |
(96) | (82 | ) | (83 | ) | |||||||||||
Proceeds from sale of equity investments |
683 | 357 | 205 | |||||||||||||
Contingent consideration paid |
(73) | (338 | ) | (3 | ) | |||||||||||
Purchase of businesses, net of cash acquired |
38 | 17 | (3,203 | ) | (101 | ) | ||||||||||
Disposal of businesses |
38 | 72 | 10,246 | 225 | ||||||||||||
Investments in associates and joint ventures |
20 | (11) | (16 | ) | (9 | ) | ||||||||||
Proceeds from disposal of subsidiary and interest in associate |
| 564 | 1 | |||||||||||||
(Increase)/decrease in liquid investments |
| (2 | ) | 1 | ||||||||||||
Interest received |
68 | 99 | 63 | |||||||||||||
Dividends from associates, joint ventures and equity investments |
42 | 5 | 5 | |||||||||||||
Net cash (outflow)/inflow from investing activities |
(1,269) | 6,037 | (1,078 | ) | ||||||||||||
Cash flow from financing activities |
||||||||||||||||
Shares acquired by ESOP Trusts |
(74) | (99 | ) | (95 | ) | |||||||||||
Issue of share capital |
33 | 89 | 73 | 167 | ||||||||||||
Purchase of own shares for cancellation or to be held as Treasury shares |
| | (238 | ) | ||||||||||||
Purchase of non-controlling interests |
| | (679 | ) | ||||||||||||
Increase in long-term loans |
| | 1,960 | |||||||||||||
Increase in short-term loans |
1,067 | | | |||||||||||||
Repayment of short-term loans |
(919) | (2,412 | ) | (1,709 | ) | |||||||||||
Net repayment of obligations under finance leases |
(18) | (25 | ) | (23 | ) | |||||||||||
Interest paid |
(732) | (762 | ) | (707 | ) | |||||||||||
Dividends paid to shareholders |
(4,850) | (3,874 | ) | (3,843 | ) | |||||||||||
Distributions to non-controlling interests |
(534) | (237 | ) | (205 | ) | |||||||||||
Other financing cash flows |
(421) | 233 | (13 | ) | ||||||||||||
Net cash outflow from financing activities |
(6,392) | (7,103 | ) | (5,385 | ) | |||||||||||
(Decrease)/increase in cash and bank overdrafts |
37 | (1,164) | 1,503 | (1,287 | ) | |||||||||||
Cash and bank overdrafts at beginning of year |
5,486 | 4,028 | 5,231 | |||||||||||||
Exchange adjustments |
283 | (45 | ) | 84 | ||||||||||||
(Decrease)/increase in cash and bank overdrafts |
(1,164) | 1,503 | (1,287 | ) | ||||||||||||
Cash and bank overdrafts at end of year |
4,605 | 5,486 | 4,028 | |||||||||||||
Cash and bank overdrafts at end of year comprise: |
||||||||||||||||
Cash and cash equivalents* |
4,897 | 5,830 | 4,719 | |||||||||||||
Overdrafts* |
(292) | (344 | ) | (691 | ) | |||||||||||
4,605 | 5,486 | 4,028 |
* Comparative figures for 2014 have been restated, see page 162 for further details.
162 |
GSK Annual Report 2016 |
|||
Notes to the financial statements
1. Presentation of the financial statements
|
Description of business
GSK is a major global healthcare group which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products including vaccines, over-the-counter (OTC) medicines and health-related consumer products. GSKs principal pharmaceutical products include medicines in the following therapeutic areas: respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, anti-bacterials, dermatology, rare diseases, immuno-inflammation, vaccines and HIV.
Compliance with applicable law and IFRS
The financial statements have been prepared in accordance with the Companies Act 2006, Article 4 of the IAS Regulation and International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and related interpretations, as adopted by the European Union.
The financial statements are also in compliance with IFRS as issued by the International Accounting Standards Board.
Composition of financial statements
The consolidated financial statements are drawn up in Sterling, the functional currency of GlaxoSmithKline plc, and in accordance with IFRS accounting presentation. The financial statements comprise:
| Consolidated income statement |
| Consolidated statement of comprehensive income |
| Consolidated balance sheet |
| Consolidated statement of changes in equity |
| Consolidated cash flow statement |
| Notes to the financial statements. |
Composition of the Group
A list of the subsidiary and associated undertakings which, in the opinion of the Directors, principally affected the amount of profit or the net assets of the Group is given in Note 45, Principal Group companies.
Accounting principles and policies
The financial statements have been prepared using the historical cost convention modified by the revaluation of certain items, as stated in the accounting policies, and on a going concern basis.
The financial statements have been prepared in accordance with the Groups accounting policies approved by the Board and described in Note 2, Accounting principles and policies. Information on the application of these accounting policies, including areas of estimation and judgement is given in Note 3, Key accounting judgements and estimates.
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Implementation of new accounting standards
Following an agenda decision by the IFRS Interpretations Committee regarding offsetting and cash pooling arrangements, the Group has revised its disclosure of its cash pooling arrangements. There is no change to the results or cash flows for the year to 31 December 2015 and there was no impact on the balance sheet at 31 December 2015. The impact at 1 January 2015 was to increase both cash and cash equivalents and short-term borrowings by £381 million.
The amendment to IFRS 11 Joint arrangements has been implemented from 1 January 2016. This revision has not had a material impact on the results or financial position of the Group.
Financial period
These financial statements cover the financial year from 1 January to 31 December 2016, with comparative figures for the financial years from 1 January to 31 December 2015 and, where appropriate, from 1 January to 31 December 2014.
Parent company financial statements
The financial statements of the parent company, GlaxoSmithKline plc, have been prepared in accordance with UK GAAP and with UK accounting presentation. The company balance sheet is presented on page 235 and the accounting policies are given on page 236.
2. Accounting principles and policies
|
Consolidation
The consolidated financial statements include:
| the assets and liabilities, and the results and cash flows, of the company and its subsidiaries, including ESOP Trusts |
| the Groups share of the results and net assets of associates and joint ventures |
| the Groups share of assets, liabilities, revenue and expenses of joint operations. |
The financial statements of entities consolidated are made up to 31 December each year.
Entities over which the Group has the power to direct the relevant activities so as to affect the returns to the Group, generally through control over the financial and operating policies, are accounted for as subsidiaries.
Where the Group has the ability to exercise joint control over, and rights to the net assets of, entities, the entities are accounted for as joint ventures. Where the Group has the ability to exercise joint control over an arrangement, but has rights to specified assets and obligations for specified liabilities of the arrangement, the arrangement is accounted for as a joint operation. Where the Group has the ability to exercise significant influence over entities, they are accounted for as associates. The results and assets and liabilities of associates and joint ventures are incorporated into the consolidated financial statements using the equity method of accounting. The Groups rights to assets, liabilities, revenue and expenses of joint operations are included in the consolidated financial statements in accordance with those rights and obligations.
Interests acquired in entities are consolidated from the date the Group acquires control and interests sold are de-consolidated from the date control ceases.
163 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
2. Accounting principles and policies continued
|
Transactions and balances between subsidiaries are eliminated and no profit before tax is taken on sales between subsidiaries until the products are sold to customers outside the Group. The relevant proportion of profits on transactions with joint ventures, joint operations and associates is also deferred until the products are sold to third parties. Transactions with non-controlling interests are recorded directly in equity. Deferred tax relief on unrealised intra-Group profit is accounted for only to the extent that it is considered recoverable.
Goodwill is capitalised as a separate item in the case of subsidiaries and as part of the cost of investment in the case of joint ventures and associates. Goodwill is denominated in the currency of the operation acquired.
Where the cost of acquisition is below the fair value of the net assets acquired, the difference is recognised directly in the income statement.
Business combinations
Business combinations are accounted for using the acquisition accounting method. Identifiable assets, liabilities and contingent liabilities acquired are measured at fair value at acquisition date. The consideration transferred is measured at fair value and includes the fair value of any contingent consideration. Where the consideration transferred, together with the non-controlling interest, exceeds the fair value of the net assets, liabilities and contingent liabilities acquired, the excess is recorded as goodwill. The costs of acquisition are charged to the income statement in the period in which they are incurred.
Where not all of the equity of a subsidiary is acquired the non-controlling interest is recognised either at fair value or at the non-controlling interests share of the net assets of the subsidiary, on a case-by-case basis. Changes in the Groups ownership percentage of subsidiaries are accounted for within equity.
Foreign currency translation
Foreign currency transactions are booked in the functional currency of the Group company at the exchange rate ruling on the date of transaction. Foreign currency monetary assets and liabilities are retranslated into the functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are included in the income statement.
On consolidation, assets and liabilities, including related goodwill, of overseas subsidiaries, associates and joint ventures, are translated into Sterling at rates of exchange ruling at the balance sheet date. The results and cash flows of overseas subsidiaries, associates and joint ventures are translated into Sterling using average rates of exchange.
Exchange adjustments arising when the opening net assets and the profits for the year retained by overseas subsidiaries, associates and joint ventures are translated into Sterling, less exchange differences arising on related foreign currency borrowings which hedge the Groups net investment in these operations, are taken to a separate component of equity.
When translating into Sterling the assets, liabilities, results and cash flows of overseas subsidiaries, associates and joint ventures which are reported in currencies of hyper-inflationary economies, adjustments are made where material to reflect current price levels. Any loss on net monetary assets is charged to the consolidated income statement.
Revenue
Revenue is recognised in the income statement when goods or services are supplied or made available to external customers against orders received, title and risk of loss is passed to the customer, reliable estimates can be made of relevant deductions and all relevant obligations have been fulfilled, such that the earnings process is regarded as being complete.
Turnover represents net invoice value after the deduction of discounts and allowances given and accruals for estimated future rebates and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in the light of contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated using wholesaler and other third-party analyses, market research data and internally generated information. Value added tax and other sales taxes are excluded from revenue.
Where the Group co-promotes a product and the counterparty records the sale, the Group records its share of revenue as co-promotion income within turnover. The nature of co-promotion activities is such that the Group records no costs of sales. Pharmaceutical turnover includes co-promotion revenue of £9 million (2015 £14 million; 2014 £22 million). In addition, initial or event-based milestone income (excluding royalty income) arising on development or marketing collaborations of the Groups compounds or products with other parties is recognised in turnover. Milestone income of £nil is included in turnover (2015 £nil; 2014 £57 million).
Royalty income is recognised on an accruals basis in accordance with the terms of the relevant licensing agreements.
Expenditure
Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Manufacturing start-up costs between validation and the achievement of normal production are expensed as incurred. Advertising and promotion expenditure is charged to the income statement as incurred. Shipment costs on inter-company transfers are charged to cost of sales; distribution costs on sales to customers are included in selling, general and administrative expenditure.
Restructuring costs are recognised and provided for, where appropriate, in respect of the direct expenditure of a business reorganisation where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken.
164 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
2. Accounting principles and policies continued
|
Research and development
Research and development expenditure is charged to the income statement in the period in which it is incurred. Development expenditure is capitalised when the criteria for recognising an asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable. Property, plant and equipment used for research and development is capitalised and depreciated in accordance with the Groups policy.
Environmental expenditure
Environmental expenditure related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible is charged to the income statement. The Group recognises its liability on a site-by-site basis when it can be reliably estimated. This liability includes the Groups portion of the total costs and also a portion of other potentially responsible parties costs when it is probable that they will not be able to satisfy their respective shares of the clean-up obligation. Recoveries of reimbursements are recorded as assets when virtually certain.
Legal and other disputes
Provision is made for the anticipated settlement costs of legal or other disputes against the Group where an outflow of resources is considered probable and a reliable estimate can be made of the likely outcome. In addition, provision is made for legal or other expenses arising from claims received or other disputes. In respect of product liability claims related to certain products, there is sufficient history of claims made and settlements to enable management to make a reliable estimate of the provision required to cover unasserted claims. In certain cases, an incurred but not reported (IBNR) actuarial technique is used to determine this estimate.
The Group may become involved in legal proceedings, in respect of which it is not possible to make a reliable estimate of the expected financial effect, if any, that could result from ultimate resolution of the proceedings. In these cases, appropriate disclosure about such cases would be included but no provision would be made. Costs associated with claims made by the Group against third parties are charged to the income statement as they are incurred.
Pensions and other post-employment benefits
The costs of providing pensions under defined benefit schemes are calculated using the projected unit credit method and spread over the period during which benefit is expected to be derived from the employees services, consistent with the advice of qualified actuaries. Pension obligations are measured as the present value of estimated future cash flows discounted at rates reflecting the yields of high quality corporate bonds. Pension scheme assets are measured at fair value at the balance sheet date.
The costs of other post-employment liabilities are calculated in a similar way to defined benefit pension schemes and spread over the period during which benefit is expected to be derived from the employees services, in accordance with the advice of qualified actuaries.
Actuarial gains and losses and the effect of changes in actuarial assumptions, are recognised in the statement of comprehensive income in the year in which they arise.
The Groups contributions to defined contribution plans are charged to the income statement as incurred.
Employee share plans
Incentives in the form of shares are provided to employees under share option and share award schemes.
The fair values of these options and awards are calculated at their grant dates using a Black-Scholes option pricing model and charged to the income statement over the relevant vesting periods.
The Group provides finance to ESOP Trusts to purchase company shares to meet the obligation to provide shares when employees exercise their options or awards. Costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves. A transfer is made between other reserves and retained earnings over the vesting periods of the related share options or awards to reflect the ultimate proceeds receivable from employees on exercise.
Property, plant and equipment
Property, plant and equipment (PP&E) is stated at the cost of purchase or construction, less provisions for depreciation and impairment. Financing costs are capitalised within the cost of qualifying assets in construction.
Depreciation is calculated to write off the cost less residual value of PP&E, excluding freehold land, using the straight-line basis over the expected useful life. Residual values and lives are reviewed, and where appropriate adjusted annually. The normal expected useful lives of the major categories of PP&E are:
Freehold buildings |
|
20 to 50 years |
|
|
Leasehold land and buildings |
|
Lease term or 20 to 50 years |
|
|
Plant and machinery |
|
10 to 20 years |
|
|
Equipment and vehicles |
|
3 to 10 years |
|
On disposal of PP&E, the cost and related accumulated depreciation and impairments are removed from the financial statements and the net amount, less any proceeds, is taken to the income statement.
Leases
Leasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as finance leases, as if the asset had been purchased outright. The assets are included in PP&E or computer software and the capital elements of the leasing commitments are shown as obligations under finance leases. Assets held under finance leases are depreciated on a basis consistent with similar owned assets or the lease term, if shorter. The interest element of the lease rental is included in the income statement. All other leases are operating leases and the rental costs are charged to the income statement on a straight-line basis over the lease term.
Goodwill
Goodwill is stated at cost less impairments. Goodwill is deemed to have an indefinite useful life and is tested for impairment at least annually.
Where the fair value of the interest acquired in an entitys assets, liabilities and contingent liabilities exceeds the consideration paid, this excess is recognised immediately as a gain in the income statement.
165 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
2. Accounting principles and policies continued
|
Other intangible assets
Intangible assets are stated at cost less provisions for amortisation and impairments.
Licences, patents, know-how and marketing rights separately acquired or acquired as part of a business combination are amortised over their estimated useful lives, generally not exceeding 20 years, using the straight-line basis, from the time they are available for use. The estimated useful lives for determining the amortisation charge take into account patent lives, where applicable, as well as the value obtained from periods of non-exclusivity. Asset lives are reviewed, and where appropriate adjusted, annually. Contingent milestone payments are recognised at the point that the contingent event becomes probable. Any development costs incurred by the Group and associated with acquired licences, patents, know-how or marketing rights are written off to the income statement when incurred, unless the criteria for recognition of an internally generated intangible asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable.
Acquired brands are valued independently as part of the fair value of businesses acquired from third parties where the brand has a value which is substantial and long term and where the brands either are contractual or legal in nature or can be sold separately from the rest of the businesses acquired. Brands are amortised over their estimated useful lives of up to 20 years, except where it is considered that the useful economic life is indefinite.
The costs of acquiring and developing computer software for internal use and internet sites for external use are capitalised as intangible fixed assets where the software or site supports a significant business system and the expenditure leads to the creation of a durable asset. ERP systems software is amortised over seven to ten years and other computer software over three to five years.
Impairment of non-current assets
The carrying values of all non-current assets are reviewed for impairment, either on a stand-alone basis or as part of a larger cash generating unit, when there is an indication that the assets might be impaired. Additionally, goodwill, intangible assets with indefinite useful lives and intangible assets which are not yet available for use are tested for impairment annually. Any provision for impairment is charged to the income statement in the year concerned.
Impairments of goodwill are not reversed. Impairment losses on other non-current assets are only reversed if there has been a change in estimates used to determine recoverable amounts and only to the extent that the revised recoverable amounts do not exceed the carrying values that would have existed, net of depreciation or amortisation, had no impairments been recognised.
Investments in associates, joint ventures and joint operations
Investments in associates and joint ventures are carried in the consolidated balance sheet at the Groups share of their net assets at date of acquisition and of their post-acquisition retained profits or losses together with any goodwill arising on the acquisition. The Group recognises its rights to assets, liabilities, revenue and expenses of joint operations.
Available-for-sale investments
Liquid investments and other investments are classified as available-for-sale investments and are initially recorded at fair value plus transaction costs and then remeasured at subsequent reporting dates to fair value. Unrealised gains and losses on available-for-sale investments are recognised directly in other comprehensive income. Impairments arising from the significant or prolonged decline in fair value of an equity investment reduce the carrying amount of the asset directly and are charged to the income statement.
On disposal or impairment of the investments, any gains and losses that have been deferred in other comprehensive income are reclassified to the income statement. Dividends on equity investments are recognised in the income statement when the Groups right to receive payment is established. Equity investments are recorded in non-current assets unless they are expected to be sold within one year.
Purchases and sales of equity investments are accounted for on the trade date and purchases and sales of other available-for-sale investments are accounted for on settlement date.
Inventories
Inventories are included in the financial statements at the lower of cost (including raw materials, direct labour, other direct costs and related production overheads) and net realisable value. Cost is generally determined on a first in, first out basis. Pre-launch inventory is held as an asset when there is a high probability of regulatory approval for the product. Before that point a provision is made against the carrying value to its recoverable amount; the provision is then reversed at the point when a high probability of regulatory approval is determined.
Trade receivables
Trade receivables are carried at original invoice amount less any provisions for doubtful debts. Provisions are made where there is evidence of a risk of non-payment, taking into account ageing, previous experience and general economic conditions. When a trade receivable is determined to be uncollectable it is written off, firstly against any provision available and then to the income statement.
Subsequent recoveries of amounts previously provided for are credited to the income statement. Long-term receivables are discounted where the effect is material.
Borrowings
All borrowings are initially recorded at the amount of proceeds received, net of transaction costs. Borrowings are subsequently carried at amortised cost, with the difference between the proceeds, net of transaction costs, and the amount due on redemption being recognised as a charge to the income statement over the period of the relevant borrowing.
166 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
2. Accounting principles and policies continued
|
Taxation
Current tax is provided at the amounts expected to be paid applying tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided in full, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is provided using rates of tax that have been enacted or substantively enacted by the balance sheet date.
Derivative financial instruments and hedging
Derivative financial instruments are used to manage exposure to market risks. The principal derivative instruments used by GSK are foreign currency swaps, interest rate swaps, foreign exchange forward contracts and options. The Group does not hold or issue derivative financial instruments for trading or speculative purposes.
Derivative financial instruments are classified as held-for-trading and are carried in the balance sheet at fair value. Derivatives designated as hedging instruments are classified on inception as cash flow hedges, net investment hedges or fair value hedges.
Changes in the fair value of derivatives designated as cash flow hedges are recognised in other comprehensive income to the extent that the hedges are effective. Ineffective portions are recognised in profit or loss immediately. Amounts deferred in other comprehensive income are reclassified to the income statement when the hedged item affects profit or loss.
Net investment hedges are accounted for in a similar way to cash flow hedges.
Changes in the fair value of derivatives designated as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Discounting
Where the time value of money is material, balances are discounted to current values using appropriate discount rates. The unwinding of the discounts is recorded in finance income and finance expense.
3. Key accounting judgements and estimates
|
In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the financial statements. Actual amounts and results could differ from those estimates. The following are considered to be the key accounting judgements and estimates made.
Turnover
Group turnover for 2016 was £27,889 million (2015 £23,923 million).
Revenue is recognised when title and risk of loss is passed to the customer, reliable estimates can be made of relevant deductions and all relevant obligations have been fulfilled, such that the earnings process is regarded as being complete.
Gross turnover is reduced by rebates, discounts, allowances and product returns given or expected to be given, which vary by product arrangements and buying groups. These arrangements with purchasing organisations are dependent upon the submission of claims some time after the initial recognition of the sale. Accruals are made at the time of sale for the estimated rebates, discounts or allowances payable or returns to be made, based on available market information and historical experience.
Because the amounts are estimated they may not fully reflect the final outcome, and the amounts are subject to change dependent upon, amongst other things, the types of buying group and product sales mix.
The level of accrual for rebates and returns is reviewed and adjusted regularly in the light of contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated using wholesaler and other third-party analyses, market research data and internally generated information.
Future events could cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.
Taxation
The tax charge for the year was £877 million (2015 £2,154 million). At December 2016, current tax payable was £1,305 million
(2015 £1,421 million), current tax recoverable was £226 million
(2015 £180 million), deferred tax liabilities were £1,934 million
(2015 £1,522 million) and deferred tax assets were £4,374 million
(2015 £2,905 million).
Current tax is provided at the amounts expected to be paid, and deferred tax is provided on temporary differences between the tax bases of assets and liabilities and their carrying amounts, at the rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised, based on managements assumptions relating to the amounts and timing of future taxable profits. Factors affecting the tax charge in future years are set out in Note 14, Taxation. A 1% change in the Groups effective tax rate in 2016 would have changed the total tax charge for the year by approximately £19 million.
The Group has open tax issues with a number of revenue authorities. Where an outflow of funds is believed to be probable and a reliable estimate of the outcome of the dispute can be made, management provides for its best estimate of the liability. In calculating any such liability GSK applies a risk based approach which takes into account, as appropriate, the probability that the Group would be able to obtain compensatory adjustments under international tax treaties. These estimates take into account the specific circumstances of each dispute and relevant external advice, are inherently judgemental and could change substantially over time as new facts emerge and each dispute progresses.
167 | GSK Annual Report 2016 |
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3. Key accounting judgements and estimates continued
|
GSK continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. At 31 December 2016, the group had recognised provisions of £1,892 million in respect of uncertain tax positions (2015 £1,687 million) Where open issues exist the ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of negotiations with the relevant tax authorities or, if necessary, litigation proceedings.
Legal and other disputes
Legal costs for the year were £162 million (2015 £221 million). At 31 December 2016 provisions for legal and other disputes amounted to £344 million (2015 £352 million).
The Group provides for anticipated settlement costs where an outflow of resources is considered probable and a reliable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the Group. These estimates take into account the specific circumstances of each dispute and relevant external advice are inherently judgemental and could change substantially over time as new facts emerge and each dispute progresses. Details of the status and various uncertainties involved in the significant unresolved disputes are set out in Note 46, Legal proceedings.
The companys Directors, having taken legal advice, have established provisions after taking into account the relevant facts and circumstances of each matter and in accordance with accounting requirements. In respect of product liability claims related to certain products there is sufficient history of claims made and settlements to enable management to make a reliable estimate of the provision required to cover unasserted claims. The Group may become involved in legal proceedings, in respect of which it is not possible to make a reliable estimate of the expected financial effect, if any, that will result from ultimate resolution of the proceedings. In these cases, appropriate disclosure about such cases would be included, but no provision would be made and no contingent liability can be quantified.
The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations. The position could change over time and, therefore, there can be no assurance that any losses that result from the outcome of any legal proceedings will not exceed the amount of the provisions reported in the Groups financial statements by a material amount.
Goodwill and other intangible asset impairments
At 31 December 2016, goodwill was £5,965 million (2015 £5,162 million) and other intangible assets were £18,776 million (2015 £16,672 million).
Goodwill is deemed to have an indefinite life and so is not amortised. Annual impairment tests of the cash generating units to which goodwill is allocated are performed. Impairment tests are based on established market multiples or risk-adjusted future cash flows discounted using appropriate discount rates. The assumptions used in these impairment tests are set out in Note 18, Goodwill.
In each case the valuations indicate sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of the related goodwill.
Impairment tests on other intangible assets are undertaken if events occur which call into question the carrying values of the assets. Where brands and other intangible assets which are not yet available for use are not amortised, they are subject to annual impairment tests. Valuations for impairment tests are based on established market multiples or risk-adjusted future cash flows over the estimated useful life of the asset, where limited, discounted using appropriate discount rates as set out in Note 19, Other intangible assets.
The assumptions relating to future cash flows, estimated useful lives and discount rates are based on business forecasts and are therefore inherently judgemental. Future events could cause the assumptions used in these impairment tests to change with a consequent adverse effect on the future results of the Group.
Contingent consideration and put option liabilities
The 2016 income statement charge for contingent consideration and put option liabilities was £3,991 million (2015 £2,069 million).
At 31 December 2016, the liability for contingent consideration amounted to £5,896 million (2015 £3,855 million). Of this amount, £5,304 million (2015 £3,409 million) relates to the acquisition of the former Shionogi-ViiV Healthcare joint venture in 2012 and £545 million (2015 £405 million) relates to the acquisition of the Vaccines business from Novartis in 2015.
Any contingent consideration included in the consideration payable for a business combination is recorded at fair value at the date of acquisition. These fair values are generally based on risk-adjusted future cash flows discounted using appropriate post-tax discount rates. The fair values are reviewed on a regular basis, at least annually, and any changes are reflected in the income statement. See Note 39 Contingent consideration liabilities.
During 2015, the Group granted a put option to Novartis in respect of Novartis shareholding in the Consumer Healthcare Joint Venture. In certain circumstances, Novartis has the right to require GSK to acquire its 36.5% shareholding in the Consumer Healthcare Joint Venture at a market-based valuation. This right is exercisable in certain windows from 2018 to 2035 and may be exercised either in respect of Novartis entire shareholding or in up to four instalments. GSK has recognised a financial liability of £7,420 million in Other non-current liabilities at 31 December 2016 (2015 £6,287 million). This represents the present value of the estimated redemption value by GSK in the event of full exercise of the right by Novartis and is calculated by applying relevant public company multiples, with no premium or discount, to forecast future profits in accordance with the shareholder agreements. Sensitivity analysis is given in Note 30, Other non-current liabilities.
Pfizer may request an IPO of ViiV Healthcare at any time and if either GSK does not consent to such IPO or an offering is not completed within nine months, Pfizer could require GSK to acquire its shareholding. A liability for the put option was recognised on the Groups balance sheet during 2016 at an initial value of £1,070 million. GSK also recognised liabilities for the future preferential dividends anticipated to become payable to Pfizer and Shionogi on the Groups balance sheet during 2016. The liability for the Pfizer put option of £1,319 million at 31 December 2016 was recognised in Trade and other payables. Sensitivity analysis is also given in Note 27 Trade and other payables.
Shionogi also held a put option over its shareholding in ViiV Healthcare and during 2016, GSK recognised the liability for the put option on the Groups balance sheet at an initial value of £926 million. In Q4 2016, Shionogi irrevocably agreed to waive its put option and as a result GSK de-recognised the liability for this put option on the Groups balance sheet directly to equity. The value of the liability was £1,244 million when it was de-recognised. See Non-controlling interests in ViiV Healthcare on page 58 for full details on these put options.
The assumptions relating to future cash flows and discount rates are based on business forecasts and are therefore inherently judgemental. Future events could cause the assumptions underlying these projections or the market-based multiples, which are used to value the liabilities for contingent consideration and the put options, to change with a consequent adverse effect on the future results of the Group.
168 |
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Notes to the financial statements continued
3. Key accounting judgements and estimates continued
|
Pensions and other post-employment benefits
The costs of providing pensions and other post-employment benefits are charged to the income statement in accordance with IAS 19 Employee benefits over the period during which benefit is derived from the employees services. The costs are assessed on the basis of assumptions selected by management. These assumptions include future earnings and pension increases, discount rates, expected long-term rates of return on assets and mortality rates, and are disclosed in Note 28, Pensions and other post-employment benefits. Where a surplus on a defined benefit scheme arises, or there is potential for a surplus to arise from committed future contributions, the rights of the Trustees to prevent the Group obtaining a refund of that surplus in the future are considered in determining whether it is necessary to restrict the amount of the surplus that is recognised.
The expected long-term rates of return on bonds are determined based on the portfolio mix of index-linked, government and corporate bonds. An equity risk premium is added to this for equities.
Discount rates are derived from AA rated corporate bond yields except in countries where there is no deep market in corporate bonds where government bond yields are used. A sensitivity analysis is provided in Note 28, Pensions and other post-employment benefits, but a 0.25% reduction in the discount rate would lead to an increase in the net pension deficit of approximately £769 million and an increase in the annual pension cost of approximately £27 million. The selection of different assumptions could affect the future results of the Group.
4. New accounting requirements
|
The following new and amended accounting standards have been issued by the IASB and are likely to affect future Annual Reports.
IFRS 15 Revenue from contracts with customers was issued in May 2014 and will be implemented by the Group from 1 January 2018. The Standard provides a single, principles-based approach to the recognition of revenue from all contracts with customers. It focuses on the identification of performance obligations in a contract and requires revenue to be recognised when or as those performance obligations are satisfied.
The Group is currently assessing the new IFRS and does not expect to be able to quantify the impact of any potential changes until later in 2017.
IFRS 9 Financial instruments was issued in its final form in July 2014 and will be implemented by the Group from 1 January 2018. The Standard will replace the majority of IAS 39 and covers the classification, measurement and de recognition of financial assets and financial liabilities, impairment of financial assets and provides a new hedge accounting model.
The Group is currently assessing the new IFRS and does not expect to be able to quantify the impact of any potential changes until later in 2017.
IFRS 16 Leases was issued in January 2016 and will be implemented by the Group from 1 January 2019. The Standard will replace IAS 17 Leases and will require lease liabilities and right of use assets to be recognised on the balance sheet for almost all leases.
The Group is in the early stages of assessing the potential impact of the new IFRS.
5. Exchange rates
|
The Group uses the average of exchange rates prevailing during the period to translate the results and cash flows of overseas subsidiaries, joint ventures and associates into Sterling and period end rates to translate the net assets of those entities. The currencies which most influence these translations and the relevant exchange rates were as follows:
2016 |
2015 | 2014 | ||||||||||
Average rates: |
||||||||||||
US$/£ |
1.36 | 1.53 | 1.65 | |||||||||
Euro/£ |
1.23 | 1.37 | 1.24 | |||||||||
Yen/£ |
149 | 185 | 175 | |||||||||
Period end rates: |
||||||||||||
US$/£ |
1.24 | 1.47 | 1.56 | |||||||||
Euro/£ |
1.17 | 1.36 | 1.29 | |||||||||
Yen/£ |
144 | 177 | 187 |
169 | GSK Annual Report 2016 |
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6. Segment information
|
Operating segments are reported based on the financial information provided to the Chief Executive Officer and the responsibilities of the Corporate Executive Team (CET). The completion of the Novartis transaction on 2 March 2015 changed the balance of the Group and GSK changed its segment reporting to reflect this. With effect from 1 January 2016, GSK has reported results under four segments: Pharmaceuticals, which now includes HIV, Pharmaceuticals R&D, Vaccines and Consumer Healthcare and individual members of the CET are responsible for each segment. Comparative information has been restated accordingly.
The Groups management reporting process allocates intra-Group profit on a product sale to the market in which that sale is recorded, and the profit analyses below have been presented on that basis.
The Pharmaceuticals R&D segment is the responsibility of the President, Pharmaceuticals R&D and is reported as a separate segment.
Corporate and other unallocated turnover and costs included the results of several Vaccines and Consumer Healthcare products which were held for sale in a number of markets in order to meet anti-trust approval requirements in 2014 and 2015, together with the costs of corporate functions.
During 2016, the US operations of the Pharmaceuticals and Vaccines businesses made sales to three wholesalers of approximately £2,139 million (2015 £1,574 million; 2014 £1,478 million), £2,691 million (2015 £2,471 million; 2014 £2,315 million) and £2,129 million (2015 £1,602 million; 2014 £1,627 million) respectively, after allocating final-customer discounts to the wholesalers.
170 |
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Notes to the financial statements continued
6. Segment information continued
|
171 | GSK Annual Report 2016 |
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6. Segment information continued
|
The Pharmaceuticals segment includes the Shionogi-ViiV Healthcare contingent consideration liability of £5,304 million
(2015 £3,409 million) and the Pfizer put option of £1,319 million (2015 £nil). The Consumer Healthcare segment includes the put option liability of £7,420 million (2015 £6,287 million).
172 |
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Notes to the financial statements continued
6. Segment information continued
|
Geographical information
The UK is regarded as being the Groups country of domicile.
Turnover by location of customer
|
2016 £m |
2015
(restated) £m |
2014 £m |
|||||||||
UK |
1,056 | 1,102 | 1,100 | |||||||||
US |
10,197 | 8,222 | 7,409 | |||||||||
International
|
|
16,636
|
|
|
14,599
|
|
|
14,497
|
|
|||
External turnover
|
|
27,889
|
|
|
23,923
|
|
|
23,006
|
|
|||
|
||||||||||||
Turnover by location of subsidiary
|
2016 £m |
2015 £m |
2014 £m |
|||||||||
UK |
3,519 | 3,146 | 3,518 | |||||||||
US |
16,105 | 13,273 | 10,768 | |||||||||
International
|
|
19,805
|
|
|
17,385
|
|
|
17,227
|
|
|||
Turnover including inter-segment turnover
|
|
39,429
|
|
|
33,804
|
|
|
31,513
|
|
|||
|
||||||||||||
UK |
2,018 | 1,751 | 1,994 | |||||||||
US |
5,990 | 4,934 | 3,432 | |||||||||
International
|
|
3,532
|
|
|
3,196
|
|
|
3,081
|
|
|||
Inter-segment turnover
|
|
11,540
|
|
|
9,881
|
|
|
8,507
|
|
|||
UK |
1,501 | 1,395 | 1,524 | |||||||||
US |
10,115 | 8,339 | 7,336 | |||||||||
International
|
|
16,273
|
|
|
14,189
|
|
|
14,146
|
|
|||
External turnover
|
|
27,889
|
|
|
23,923
|
|
|
23,006
|
|
|||
|
||||||||||||
Operating profit by location of subsidiary
|
2016 £m |
2015 £m |
2014 £m |
|||||||||
UK |
1,561 | 8,243 | 414 | |||||||||
US |
2,343 | 4,307 | 1,375 | |||||||||
International
|
|
(1,306)
|
|
|
(2,228)
|
|
|
1,808
|
|
|||
Total operating profit
|
|
2,598
|
|
|
10,322
|
|
|
3,597
|
|
|||
|
||||||||||||
Non-current assets by location of subsidiary
|
2016 £m |
2015 £m |
||||||||||
UK |
7,060 | 6,967 | ||||||||||
US |
7,802 | 7,524 | ||||||||||
International
|
|
21,234
|
|
|
17,474
|
|
||||||
Non-current assets
|
|
36,096
|
|
|
31,965
|
|
Non-current assets by location excludes amounts relating to other investments, deferred tax assets, derivative financial instruments, pension assets, amounts receivable under insurance contracts and certain other non-current receivables.
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7. Other operating income/(expense)
|
2016
|
2015
£m |
2014
£m |
||||||||||
Impairment of equity investments |
(47) | (263) | (25) | |||||||||
Disposal of equity investments |
254 | 342 | 155 | |||||||||
Disposal of businesses and assets |
283 | 9,661 | 244 | |||||||||
Fair value remeasurements on contingent consideration recognised in business combinations |
(2,205) | (1,965) | (770) | |||||||||
Remeasurement of ViiV Healthcare put option liabilities and preferential dividends |
(577) | | | |||||||||
Remeasurement of Consumer Healthcare put option liability |
(1,133) | (83) | | |||||||||
Fair value adjustments on derivative financial instruments |
(3) | 2 | (313) | |||||||||
Other income/(expense)
|
|
23
|
|
|
21
|
|
|
9
|
|
|||
|
(3,405)
|
|
|
7,715
|
|
|
(700
|
)
|
Disposal of businesses and assets in 2016 included milestone income of £152 million in relation to the divestment of ofatumumab and a number of other smaller divestments and in 2015 included the disposal of the Oncology business to Novartis for £9,228 million and an initial £200 million for the divestment of ofatumumab. Fair value remeasurements on contingent consideration recognised in business combinations comprised £2,162 million related to the acquisition of the former Shionogi-ViiV Healthcare joint venture and £152 million related to the contingent consideration, payable to Novartis related to the Vaccines acquisition, partially offset by hedging gains and other smaller items.
Fair value adjustments on derivative financial instruments arise from foreign exchange forward contracts and options taken out to hedge against foreign currency movements when sales and purchases are denominated in foreign currencies (see Note 42, Financial instruments and related disclosures). In 2014 this included an unrealised loss of £299 million arising from a number of forward exchange contracts entered into following announcement of the proposed Novartis transaction to protect the Sterling value of the net US Dollar proceeds due to the Group on completion of the transaction.
8. Operating profit
|
The reversals of prior year write-downs of inventories principally arise from the reassessment of usage or demand expectations prior to inventory expiration.
Included within operating profit are major restructuring charges of £970 million (2015 £1,891 million; 2014 £750 million), see Note 10, Major restructuring costs.
174 |
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Notes to the financial statements continued
8. Operating profit continued
|
9. Employee costs
|
175 | GSK Annual Report 2016 |
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9. Employee costs continued
|
The average monthly number of persons employed by the Group (including Directors) during the year was:
10. Major restructuring costs
|
Major restructuring costs charged in arriving at operating profit include restructuring costs arising under the Major Change programme initiated in 2013, under the Pharmaceuticals Restructuring Programme announced in October 2014 and following the Novartis transaction, completed in 2015.
Under the combined programme the total restructuring costs of £970 million in 2016 were incurred in the following areas:
| Restructuring of the R&D organisation, predominantly in the United Kingdom, North America and Japan. |
| Projects to simplify or eliminate processes leading to staff reductions in support functions. |
| Restructuring of the Pharmaceuticals business in Emerging Markets and Europe leading to staff reductions in sales force and administration. |
| Transformation of the Manufacturing and Vaccines businesses to deliver a step change in quality, cost and productivity. |
| The continued integration of the enhanced Vaccines business and the Consumer Healthcare Joint Venture. |
The analysis of the costs charged to operating profit under these programmes is as follows:
Provision reversals of £140 million (2015 £44 million; 2014 £4 million) reflect release of legacy support function and Novartis integration provisions. Asset impairments of £158 million (2015 £419 million; 2014 £nil) and other non-cash charges totalling £108 million (2015 £51 million; 2014 £15 million) are non-cash items, principally fixed asset write downs across support function, manufacturing and research facilities and accelerated depreciation where asset lives in R&D and manufacturing have been shortened as a result of the major restructuring programme. All other charges have been or will be settled in cash and include the termination of leases, site closure costs, consultancy and project management fees.
176 |
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Notes to the financial statements continued
11. Finance income
|
2016
|
2015
|
2014
|
||||||||||||
Interest income arising from: |
||||||||||||||
cash and cash equivalents |
67 | 71 | 56 | |||||||||||
available-for-sale investments |
1 | 1 | 1 | |||||||||||
derivatives at fair value through profit or loss |
| 24 | | |||||||||||
loans and receivables |
2 | 3 | 9 | |||||||||||
Fair value adjustments on derivatives at fair value through profit or loss
|
2 | 5 | 2 | |||||||||||
|
72
|
|
|
104
|
|
|
68
|
|
All derivatives accounted for at fair value through profit or loss other than designated and effective hedging instruments (see Note 42, Financial instruments and related disclosures) are classified as held-for-trading financial instruments under IAS 39.
12. Finance expense
|
All derivatives accounted for at fair value through profit or loss, other than designated and effective hedging instruments (see Note 42, Financial instruments and related disclosures), are classified as held-for-trading financial instruments under IAS 39. Interest expense arising on derivatives at fair value through profit or loss relates to swap interest expense.
177 | GSK Annual Report 2016 |
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13. Associates and joint ventures
|
The Groups share of after tax profits and losses of associates and joint ventures is set out below:
The Groups sales to associates and joint ventures were £43 million in 2016 (2015 £41 million; 2014 £85 million).
178 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
14. Taxation
|
In 2016, GSK made payments of £146 million in UK corporation tax to HMRC. In January 2017, GSK made further payments of £71 million in relation to UK corporation tax. These amounts are for corporation tax only, and do not include the various other business taxes borne by GSK each year.
A significant component of the deferred tax credit for each of 2016 and the prior periods arose in respect of the remeasurement of the contingent consideration in relation to the former Shionogi-ViiV Healthcare joint venture. In 2015, the credit also included the unwind of deferred tax liabilities on the disposal of the Groups Oncology business to Novartis.
The following table reconciles the tax charge calculated at the UK statutory rate on the Group profit before tax with the actual tax charge for the year.
GSK has a substantial business presence in many countries around the world. The impact of differences in overseas taxation rates arose from profits being earned in countries with tax rates higher than the UK statutory rate, the most significant of which in 2016 were the US, France and India. This was partly offset by the increased benefit of intellectual property incentives from the UK Patent Box and Belgian Patent Income Deduction regimes. Such regimes provide a reduced rate of corporate income tax on profits earned from qualifying patents. The Group also incurred material non-deductible charges following the revaluation of liabilities for the ViiV Healthcare and Consumer Healthcare Joint Venture put options. The impact of higher overseas tax rates was reduced in 2015 by permanent differences arising on disposals.
The Groups overall effective tax rate for 2016 of 45.2% was influenced by significant transaction-related remeasurement charges arising on the ViiV Healthcare contingent consideration liability and the Consumer Healthcare Joint Venture and ViiV Healthcare put option liabilities. The remeasurement of these liabilities gave rise to a charge to profit before tax in 2016 of £3,862 million with a related tax credit of £396 million (10.3%). Excluding these items, the effective tax rate for the year would have been 21.9%. Further details on the Consumer Healthcare Joint Venture put option are set out in Note 30, Other non-current liabilities and on the ViiV Healthcare arrangements on page 58.
Future tax charges, and therefore our effective tax rate, may be affected by factors such as acquisitions, disposals, restructuring, the location of research and development activity, tax regime reforms and the resolution of open matters as we continue to bring our tax affairs up to date around the world.
All of the above items have been charged to the statement of comprehensive income except for tax on share based payments.
179 | GSK Annual Report 2016 |
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|
14. Taxation continued
|
Issues relating to taxation
The Groups tax charge is the sum of the total current and deferred tax expense. The calculation of the Groups total tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. At 31 December 2016 the Group held provisions of £1,892 million in respect of such uncertain tax positions (2015 - £1,687 million). The increase in recognised provisions during 2016 was primarily driven by the foreign exchange impact of revaluing overseas exposures. While the ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with the relevant tax authorities, or litigation where appropriate, the Group continues to believe that it has made appropriate provision for periods which are open and not yet agreed by the tax authorities.
The integrated nature of the Groups worldwide operations involves significant investment in research and strategic manufacturing at a limited number of locations, with consequential cross-border supply routes into numerous end-markets. GSKs biggest risk with respect to taxation is that, despite our adherence to the OECDs established arms length principle, different tax authorities will seek to attribute further profit to activities being undertaken in their jurisdiction, potentially resulting in double taxation. GSK applies a risk-based approach to determine the transactions most likely to be subject to challenge and the probability that the Group would be able to obtain compensatory adjustments under international tax treaties. The Group also has open items in several jurisdictions concerning such matters as the deductibility of particular expenses and the tax treatment of certain business transactions. The Group does not consider there to be any major sources of estimation uncertainty at the end of the reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts of tax-related assets and liabilities within the next financial year.
There continues to be a significant international focus on tax reform, including the OECDs BEPS project and European Commission initiatives, including the increased use of fiscal state aid investigations. Together with domestic initiatives around the world these may result in significant changes to established tax principles and an increase in tax authority disputes. In turn, this could adversely affect our effective tax rate or result in higher cash tax liabilities.
The aggregate amount of unremitted profits at the balance sheet date was approximately £18 billion (2015 £16 billion). The majority of these unremitted profits would not be subject to tax on repatriation as UK legislation relating to company distributions provides for exemption from tax for most overseas profits, subject to certain exceptions. Provision for deferred tax liabilities of £205 million (2015 £180 million) has been made in respect of withholding tax that would arise on the distribution of profits by certain overseas subsidiaries. The remainder of unremitted profits on which deferred tax has not been provided was £1.7 billion at 31 December 2016 (2015 £1.5 billion). Deferred tax on distribution of these remaining profits has not been provided on the grounds that the Group is able to control the timing of the reversal of the remaining temporary differences and it is probable that they will not reverse in the foreseeable future.
Movement in deferred tax assets and liabilities
Accelerated
capital allowances £m |
Intangible
assets £m |
Contingent
consideration
|
Intra-Group profit £m |
Pensions &
£m |
Tax
losses
|
Share
option and award schemes £m |
Other
net
differences
|
Total £m |
||||||||||||||||||||||||||||
Asset/liability at 1 January 2016 |
|
(346 |
) |
|
(2,234 |
) |
|
790 |
|
|
825 |
|
|
989 |
|
|
97 |
|
|
92 |
|
|
1,170 |
|
|
1,383 |
|
|||||||||
Exchange adjustments |
(47 | ) | (153 | ) | | 168 | 164 | 13 | 14 | 87 | 246 | |||||||||||||||||||||||||
Credit to income statement |
16 | 63 | 348 | 61 | 15 | 117 | 4 | 40 | 664 | |||||||||||||||||||||||||||
Credit to statement of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
53
|
|
|
147
|
|
|||||||||
Asset/liability at 31 December 2016
|
|
(377
|
)
|
|
(2,324
|
)
|
|
1,138
|
|
|
1,054
|
|
|
1,262
|
|
|
227
|
|
|
110
|
|
|
1,350
|
|
|
2,440
|
|
The deferred tax credit to the income statement of £664 million includes £123 million of R&D incentives recognised within Operating profit (and not the taxation charge) in the Income statement.
Deferred tax liabilities provided in relation to intangible assets predominately relate to temporary differences arising on assets and liabilities acquired as part of historic business combinations. The Group continues to recognise deferred tax assets on future obligations in respect of contingent consideration amounts payable to minority shareholders. These payments are tax deductible at the point in time at which payment is made.
A deferred tax asset is recognised on intra-Group profits arising on inter-company stock which are eliminated within the consolidated accounts. As intra-Group profits are not eliminated from the individual entities tax returns a temporary difference arises that will reverse at the point in time stock is sold externally.
The deferred tax asset recognised on tax losses comprises a £173 million (2015 £97 million) asset related to trading losses and a £54 million (2015 £nil) asset related to capital losses. Other net temporary differences include accrued expenses for which a tax deduction is only available on a paid basis.
After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax asset comprises:
2016 £m |
2015 £m |
|||||||
Deferred tax assets |
|
4,374 |
|
|
2,905 |
|
||
Deferred tax liabilities
|
|
(1,934
|
)
|
|
(1,522
|
)
|
||
|
2,440
|
|
|
1,383
|
|
180 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
14. Taxation continued
|
Deferred tax assets are recognised where it is probable that future taxable profit will be available to utilise losses. The amount of unrecognised trading losses for 2015 has been revised following a reassessment of available losses for which deferred tax was not recognised.
15. Earnings per share
|
16. Dividends
|
2016
|
2015
|
2014
|
||||||||||||||||||||||||||||||||||
Paid/payable
|
Dividend
|
Total dividend £m
|
Paid
|
Dividend
|
Total dividend £m
|
Paid
|
Dividend
|
Total
|
||||||||||||||||||||||||||||
First interim |
14 July 2016 | 19 | 923 | 9 July 2015 | 19 | 920 | 10 July 2014 | 19 | 916 | |||||||||||||||||||||||||||
Second interim |
13 October 2016 | 19 | 925 | 1 October 2015 | 19 | 919 | 2 October 2014 | 19 | 918 | |||||||||||||||||||||||||||
Third interim |
12 January 2017 | 19 | 925 | 14 January 2016 | 19 | 919 | 8 January 2015 | 19 | 924 | |||||||||||||||||||||||||||
Fourth interim
|
|
13 April 2017
|
|
|
23
|
|
|
1,119
|
|
|
14 April 2016
|
|
|
23
|
|
|
1,114
|
|
|
9 April 2015
|
|
|
23
|
|
|
1,111
|
|
|||||||||
Total
|
|
80
|
|
|
3,892
|
|
|
80
|
|
|
3,872
|
|
|
80
|
|
|
3,869
|
|
||||||||||||||||||
Special dividend
|
|
14 April 2016
|
|
|
20
|
|
|
969
|
|
Under IFRS interim dividends are only recognised in the financial statements when paid and not when declared. GSK normally pays a dividend two quarters after the quarter to which it relates and one quarter after it is declared. The 2016 financial statements recognise those dividends paid in 2016, namely the third and fourth interim dividends for 2015, the special dividend declared in 2015 and the first and second interim dividends for 2016.
The amounts recognised in each year are as follows:
2016 £m |
2015
|
2014 £m |
||||||||||||
Dividends to shareholders
|
|
4,850
|
|
3,874
|
|
3,843
|
|
181 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
17. Property, plant and equipment
|
Land and buildings £m
|
Plant,
|
Assets in construction £m
|
Total £m
|
|||||||||||||
Cost at 1 January 2015 |
|
6,804 |
|
|
10,170 |
|
|
2,381 |
|
|
19,355 |
|
||||
Exchange adjustments |
(48 | ) | (92 | ) | (42 | ) | (182 | ) | ||||||||
Additions through business combinations |
310 | 285 | 103 | 698 | ||||||||||||
Other additions |
95 | 242 | 1,099 | 1,436 | ||||||||||||
Capitalised borrowing costs |
| | 19 | 19 | ||||||||||||
Disposals and write-offs |
(74 | ) | (340 | ) | (15 | ) | (429 | ) | ||||||||
Reclassifications |
228 | 557 | (875 | ) | (90 | ) | ||||||||||
Transfer to assets held for sale
|
|
(10
|
)
|
|
(47
|
)
|
|
|
|
|
(57
|
)
|
||||
Cost at 31 December 2015 |
|
7,305 |
|
|
10,775 |
|
|
2,670 |
|
|
20,750 |
|
||||
Exchange adjustments |
956 | 1,100 | 271 | 2,327 | ||||||||||||
Other additions |
117 | 384 | 1,043 | 1,544 | ||||||||||||
Capitalised borrowing costs |
| | 30 | 30 | ||||||||||||
Disposals and write-offs |
(349 | ) | (1,422 | ) | (53 | ) | (1,824 | ) | ||||||||
Reclassifications |
110 | 512 | (761 | ) | (139 | ) | ||||||||||
Transfer to assets held for sale
|
|
(378
|
)
|
|
(114
|
)
|
|
(32
|
)
|
|
(524
|
)
|
||||
Cost at 31 December 2016
|
|
7,761
|
|
|
11,235
|
|
|
3,168
|
|
|
22,164
|
|
||||
Depreciation at 1 January 2015 |
|
(2,681 |
) |
|
(7,151 |
) |
|
|
|
|
(9,832 |
) |
||||
Exchange adjustments |
16 | 41 | | 57 | ||||||||||||
Charge for the year |
(291 | ) | (601 | ) | | (892 | ) | |||||||||
Disposals and write-offs |
54 | 275 | | 329 | ||||||||||||
Transfer (from)/to assets held for sale
|
|
(12
|
)
|
|
21
|
|
|
|
|
|
9
|
|
||||
Depreciation at 31 December 2015 |
|
(2,914 |
) |
|
(7,415 |
) |
|
|
|
|
(10,329 |
) |
||||
Exchange adjustments |
(377 | ) | (717 | ) | | (1,094 | ) | |||||||||
Charge for the year |
(338 | ) | (640 | ) | | (978 | ) | |||||||||
Disposals and write-offs |
205 | 1,270 | | 1,475 | ||||||||||||
Transfer to assets held for sale
|
|
165
|
|
|
92
|
|
|
|
|
|
257
|
|
||||
Depreciation at 31 December 2016
|
|
(3,259
|
)
|
|
(7,410
|
)
|
|
|
|
|
(10,669
|
)
|
||||
Impairment at 1 January 2015 |
(116 | ) | (279 | ) | (76 | ) | (471 | ) | ||||||||
Exchange adjustments |
(8 | ) | 1 | 1 | (6 | ) | ||||||||||
Disposals and write-offs |
7 | 16 | | 23 | ||||||||||||
Impairment losses |
(162 | ) | (177 | ) | (31 | ) | (370 | ) | ||||||||
Reversal of impairments |
5 | 19 | | 24 | ||||||||||||
Transfer to assets held for sale
|
|
|
|
|
47
|
|
|
|
|
|
47
|
|
||||
Impairment at 31 December 2015 |
(274 | ) | (373 | ) | (106 | ) | (753 | ) | ||||||||
Exchange adjustments |
(45 | ) | (37 | ) | (11 | ) | (93 | ) | ||||||||
Disposals and write-offs |
91 | 135 | 35 | 261 | ||||||||||||
Impairment losses |
(135 | ) | (117 | ) | (6 | ) | (258 | ) | ||||||||
Reversal of impairments |
38 | 38 | 2 | 78 | ||||||||||||
Transfer to assets held for sale
|
46 | 10 | 22 | 78 | ||||||||||||
Impairment at 31 December 2016
|
|
(279
|
)
|
|
(344
|
)
|
|
(64
|
)
|
|
(687
|
)
|
||||
Total depreciation and impairment at 31 December 2015 |
(3,188 | ) | (7,788 | ) | (106 | ) | (11,082 | ) | ||||||||
Total depreciation and impairment at 31 December 2016
|
|
(3,538
|
)
|
|
(7,754
|
)
|
|
(64
|
)
|
|
(11,356
|
)
|
||||
Net book value at 1 January 2015
|
|
4,007
|
|
|
2,740
|
|
|
2,305
|
|
|
9,052
|
|
||||
Net book value at 31 December 2015
|
|
4,117
|
|
|
2,987
|
|
|
2,564
|
|
|
9,668
|
|
||||
Net book value at 31 December 2016
|
|
4,223
|
|
|
3,481
|
|
|
3,104
|
|
|
10,808
|
|
The weighted average interest rate for capitalised borrowing costs in the year was 3.8% (2015 3.8%). Disposals and write-offs in the year include a number of assets with nil net book value that are no longer in use in the business.
182 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
17. Property, plant and equipment continued
|
The net book value at 31 December 2016 of the Groups land and buildings comprised freehold properties £3,887 million (2015 £3,251 million), properties with leases of 50 years or more £294 million (2015 £327 million) and properties with leases of less than 50 years £42 million (2015 £100 million).
Included in land and buildings at 31 December 2016 were leased assets with a cost of £590 million (2015 £756 million), accumulated depreciation of £253 million (2015 £233 million), impairment of £1 million (2015 £nil) and a net book value of £448 million (2015 £523 million). Included in plant, equipment and vehicles at 31 December 2016 were leased assets with a cost of £44 million (2015 £31 million), accumulated depreciation of £15 million (2015 £27 million), impairment of £nil (2015 £nil) and a net book value of £29 million (2015 £4 million). Some lease agreements include renewal or purchase options or escalation clauses.
The impairment losses principally arose from decisions to rationalise facilities and are calculated based on either fair value less costs of disposal or value in use. The fair value less costs of disposal valuation methodology uses significant inputs which are not based on observable market data, and therefore this valuation technique is classified as level 3 of the fair value hierarchy. These calculations determine the net present value of the projected risk-adjusted, post-tax cash flows of the relevant asset or cash generating unit, applying a discount rate of the Group post-tax weighted average cost of capital (WACC) of 7%, adjusted where appropriate for relevant specific risks. For value in use calculations, where an impairment is indicated and a pre-tax cash flow calculation is expected to give a materially different result, the test would be reperformed using pre-tax cash flows and a pre-tax discount rate. The Group WACC is equivalent to a pre-tax discount rate of approximately 9%. The net impairment losses have been charged to cost of sales £45 million (2015 £109 million), R&D £15 million (2015 £63 million) and SG&A £120 million (2015 £174 million), and included £151 million (2015 £327 million) arising from the major restructuring programmes.
Reversals of impairment arose from subsequent reviews of the impaired assets where the conditions which gave rise to the original impairments were deemed no longer to apply. All of the reversals have been credited to cost of sales.
The carrying value at 31 December 2016 of assets for which impairments have been charged or reversed in the year was £171 million (2015 £138 million).
During 2016, £139 million (2015 £90 million) of computer software was reclassified from assets in construction to intangible assets on becoming ready for use.
18. Goodwill
|
2016 £m |
2015 £m |
|||||||
Cost at 1 January |
|
5,162 |
|
|
3,724 |
|
||
Exchange adjustments |
814 | 66 | ||||||
Additions through business combinations (Note 38) |
7 | 1,372 | ||||||
Transfer to assets held for sale |
(18) | | ||||||
Cost at 31 December
|
|
5,965
|
|
|
5,162
|
|
||
Net book value at 1 January |
5,162 | 3,724 | ||||||
Net book value at 31 December |
5,965 | 5,162 |
In 2016, GSK acquired the HIV R&D preclinical and discovery stage portfolio from Bristol Myers Squibb. Goodwill of £7 million arose from this acquisition which was allocated to Pharmaceuticals.
Goodwill is allocated to the Groups segments as follows. The allocations for 2015 have been revised to reflect the current segment structure.
2016 £m |
2015 £m |
|||||||
Pharmaceuticals |
|
3,288 |
|
|
2,952 |
|
||
Vaccines |
1,353 | 1,003 | ||||||
Consumer Healthcare
|
|
1,324
|
|
|
1,207
|
|
||
Net book value at 31 December
|
|
5,965
|
|
|
5,162
|
|
183 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
18. Goodwill continued
|
The recoverable amounts of the cash generating units are assessed using a fair value less costs of disposal model. Fair value less costs of disposal is calculated using a discounted cash flow approach, with a post-tax discount rate applied to the projected risk-adjusted post-tax cash flows and terminal value.
The discount rate used is based on the Group WACC of 7%, as most cash generating units have integrated operations across large parts of the Group. The discount rate is adjusted where appropriate for specific country or currency risks. The valuation methodology uses significant inputs which are not based on observable market data, therefore this valuation technique is classified as level 3 in the fair value hierarchy.
Details relating to the discounted cash flow models used in the impairment tests of the Pharmaceuticals, Vaccines and Consumer Healthcare cash generating units are as follows:
The terminal growth rates do not exceed the long-term projected growth rates for the relevant markets, reflect the impact of future generic competition and take account of new product launches.
In each case the valuations indicated sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of the related goodwill. Goodwill is monitored at the segmental level.
The Pharmaceuticals cash generating unit comprises a collection of smaller cash generating units including assets with indefinite lives with a carrying value of £211 million (2015 £240 million). The Consumer Healthcare cash generating unit also comprises a collection of smaller cash generating units including brands with indefinite lives with a carrying value of £9.03 billion (2015 £7.71 billion).
Details of indefinite life brands are given in Note 19 Other intangible assets.
184 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
19. Other intangible assets
|
Computer software £m |
Licences, patents, etc. £m |
Amortised brands £m |
Indefinite life brands £m |
Total £m |
||||||||||||||||
Cost at 1 January 2015 |
|
1,818 |
|
|
10,281 |
|
|
422 |
|
|
2,155 |
|
|
14,676 |
|
|||||
Exchange adjustments |
32 | 74 | 3 | (14 | ) | 95 | ||||||||||||||
Capitalised development costs |
| 217 | | | 217 | |||||||||||||||
Capitalised borrowing costs |
7 | | | | 7 | |||||||||||||||
Additions through business combinations |
| 2,791 | | 5,997 | 8,788 | |||||||||||||||
Other additions |
174 | 132 | | | 306 | |||||||||||||||
Reclassifications |
90 | | | | 90 | |||||||||||||||
Disposals and asset write-offs |
(91 | ) | (98 | ) | | | (189 | ) | ||||||||||||
Transfer to assets held for sale
|
|
(2
|
)
|
|
(3
|
)
|
|
(38
|
)
|
|
(64
|
)
|
|
(107
|
)
|
|||||
Cost at 31 December 2015
|
|
2,028
|
|
|
13,394
|
|
|
387
|
|
|
8,074
|
|
|
23,883
|
|
|||||
Exchange adjustments |
137 | 1,139 | 20 | 1,320 | 2,616 | |||||||||||||||
Capitalised development costs |
| 219 | 21 | | 240 | |||||||||||||||
Capitalised borrowing costs |
4 | | | | 4 | |||||||||||||||
Additions through business combinations |
| 102 | | | 102 | |||||||||||||||
Other additions |
238 | 349 | | | 587 | |||||||||||||||
Disposals and asset write-offs |
(389 | ) | (21 | ) | (1 | ) | (7 | ) | (418 | ) | ||||||||||
Transfer to assets held for sale |
(1 | ) | (39 | ) | | (12 | ) | (52 | ) | |||||||||||
Reclassifications
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|||||
Cost at 31 December 2016
|
|
2,156
|
|
|
15,143
|
|
|
427
|
|
|
9,375
|
|
|
27,101
|
|
|||||
Amortisation at 1 January 2015 |
(1,213 | ) | (3,492 | ) | (134 | ) | | (4,839 | ) | |||||||||||
Exchange adjustments |
(15 | ) | (34 | ) | (1 | ) | | (50 | ) | |||||||||||
Charge for the year |
(140 | ) | (596 | ) | (2 | ) | | (738 | ) | |||||||||||
Disposals and asset write-offs |
73 | 92 | | | 165 | |||||||||||||||
Transfer to assets held for sale
|
|
1
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|||||
Amortisation at 31 December 2015
|
|
(1,294
|
)
|
|
(4,030
|
)
|
|
(133
|
)
|
|
|
|
|
(5,457
|
)
|
|||||
Exchange adjustments |
(92 | ) | (410 | ) | (5 | ) | | (507 | ) | |||||||||||
Charge for the year |
(152 | ) | (553 | ) | (91 | ) | | (796 | ) | |||||||||||
Disposals and asset write-offs |
353 | | 5 | | 358 | |||||||||||||||
Transfer to assets held for sale
|
|
1
|
|
|
10
|
|
|
|
|
|
|
|
|
11
|
|
|||||
Amortisation at 31 December 2016
|
|
(1,184
|
)
|
|
(4,983
|
)
|
|
(224
|
)
|
|
|
|
|
(6,391
|
)
|
|||||
Impairment at 1 January 2015 |
(42 | ) | (1,239 | ) | (154 | ) | (82 | ) | (1,517 | ) | ||||||||||
Exchange adjustments |
1 | (58 | ) | | | (57 | ) | |||||||||||||
Impairment losses |
(14 | ) | (148 | ) | (15 | ) | (40 | ) | (217 | ) | ||||||||||
Disposals and asset write-offs |
16 | 6 | | | 22 | |||||||||||||||
Transfer to assets held for sale
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
15
|
|
|||||
Impairment at 31 December 2015
|
|
(39
|
)
|
|
(1,439
|
)
|
|
(154
|
)
|
|
(122
|
)
|
|
(1,754
|
)
|
|||||
Exchange adjustments |
(3 | ) | (266 | ) | | (3 | ) | (272 | ) | |||||||||||
Impairment losses |
(2 | ) | (15 | ) | | (5 | ) | (22 | ) | |||||||||||
Disposals and asset write-offs |
35 | 40 | 11 | | 86 | |||||||||||||||
Transfer to assets held for sale
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
28
|
|
|||||
Impairment at 31 December 2016
|
|
(9
|
)
|
|
(1,652
|
)
|
|
(143
|
)
|
|
(130
|
)
|
|
(1,934
|
)
|
|||||
Total amortisation and impairment at 31 December 2015 |
(1,333 | ) | (5,469 | ) | (287 | ) | (122 | ) | (7,211 | ) | ||||||||||
Total amortisation and impairment at 31 December 2016
|
|
(1,193
|
)
|
|
(6,635
|
)
|
|
(367
|
)
|
|
(130
|
)
|
|
(8,325
|
)
|
|||||
Net book value at 1 January 2015 |
563 | 5,550 | 134 | 2,073 | 8,320 | |||||||||||||||
Net book value at 31 December 2015 |
695 | 7,925 | 100 | 7,952 | 16,672 | |||||||||||||||
Net book value at 31 December 2016
|
|
963
|
|
|
8,508
|
|
|
60
|
|
|
9,245
|
|
|
18,776
|
|
The weighted average interest rate for capitalised borrowing costs in the year was 3.8% (2015 3.8%).
The net book value of computer software included £620 million (2015 £407 million) of internally generated costs.
The charge for impairments in the year includes the impairments of Oncomed, Ansolar and Maxinutrition. The carrying value at 31 December 2016 of intangible assets, for which impairments have been charged or reversed in the year, following those impairments or reversals, was £116 million (2015 £308 million).
The patent expiry dates of the Groups most significant assets, where relevant, are set out on pages 250 and 251.
185 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
19. Other intangible assets continued
|
Amortisation and impairment losses, net of reversals, have been charged in the income statement as follows:
Each of these brands is considered to have an indefinite life, given the strength and durability of the brand and the level of marketing support. The brands are in relatively similar stable and profitable market sectors, with similar risk profiles, and their size, diversification and market shares mean that the risk of market-related factors causing a reduction in the lives of the brands is considered to be relatively low. The Group is not aware of any material legal, regulatory, contractual, competitive, economic or other factors which could limit their useful lives. Accordingly, they are not amortised. The increase in carrying value in the year primarily reflects the impact of exchange rate movements.
Each brand is tested annually for impairment and other amortised intangible assets are tested when indicators of impairment arise. This testing applies a fair value less costs of disposal methodology, generally using post-tax cash flow forecasts with a terminal value calculation and a discount rate equal to the Group post-tax WACC of 7%, adjusted where appropriate for country and currency specific risks. This valuation methodology uses significant inputs which are not based on observable market data, and therefore this valuation technique is classified as level 3 of the fair value hierarchy. The main assumptions include future sales price and volume growth, product contribution, the future expenditure required to maintain the products marketability and registration in the relevant jurisdictions and exchange rates. These assumptions are based on past experience and are reviewed as part of managements budgeting and strategic planning cycle for changes in market conditions and sales erosion through competition. The terminal growth rates applied of between nil% and 5% are managements estimates of future long-term average growth rates of the relevant markets. In each case the valuations indicate sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of these intangible assets.
186 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
20. Investments in associates and joint ventures
|
Joint | 2016 | Joint | 2015 | |||||||||||||||||||||
ventures | Associates | Total | ventures | Associates | Total | |||||||||||||||||||
£m | £m | £m | £m | £m | £m | |||||||||||||||||||
At 1 January |
20 | 187 | 207 | 8 | 332 | 340 | ||||||||||||||||||
Exchange adjustments |
4 | 41 | 45 | 1 | 2 | 3 | ||||||||||||||||||
Additions |
3 | 8 | 11 | 13 | 10 | 23 | ||||||||||||||||||
Disposals |
| | | | (143 | ) | (143 | ) | ||||||||||||||||
Transfer from other investments |
| | | | 146 | 146 | ||||||||||||||||||
Distributions received |
(2 | ) | (1 | ) | (3 | ) | | (38 | ) | (38 | ) | |||||||||||||
Other movements |
(2 | ) | | (2 | ) | | (165 | ) | (165 | ) | ||||||||||||||
(Loss)/profit after tax recognised in the consolidated income statement |
(4 | ) | 9 | 5 | (2 | ) | 16 | 14 | ||||||||||||||||
Other comprehensive income recognised in the consolidated statement of comprehensive income |
| | | | 27 | 27 | ||||||||||||||||||
At 31 December |
19 | 244 | 263 | 20 | 187 | 207 |
The Group held one significant associate at 31 December 2016, Innoviva, Inc. At 31 December 2016, the Group owned 32 million shares or 29.5% of Innoviva, which is a biopharmaceutical company listed on NASDAQ. The company partnered with GSK in the development of the long acting beta agonist vilanterol and currently receives royalty income from sales of products that contain this component, namely Relvar/Breo Ellipta and Anoro Ellipta . It also retains a 15% economic interest in future royalties to be paid by GSK on sales of Closed Triple, if approved and commercialised. The remaining 85% of the economic interest in these royalties will be due to Theravance Biopharma Inc., a company spun out of Innoviva in 2014, in which the Group holds 18.6% of the common stock. The investment in Innoviva had a market value of £278 million at 31 December 2016 (2015 £229 million).
Summarised balance sheet information, based on results information, in respect of Innoviva is set out below:
At 31 December | At 31 December | |||||||
2016 | 2015 | |||||||
£m | £m | |||||||
Non-current assets |
146 | 143 | ||||||
Current assets |
160 | 146 | ||||||
Current liabilities |
(16 | ) | (9 | ) | ||||
Non-current liabilities |
(575 | ) | (513 | ) | ||||
Net liabilities |
(285 | ) | (233 | ) | ||||
2016 | 2015 | |||||||
£m | £m | |||||||
Interest in associated undertaking |
(84 | ) | (65 | ) | ||||
Goodwill |
84 | 64 | ||||||
Fair value and other adjustments |
138 | 113 | ||||||
Carrying value at 31 December |
138 | 112 |
187 | GSK Annual Report 2016 |
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
21. Other investments
|
22. Other non-current assets
|
2016
£m |
2015
£m |
|||||||
Amounts receivable under insurance contracts |
602 | 477 | ||||||
Pension schemes in surplus |
313 | 258 | ||||||
Other receivables
|
|
284
|
|
|
255
|
|
||
1,199 | 990 |
188 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
23. Inventories
|
2016
|
2015
|
|||||||
Raw materials and consumables |
1,068 | 1,563 | ||||||
Work in progress |
2,299 | 1,453 | ||||||
Finished goods |
1,735 | 1,700 | ||||||
5,102 | 4,716 |
24. Trade and other receivables
|
2016
|
2015
|
|||||
Trade receivables, net of provision for bad and doubtful debts |
4,615 | 3,824 | ||||
Accrued income |
64 | 55 | ||||
Other prepayments |
335 | 307 | ||||
Interest receivable |
11 | 9 | ||||
Employee loans and advances |
17 | 36 | ||||
Other receivables |
984 | 1,384 | ||||
6,026 | 5,615 |
Trade receivables included £9 million (2015 £8 million) due from associates and joint ventures. Other receivables included £7 million (2015 £nil) due from associates and joint ventures.
Bad and doubtful debt provision
|
2016
|
2015
|
||||
At 1 January |
167 | 142 | ||||
Exchange adjustments |
23 | (2) | ||||
Charge for the year |
77 | 45 | ||||
Subsequent recoveries of amounts provided for |
(59) | (17) | ||||
Utilised |
(1) | (1) | ||||
At 31 December |
207 | 167 |
25. Cash and cash equivalents
|
2016
|
2015
|
|||||
Cash at bank and in hand |
1,462 | 1,114 | ||||
Short-term deposits |
3,435 | 4,716 | ||||
4,897 | 5,830 |
26. Assets held for sale
|
2016
|
2015
|
|||||
Property, plant and equipment |
184 | 32 | ||||
Goodwill |
13 | | ||||
Other intangibles |
12 | 5 | ||||
Inventory |
7 | 15 | ||||
Other |
(1) | (6) | ||||
215 | 46 |
Non-current assets and disposal groups are transferred to assets held for sale when it is expected that their carrying amounts will be recovered principally through disposal and a sale is considered highly probable. They are held at the lower of carrying amount and fair value less costs to sell.
Included within Assets held for sale are assets which were written down to fair value less costs to sell of £79 million (2015 £36 million). The valuation methodology uses significant inputs which are not based on observable market data, therefore, this valuation is classified as level 3 in the fair value hierarchy.
189 | GSK Annual Report 2016 |
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
27. Trade and other payables
|
2016 £m |
2015 £m |
|||||
Trade payables |
3,596 | 3,120 | ||||
Wages and salaries |
1,236 | 1,069 | ||||
Social security |
120 | 118 | ||||
ViiV Healthcare put option |
1,319 | | ||||
Other payables |
447 | 368 | ||||
Deferred income |
158 | 73 | ||||
Customer return and rebate accruals |
2,778 | 2,056 | ||||
Other accruals |
2,310 | 2,081 | ||||
11,964 | 8,885 |
Trade and other payables included £36 million (2015 £17 million) due to associates and joint ventures.
Customer return and rebate accruals are provided for by the Group at the point of sale in respect of the estimated rebates, discounts or allowances payable to customers, and included £2,218 million (2015 £1,671 million) in respect of US Pharmaceuticals and Vaccines, as more fully described in the Group financial review on page 76. Accruals are made at the time of sale but the actual amounts paid are based on claims made some time after the initial recognition of the sale. As the amounts are estimated, they may not fully reflect the final outcome and are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of accrual is reviewed and adjusted quarterly in light of historical experience of actual rebates, discounts or allowances given and returns made and any changes in arrangements. Future events could cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.
Pfizers put option over its shareholding in ViiV Healthcare was recognised during 2016 and is currently exercisable. The table below shows on an indicative basis the income statement and balance sheet sensitivity of the Pfizer put option to reasonably possible changes in key assumptions.
Increase/(decrease) in financial liability and loss/(gain) in Income statement |
2016
£m |
|
10 cent appreciation of US Dollar |
65 | |
10 cent depreciation of US Dollar |
(55) | |
10 cent appreciation of Euro |
36 | |
10 cent depreciation of Euro |
(30) |
An explanation of the accounting for ViiV Healthcare is set out on page 58.
28. Pensions and other post-employment benefits
|
190 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
|
GSK entities operate pension arrangements which cover the Groups material obligations to provide pensions to retired employees. These arrangements have been developed in accordance with local practices in the countries concerned. Pension benefits can be provided by state schemes; by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee; or by defined benefit schemes, whereby retirement benefits are based on employee pensionable remuneration and length of service.
Pension costs of defined benefit schemes for accounting purposes have been calculated using the projected unit method. In certain countries pension benefits are provided on an unfunded basis, some administered by trustee companies. Formal, independent, actuarial valuations of the Groups main plans are undertaken regularly, normally at least every three years.
Actuarial movements in the year are recognised through the statement of comprehensive income. Discount rates are derived from AA rated corporate bond yields except in countries where there is no deep market in corporate bonds where government bond yields are used. Discount rates are selected to reflect the term of the expected benefit payments. Projected inflation rate and pension increases are long-term predictions based on the yield gap between long-term index-linked and fixed interest Gilts. In the UK, mortality rates are determined by adjusting the SAPS S2 standard mortality tables to reflect recent scheme experience. These rates are then projected to reflect improvements in life expectancy in line with the CMI 2015 projections with a long-term rate of improvement of 1.25% per year for both males and females. In the US, mortality rates are calculated using the RP2014 white collar table adjusted to reflect recent experience. These rates are projected using scale BB-2D to allow for future improvements in life expectancy.
The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2036 for an individual then at the age of 60 is as follows:
UK | US | |||||||||||||||
Male Years |
Female Years |
Male Years |
Female Years |
|||||||||||||
Current |
27.8 | 29.8 | 27.2 | 28.9 | ||||||||||||
Projected for 2036 |
29.6 | 31.9 | 28.9 | 30.6 |
The assets of funded schemes are generally held in separately administered trusts, either as specific assets or as a proportion of a general fund, or are insurance contracts. Assets are invested in different classes in order to maintain a balance between risk and return. Investments are diversified to limit the financial effect of the failure of any individual investment. The Group reviewed the investment strategy of the UK plans in 2011 and the asset allocation for the UK plans has been adjusted to approximately 55% return seeking assets and 45% liability matching assets. In 2013, the target asset allocation of the US plans was also updated to 55% return seeking assets and 45% liability matching assets.
The Pension Plans are exposed to risk that arises because the estimated market value of the Plans assets might decline, the investment returns might reduce, or the estimated value of the Plans liabilities might increase.
In line with the agreed mix of return seeking assets to generate future returns and liability matching assets to better match future pension obligations, the Group has defined an overall long-term investment strategy for the Plans, with investments across a broad range of assets. The main market risks within the asset and hedging portfolio are against credit risk, interest rates, long-term inflation, equities, property, and bank counterparty risk.
The Plan liabilities are a series of future cash flows with relatively long duration. On an IAS 19R basis, these cash flows are sensitive to changes in the expected long-term inflation rate and the discount rate (AA corporate bond yield curve) where an increase in long-term inflation corresponds with an increase in the liabilities, and an increase in the discount rate corresponds with a decrease in the liabilities.
In the UK the defined benefit pension schemes operated for the benefit of former Glaxo Wellcome employees and former SmithKline Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled to join a defined contribution scheme. In the US the former Glaxo Wellcome and SmithKline Beecham defined benefit schemes were merged during 2001. In addition, the Group operates a number of post-retirement healthcare schemes, the principal one of which is in the US.
The Group has applied the following financial assumptions in assessing the defined benefit liabilities:
UK | US | Rest of World | ||||||||||||||||||||||||||||||
2016
% pa |
2015
% pa |
2014 % pa |
2016
% pa |
2015
% pa |
2014 % pa |
2016
% pa |
2015
% pa |
2014
% pa |
||||||||||||||||||||||||
Rate of increase of future earnings |
2.00 | 2.00 | 2.00 | 4.00 | 4.00 | 4.00 | 2.70 | 2.70 | 2.60 | |||||||||||||||||||||||
Discount rate |
2.70 | 3.80 | 3.60 | 3.90 | 4.20 | 3.80 | 1.60 | 2.20 | 2.00 | |||||||||||||||||||||||
Expected pension increases |
3.20 | 3.10 | 3.00 | n/a | n/a | n/a | 2.10 | 2.00 | 2.00 | |||||||||||||||||||||||
Cash balance credit/conversion rate |
n/a | n/a | n/a | 3.20 | 3.20 | 3.00 | 0.30 | 0.60 | 0.50 | |||||||||||||||||||||||
Inflation rate |
3.20 | 3.10 | 3.00 | 2.25 | 2.25 | 2.25 | 1.50 | 1.40 | 1.40 |
191 | GSK Annual Report 2016 |
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
28. Pensions and other post-employment benefits continued
|
The amounts recorded in the income statement and statement of comprehensive income for the three years ended 31 December 2016 in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
The amounts included within past service costs include £52 million (2015 £25 million; 2014 £7 million) of augmentation costs of which £23 million is arising from major restructuring programmes (see Note 29, Other provisions).
192 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
|
A summarised balance sheet presentation of the Group defined benefit pension schemes and other post-retirement benefits is set out in the table below:
2016 £m |
2015 £m |
2014 £m |
||||||
Recognised in Other non-current assets: |
||||||||
Pension schemes in surplus |
313 | 258 | 93 | |||||
Recognised in Pensions and other post-employment benefits: |
||||||||
Pension schemes in deficit |
(2,397 | ) | (1,842) | (1,782) | ||||
Post-retirement benefits
|
|
(1,693
|
)
|
(1,387)
|
(1,397)
|
|||
|
(4,090
|
)
|
(3,229)
|
(3,179)
|
The fair values of the assets and liabilities of the UK and US defined benefit pension schemes, together with aggregated data for other defined benefit pension schemes in the Group are as follows:
193 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
28. Pensions and other post-employment benefits continued
|
At 31 December 2014 |
UK (restated)
£m |
US £m |
Rest of World
£m |
Group
(restated) £m |
||||||||||||||||
Equities: |
| listed | 5,358 | 1,203 | 325 | 6,886 | ||||||||||||||
| unlisted | 247 | | 9 | 256 | |||||||||||||||
Property: |
| unlisted | 256 | 146 | 4 | 406 | ||||||||||||||
Corporate bonds: |
| listed | 1,358 | 921 | 97 | 2,376 | ||||||||||||||
| unlisted | 247 | | 25 | 272 | |||||||||||||||
Government bonds: |
| listed | 2,445 | 152 | 603 | 3,200 | ||||||||||||||
Insurance contracts |
803 | | 378 | 1,181 | ||||||||||||||||
Other assets
|
|
(163
|
)
|
|
109
|
|
|
88
|
|
|
34
|
|
||||||||
Fair value of assets |
10,551 | 2,531 | 1,529 | 14,611 | ||||||||||||||||
Present value of scheme obligations
|
|
(10,991
|
)
|
|
(3,133
|
)
|
|
(2,176
|
)
|
|
(16,300
|
)
|
||||||||
Net obligation |
(440 | ) | (602 | ) | (647 | ) | (1,689 | ) | ||||||||||||
Included in Other non-current assets |
72 | | 21 | 93 | ||||||||||||||||
Included in Pensions and other post-employment benefits
|
|
(512
|
)
|
|
(602
|
)
|
|
(668
|
)
|
|
(1,782
|
)
|
||||||||
|
(440
|
)
|
|
(602
|
)
|
|
(647
|
)
|
|
(1,689
|
)
|
|||||||||
Actual return on plan assets
|
|
913
|
|
|
99
|
|
|
181
|
|
|
1,193
|
|
Pensions |
Post-retirement benefits |
|||||||||||||||||||
Movements in fair values of assets |
UK
|
US £m |
Rest of World £m |
Group (restated) £m |
Group £m |
|||||||||||||||
Assets at 1 January 2014 |
9,878 | 2,514 | 1,467 | 13,859 | | |||||||||||||||
Exchange adjustments |
| 154 | (101 | ) | 53 | | ||||||||||||||
Interest income |
437 | 112 | 47 | 596 | | |||||||||||||||
Expenses |
(6 | ) | (4 | ) | (2 | ) | (12 | ) | | |||||||||||
Settlements and curtailments |
| | (65 | ) | (65 | ) | | |||||||||||||
Remeasurement |
476 | (13 | ) | 134 | 597 | | ||||||||||||||
Employer contributions |
151 | 19 | 102 | 272 | 70 | |||||||||||||||
Scheme participants contributions |
4 | | 10 | 14 | 10 | |||||||||||||||
Benefits paid
|
|
(389
|
)
|
|
(251
|
)
|
|
(63
|
)
|
|
(703
|
)
|
|
(80
|
)
|
|||||
Assets at 31 December 2014 |
10,551 | 2,531 | 1,529 | 14,611 | | |||||||||||||||
Exchange adjustments |
| 147 | (52 | ) | 95 | | ||||||||||||||
Additions through business combinations |
| | 233 | 233 | | |||||||||||||||
Interest income |
374 | 95 | 33 | 502 | | |||||||||||||||
Expenses |
(7 | ) | (4 | ) | (4 | ) | (15 | ) | | |||||||||||
Settlements and curtailments |
| | (16 | ) | (16 | ) | | |||||||||||||
Remeasurement |
(391 | ) | (125 | ) | (10 | ) | (526 | ) | | |||||||||||
Employer contributions |
164 | 132 | 112 | 408 | 82 | |||||||||||||||
Scheme participants contributions |
4 | | 14 | 18 | 14 | |||||||||||||||
Benefits paid
|
|
(411
|
)
|
|
(275
|
)
|
|
(89
|
)
|
|
(775
|
)
|
|
(96
|
)
|
|||||
Assets at 31 December 2015 |
10,284 | 2,501 | 1,750 | 14,535 | | |||||||||||||||
Exchange adjustments |
| 459 | 305 | 764 | | |||||||||||||||
Interest income |
385 | 108 | 37 | 530 | | |||||||||||||||
Expenses |
(7 | ) | (12 | ) | | (19 | ) | | ||||||||||||
Settlements and curtailments |
| | (110 | ) | (110 | ) | | |||||||||||||
Remeasurement |
2,088 | 45 | 62 | 2,195 | | |||||||||||||||
Employer contributions |
319 | 31 | 131 | 481 | 91 | |||||||||||||||
Scheme participants contributions |
4 | | 14 | 18 | 17 | |||||||||||||||
Benefits paid
|
|
(490
|
)
|
|
(242
|
)
|
|
(92
|
)
|
|
(824
|
)
|
|
(108
|
)
|
|||||
Assets at 31 December 2016
|
|
12,583
|
|
|
2,890
|
|
|
2,097
|
|
|
17,570
|
|
|
|
|
In addition to the above assets, there are assets held by UK defined contribution plans amounting to £1,862 million at December 2016 (2015 £1,591 million; 2014 £1,501 million) which had previously been included in these figures. Prior year figures have been restated to reflect this change.
During 2016, the Group made special funding contributions to the UK pension schemes totalling £191 million (2015 £85 million; 2014 £85 million) and £nil (2015 £111 million; 2014 £nil) to the US scheme. In 2016, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions to eliminate the pension deficit identified at the 31 December 2014 actuarial funding valuation. Based on the funding agreements following the 2014 valuation, the additional contributions to eliminate the pension deficit are expected to be £123 million in 2017. The contributions were based on a government bond yield curve approach to selecting the discount rate; the rate chosen included an allowance for expected investment returns which reflected the asset mix of the schemes.
Employer contributions for 2017, including special funding contributions, are estimated to be approximately £362 million in respect of defined benefit pension schemes and £100 million in respect of post-retirement benefits.
194 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
|
Pensions |
Post-retirement
benefits |
|||||||||||||||||||
Movements in defined benefit obligations
|
UK
|
US £m
|
Rest of World
|
Group
|
Group £m
|
|||||||||||||||
Obligations at 1 January 2014 |
(9,766 | ) | (2,793 | ) | (1,913 | ) | (14,472 | ) | (1,246 | ) | ||||||||||
Exchange adjustments |
| (188 | ) | 139 | (49 | ) | (68 | ) | ||||||||||||
Service cost |
(68 | ) | (66 | ) | (90 | ) | (224 | ) | (24 | ) | ||||||||||
Past service cost |
(7 | ) | (1 | ) | 11 | 3 | 8 | |||||||||||||
Interest cost |
(430 | ) | (126 | ) | (61 | ) | (617 | ) | (54 | ) | ||||||||||
Settlements and curtailments |
| | 69 | 69 | | |||||||||||||||
Other movements |
| | (6 | ) | (6 | ) | 2 | |||||||||||||
Remeasurement |
(1,105 | ) | (210 | ) | (378 | ) | (1,693 | ) | (85 | ) | ||||||||||
Scheme participants contributions |
(4 | ) | | (10 | ) | (14 | ) | (10 | ) | |||||||||||
Benefits paid
|
|
389
|
|
|
251
|
|
|
63
|
|
|
703
|
|
|
80
|
|
|||||
Obligations at 31 December 2014 |
(10,991 | ) | (3,133 | ) | (2,176 | ) | (16,300 | ) | (1,397 | ) | ||||||||||
Exchange adjustments |
| (184 | ) | 78 | (106 | ) | (64 | ) | ||||||||||||
Additions through business combinations |
| | (397 | ) | (397 | ) | (11 | ) | ||||||||||||
Service cost |
(77 | ) | (67 | ) | (110 | ) | (254 | ) | (22 | ) | ||||||||||
Past service cost |
(25 | ) | (2 | ) | 10 | (17 | ) | 8 | ||||||||||||
Interest cost |
(388 | ) | (117 | ) | (46 | ) | (551 | ) | (52 | ) | ||||||||||
Settlements and curtailments |
| (1 | ) | 25 | 24 | 7 | ||||||||||||||
Remeasurement |
473 | 95 | 157 | 725 | 62 | |||||||||||||||
Scheme participants contributions |
(4 | ) | | (14 | ) | (18 | ) | (14 | ) | |||||||||||
Benefits paid
|
|
411
|
|
|
275
|
|
|
89
|
|
|
775
|
|
|
96
|
|
|||||
Obligations at 31 December 2015 |
(10,601 | ) | (3,134 | ) | (2,384 | ) | (16,119 | ) | (1,387 | ) | ||||||||||
Exchange adjustments |
| (586 | ) | (396 | ) | (982 | ) | (248 | ) | |||||||||||
Service cost |
(70 | ) | (66 | ) | (110 | ) | (246 | ) | (31 | ) | ||||||||||
Past service cost |
(52 | ) | (1 | ) | (1 | ) | (54 | ) | (3 | ) | ||||||||||
Interest cost |
(394 | ) | (135 | ) | (57 | ) | (586 | ) | (56 | ) | ||||||||||
Settlements and curtailments |
| | 138 | 138 | | |||||||||||||||
Remeasurement |
(2,253 | ) | (72 | ) | (286 | ) | (2,611 | ) | (59 | ) | ||||||||||
Scheme participants contributions |
(4 | ) | | (14 | ) | (18 | ) | (17 | ) | |||||||||||
Benefits paid |
490 | 242 | 92 | 824 | 108 | |||||||||||||||
Obligations at 31 December 2016
|
|
(12,884
|
)
|
|
(3,752
|
)
|
|
(3,018
|
)
|
|
(19,654
|
)
|
|
(1,693
|
)
|
In addition to the above obligations, there are obligations of UK defined contribution plans amounting to £1,862 million at December 2016 (2015 £1,591 million; 2014 £1,501 million) which had previously been included in these figures. Prior year figures have been restated to reflect this change.
The defined benefit pension obligation is analysed as follows:
2016 £m |
2015 (restated) £m |
2014
|
||||||||||||
Funded |
(18,974 | ) | (15,552 | ) | (15,849 | ) | ||||||||
Unfunded
|
|
(680
|
)
|
|
(567
|
)
|
|
(451
|
)
|
|||||
|
(19,654
|
)
|
|
(16,119
|
)
|
|
(16,300
|
)
|
The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme, together with the assumption for future medical inflation of 7% (2015 6.5%), grading down to 5% in 2025 and thereafter. At 31 December 2016, the US post-retirement healthcare scheme obligation was £1,463 million (2015 £1,208 million; 2014 £1,191 million). Post-retirement benefits are unfunded.
195 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
28. Pensions and other post-employment benefits continued
|
The movement in the net defined benefit liability is as follows:
196 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
|
The defined benefit pension obligation analysed by membership category is as follows:
2016 £m |
2015 £m |
2014 £m |
||||||||||||||
Active |
4,576 | 5,510 | 5,422 | |||||||||||||
Retired |
9,574 | 7,969 | 7,967 | |||||||||||||
Deferred
|
|
5,504
|
|
|
4,231
|
|
|
4,412
|
|
|||||||
|
19,654
|
|
|
17,710
|
|
|
17,801
|
|
||||||||
The post-retirement benefit obligation analysed by membership category is as follows: | ||||||||||||||||
2016
£m |
2015
£m |
2014
£m |
||||||||||||||
Active |
594 | 499 | 590 | |||||||||||||
Retired |
1,099 | 887 | 805 | |||||||||||||
Deferred
|
|
|
|
|
1
|
|
|
2
|
|
|||||||
|
1,693
|
|
|
1,387
|
|
|
1,397
|
|
||||||||
The weighted average duration of the defined benefit obligation is as follows: | ||||||||||||||||
2016
years |
2015
years |
2014
years |
||||||||||||||
Pension benefits
|
|
16
|
|
|
16
|
|
|
16
|
|
|||||||
Post-retirement benefits
|
|
12
|
|
|
12
|
|
|
12
|
|
Sensitivity analysis
Effect of changes in assumptions used on the benefit obligations and on the 2017 annual defined benefit pension and post retirement costs.
197 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
29. Other provisions
|
Legal and other disputes £m
|
Major
restructuring
£m
|
Employee related provisions £m
|
Other
£m
|
Total £m
|
||||||||||||||||
At 1 January 2016 |
352 | 816 | 275 | 321 | 1,764 | |||||||||||||||
Exchange adjustments |
67 | 100 | 32 | 37 | 236 | |||||||||||||||
Charge for the year |
162 | 163 | 58 | 66 | 449 | |||||||||||||||
Reversed unused |
| (140 | ) | (9 | ) | (7 | ) | (156 | ) | |||||||||||
Unwinding of discount |
(1 | ) | 4 | | 13 | 16 | ||||||||||||||
Utilised |
(233 | ) | (368 | ) | (41 | ) | (108 | ) | (750 | ) | ||||||||||
Reclassifications and other movements |
(3 | ) | 2 | (9 | ) | (26 | ) | (36 | ) | |||||||||||
Transfer to Pension obligations
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
(23
|
)
|
|||||
At 31 December 2016
|
|
344
|
|
|
554
|
|
|
306
|
|
|
296
|
|
|
1,500
|
|
|||||
To be settled within one year |
296 | 363 | 90 | 99 | 848 | |||||||||||||||
To be settled after one year
|
|
48
|
|
|
191
|
|
|
216
|
|
|
197 |
|
|
652 |
|
|||||
At 31 December 2016
|
|
344
|
|
|
554
|
|
|
306
|
|
|
296
|
|
|
1,500
|
|
Legal and other disputes
The Group is involved in a substantial number of legal and other disputes, including notification of possible claims, as set out in Note 46 Legal proceedings. Provisions for legal and other disputes include amounts relating to product liability, anti-trust, government investigations (principally relating to the SFO related investigation), contract terminations, self insurance and environmental clean-up.
The charge for the year of £162 million (net of reversals and estimated insurance recoveries) primarily related to provisions for product liability cases regarding Paxil and other products, commercial disputes and various other government investigations.
The discount on the provisions increased by £1 million in 2016 (2015 decreased by £1 million) due to higher discount rates in 2016 compared to 2015. The discount was calculated using risk-adjusted projected cash flows and risk-free rates of return.
In respect of product liability claims related to certain products, there is sufficient history of claims made and settlements to enable management to make a reliable estimate of the provision required to cover unasserted claims. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
It is in the nature of the Groups business that a number of these matters may be the subject of negotiation and litigation over many years. Litigation proceedings, including the various appeal procedures, often take many years to reach resolution, and out-of-court settlement discussions can also often be protracted.
The Group is in potential settlement discussions in a number of the disputes for which amounts have been provided and, based on its current assessment of the progress of these disputes, estimates that £296 million of the amount provided at 31 December 2016 will be settled within one year. At 31 December 2016, it was expected that £nil (2015 £nil) of the provision made for legal and other disputes will be reimbursed by third party insurers. For a discussion of legal issues, see Note 46, Legal proceedings.
Major restructuring programmes
In 2013, the Group initiated the Major Change restructuring programme focused on opportunities to simplify supply chain processes, build the Groups capabilities in manufacturing and R&D and restructure the European Pharmaceuticals business.
The Pharmaceuticals restructuring programme, announced in October 2014, has been focused on rescaling commercial operations, global support functions and certain R&D/manufacturing operations across Pharmaceuticals. In addition, an integration restructuring programme was initiated in 2015, following the completion of the Novartis transaction. All of these restructuring and integration programmes are now reported together as one combined major restructuring programme.
Provisions for staff severance payments are made when management has made a formal decision to eliminate certain positions and this has been communicated to the groups of employees affected and appropriate consultation procedures completed, where appropriate. No provision is made for staff severance payments that are made immediately.
Pension augmentations arising from staff redundancies of £23 million (2015 £25 million) have been charged during the year and then transferred to the pension obligations provision as shown in Note 28, Pensions and other post-employment benefits. Asset write-downs have been recognised as impairments of property, plant and equipment in Note 17, Property, plant and equipment. The majority of the amounts provided are expected to be utilised in the next two years.
Employee related provisions
Employee related provisions include obligations for certain medical benefits to disabled employees and their spouses in the US. At
31 December 2016, the provision for these benefits amounted to £135 million (2015 £111 million). Other employee benefits reflect a variety of provisions for severance costs, jubilee awards and other long-service benefits.
Other provisions
Included in other provisions are insurance provisions of £40 million (2015 £98 million), onerous property lease provisions of £113 million (2015 £135 million) and a number of other provisions including vehicle insurance and regulatory matters.
198 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
30. Other non-current liabilities
|
31. Net debt
|
199 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
31. Net debt continued
|
Current assets
Liquid investments are classified as available-for-sale investments. At 31 December 2016, they included US Treasury Notes and other government bonds. The effective interest rate on liquid investments at 31 December 2016 was approximately 0.7% (2015 approximately 0.7%). Liquid investment balances at 31 December 2016 earning interest at floating rates amount to £89 million (2015 £4 million). Liquid investment balances at 31 December 2016 earning interest at fixed rates amount to £nil (2015 £71 million).
The effective interest rate on cash and cash equivalents at 31 December 2016 was approximately 1.3% (2015 approximately 1.3%). Cash and cash equivalents at 31 December 2016 earning interest at floating and fixed rates amount to £4,584 million and £3 million respectively (2015 £5,654 million and £nil).
GSKs policy regarding the credit quality of cash and cash equivalents is referred to in Note 42, Financial instruments and related disclosures.
Short-term borrowings
GSK has a $10 billion (£8.1 billion) US commercial paper programme, of which $1.4 billion (£1.1 billion) was in issue at 31 December 2016 (2015 no issuances). GSK also has £1.9 billion five year committed facilities and $2.5 billion (£2.0 billion) of 364 day committed facilities. The five-year committed facilities were agreed in September 2015 and were extended by one year to 2021 in September 2016. The 364 day committed facilities were agreed in September 2016. Liquid investments, cash and cash equivalents were as shown in the table on page 198.
The weighted average interest rate on commercial paper borrowings at 31 December 2016 was 0.88% (2015 no issuances).
The weighted average interest rate on current bank loans and overdrafts at 31 December 2016 was 3.47% (2015 3.49%).
The average effective pre-swap interest rate of notes classified as short term at 31 December 2016 was 3.2% (2015 0.04%).
Long-term borrowings
At the year-end, GSK had long-term borrowings of £14.7 billion (2015 £15.3 billion) of which £11.1 billion (2015 £10 billion) falls due in more than five years. The average effective pre-swap interest rate of all notes in issue at 31 December 2016 was approximately 4.1% (2015 approximately 3.9%).
Long-term borrowings repayable after five years carry interest at effective rates between 1.54% and 6.42%. The repayment dates range from 2022 to 2045.
Pledged assets
The Group held pledged investments in US Treasury Notes with a par value of $105 million (£85 million), (2015 $105 million (£71 million)) as security against irrevocable letters of credit issued on the Groups behalf in respect of the Groups self-insurance activity. Provisions in respect of self-insurance are included within the provisions for legal and other disputes discussed in Note 29, Other provisions. In addition, £23 million (2015 £37 million) of assets included in Note 22, Other non-current assets, which do not form part of Net debt, were pledged as collateral against future rental payments under operating lease arrangements entered into by Human Genome Sciences, Inc. prior to its acquisition by the Group.
Finance lease obligations |
2016 £m |
2015 £m |
||||||
Rental payments due within one year |
25 | 25 | ||||||
Rental payments due between one and two years |
23 | 21 | ||||||
Rental payments due between two and three years |
12 | 15 | ||||||
Rental payments due between three and four years |
7 | 6 | ||||||
Rental payments due between four and five years |
| 6 | ||||||
Rental payments due after five years |
| 4 | ||||||
Total future rental payments |
67 | 77 | ||||||
Future finance charges |
(3 | ) | (7 | ) | ||||
Total finance lease obligations
|
|
64
|
|
|
70
|
|
32. Contingent liabilities
|
At 31 December 2016, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of business, amounted to £281 million (2015 £200 million). At 31 December 2016, £1 million (2015 £nil) of financial assets were pledged as collateral for contingent liabilities. Provision is made for the outcome of tax, legal and other disputes where it is both probable that the Group will suffer an outflow of funds and it is possible to make a reliable estimate of that outflow. At 31 December 2016, other than for those disputes where provision has been made, it was not possible to make a reliable estimate of the potential outflow of funds that might be required to settle disputes where the possibility of there being an outflow was more than remote. Descriptions of the significant tax, legal and other disputes to which the Group is a party are set out in Note 14, Taxation and Note 46, Legal proceedings.
200 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
33. Share capital and share premium account
|
Ordinary Shares of 25p each |
Share premium |
|||||||||||
Number | £m | £m | ||||||||||
Share capital authorised |
||||||||||||
At 31 December 2014 |
10,000,000,000 | 2,500 | ||||||||||
At 31 December 2015 |
10,000,000,000 | 2,500 | ||||||||||
At 31 December 2016
|
|
10,000,000,000
|
|
|
2,500
|
|
||||||
Share capital issued and fully paid |
||||||||||||
At 1 January 2014 |
5,342,206,696 | 1,336 | 2,595 | |||||||||
Issued under employee share schemes
|
|
13,090,536
|
|
|
3
|
|
|
164
|
|
|||
At 31 December 2014 |
5,355,297,232 | 1,339 | 2,759 | |||||||||
Issued under employee share schemes
|
|
6,010,415
|
|
|
1
|
|
|
72
|
|
|||
At 31 December 2015 |
5,361,307,647 | 1,340 | 2,831 | |||||||||
Issued under employee share schemes |
7,008,415 | 2 | 87 | |||||||||
Ordinary shares acquired by ESOP Trusts
|
|
|
|
|
|
|
|
36
|
|
|||
At 31 December 2016
|
|
5,368,316,062
|
|
|
1,342
|
|
|
2,954
|
|
|||
31 December 2016 000 |
31 December 2015 000 |
|||||||||||
Number of shares issuable under employee share schemes
|
|
71,382
|
|
|
99,833
|
|
||||||
Number of unissued shares not under option
|
|
4,560,302
|
|
|
4,538,859
|
|
At 31 December 2016, of the issued share capital, 42,710,419 shares were held in the ESOP Trusts, 458,205,950 shares were held as Treasury shares and 4,867,399,693 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values of the shares held in the ESOP Trusts are disclosed in Note 43, Employee share schemes.
201 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
34. Movements in equity
|
Retained earnings and other reserves amounted to £(3,172) million at 31 December 2016 (2015 £943 million; 2014 £165 million) of which £329 million (2015 £283 million; 2014 £337 million) relates to joint ventures and associated undertakings. The cumulative translation exchange in equity is as follows:
202 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
34. Movements in equity continued
|
2014 |
Retained earnings £m |
Other reserves £m |
Non-
£m |
Total £m |
||||||||||||||||
Items that may be subsequently reclassified to income statement: |
||||||||||||||||||||
Exchange movements on overseas net assets and net investment hedges |
(504 | ) | 7 | | (497 | ) | ||||||||||||||
Reclassification of exchange on liquidation or disposal of overseas subsidiaries |
(219 | ) | | | (219 | ) | ||||||||||||||
Deferred tax on exchange movements |
(2 | ) | | | (2 | ) | ||||||||||||||
Fair value movements on available-for-sale investments |
| 29 | | 29 | ||||||||||||||||
Deferred tax on fair value movements on available-for-sale investments |
| (78 | ) | | (78 | ) | ||||||||||||||
Reclassification of fair value movements on available-for-sale investments |
| (155 | ) | | (155 | ) | ||||||||||||||
Deferred tax on reclassification of fair value movements on available-for-sale investments |
| 58 | | 58 | ||||||||||||||||
Reclassification of cash flow hedges to income statement |
| (5 | ) | | (5 | ) | ||||||||||||||
Fair value movements on cash flow hedges |
| 5 | | 5 | ||||||||||||||||
Deferred tax on fair value movements on cash flow hedges |
| (1 | ) | | (1 | ) | ||||||||||||||
Share of other comprehensive income of associates and joint ventures |
18 | | | 18 | ||||||||||||||||
Items that will not be reclassified to income statement: |
||||||||||||||||||||
Exchange movements on overseas net assets of non-controlling interests |
| | 16 | 16 | ||||||||||||||||
Remeasurement losses on defined benefit plans |
(1,181 | ) | | | (1,181 | ) | ||||||||||||||
Deferred tax on remeasurement losses in defined benefit plans |
262 | | | 262 | ||||||||||||||||
Other comprehensive (expense)/income for the year
|
|
(1,626
|
)
|
|
(140
|
)
|
|
16
|
|
|
(1,750
|
)
|
||||||||
The analysis of other reserves is as follows: |
||||||||||||||||||||
ESOP Trust shares £m |
Fair value reserve £m |
Cash flow hedge reserve £m |
Other reserves £m |
Total £m |
||||||||||||||||
At 1 January 2014 |
(356 | ) | 413 | (12 | ) | 2,108 | 2,153 | |||||||||||||
Transferred to income and expense in the year on disposals |
| (155 | ) | (5 | ) | | (160 | ) | ||||||||||||
Net fair value movement in the year |
| 16 | 4 | | 20 | |||||||||||||||
Ordinary shares acquired by ESOP Trusts |
(245 | ) | | | | (245 | ) | |||||||||||||
Write-down of shares held by ESOP Trusts |
450 | | | | 450 | |||||||||||||||
Forward contract on non-controlling interest
|
| | | 21 | 21 | |||||||||||||||
At 31 December 2014 |
(151 | ) | 274 | (13 | ) | 2,129 | 2,239 | |||||||||||||
Transferred to income and expense in the year on disposals |
| (356 | ) | 2 | | (354 | ) | |||||||||||||
Transferred to income and expense in the year on impairments |
| 10 | | | 10 | |||||||||||||||
Net fair value movement in the year |
| 367 | 2 | | 369 | |||||||||||||||
Ordinary shares acquired by ESOP Trusts |
(99 | ) | | | | (99 | ) | |||||||||||||
Write-down of shares held by ESOP Trusts
|
175 | | | | 175 | |||||||||||||||
At 31 December 2015 |
(75 | ) | 295 | (9 | ) | 2,129 | 2,340 | |||||||||||||
Transferred to income and expense in the year on disposals |
(16 | ) | (268 | ) | | | (284 | ) | ||||||||||||
Transferred to income and expense in the year on impairments |
| 23 | | | 23 | |||||||||||||||
Net fair value movement in the year |
| 330 | 6 | | 336 | |||||||||||||||
Ordinary shares acquired by ESOP Trusts |
(576 | ) | | | | (576 | ) | |||||||||||||
Write-down of shares held by ESOP Trusts
|
381 | | | | 381 | |||||||||||||||
At 31 December 2016
|
|
(286
|
)
|
|
380
|
|
|
(3
|
)
|
|
2,129
|
|
|
2,220
|
|
Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2016 (2015 £1,849 million; 2014 £1,849 million). Other reserves also include the capital redemption reserve created as a result of the share buy-back programme amounting to £280 million at 31 December 2016 (2015 £280 million; 2014 £280 million).
203 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
35. Related party transactions
|
At 31 December 2016, GSK owned 32 million shares or 29.5% of Innoviva Inc. which is a biopharmaceutical company listed on NASDAQ. GSK began recognising Innoviva as an associate on 1 September 2015. The royalties due from GSK to Innoviva in the year were £108 million (£28 million from 1 September to 31 December 2015). At 31 December 2016, the balance payable by GSK to Innoviva was £36 million.
At 31 December 2016, GSK held a 50% interest in Japan Vaccine Co. Ltd (JVC) through its subsidiary GlaxoSmithKline K.K. This joint venture with Daiichi Sankyo Co., Ltd is primarily responsible for the development and marketing of certain prophylactic vaccines in Japan. During 2016, GSK sold £43 million (2015 £27 million) of its vaccine products into the joint venture. At 31 December 2016, the trading balance due to GSK from JVC was £9 million and the balance payable by GSK to JVC was £nil. Loans of £6 million to JVC, £2 million to Medicxi Ventures I LP and £2 million to Index Ventures Life VI (Jersey) LP remained due to GSK at 31 December 2016.
The aggregate compensation of the Directors and CET is given in Note 9, Employee costs.
36. Adjustments reconciling profit after tax to operating cash flows
|
2016 £m |
2015 £m |
2014 £m |
||||||||||
Profit after tax |
1,062 | 8,372 | 2,831 | |||||||||
Tax on profits |
877 | 2,154 | 137 | |||||||||
Share of after tax profits of associates and joint ventures |
(5 | ) | (14 | ) | (30 | ) | ||||||
Finance expense net of finance income |
664 | 653 | 659 | |||||||||
Depreciation |
978 | 892 | 780 | |||||||||
Amortisation of intangible assets |
796 | 738 | 704 | |||||||||
Impairment and assets written off |
226 | 822 | 205 | |||||||||
Profit on sale of businesses |
(5 | ) | (9,308 | ) | | |||||||
Profit on sale of intangible assets |
(178 | ) | (349 | ) | (255 | ) | ||||||
Profit on sale of investments in associates |
| (843 | ) | | ||||||||
Profit on sale of equity investments |
(254 | ) | (342 | ) | (149 | ) | ||||||
Changes in working capital: |
||||||||||||
Decrease/(increase) in inventories |
70 | (111 | ) | (529 | ) | |||||||
(Increase)/decrease in trade receivables |
(188 | ) | 98 | 347 | ||||||||
Increase in trade payables |
96 | 40 | 91 | |||||||||
Decrease/(increase) in other receivables |
381 | (593 | ) | 95 | ||||||||
Contingent consideration paid (see Note 39) |
(358 | ) | (121 | ) | (4 | ) | ||||||
Other non-cash increase in contingent consideration liabilities |
2,281 | 1,986 | 770 | |||||||||
Increase in other payables |
1,989 | 276 | (68 | ) | ||||||||
(Decrease)/increase in pension and other provisions |
(621 | ) | 100 | (41 | ) | |||||||
Share-based incentive plans |
319 | 368 | 332 | |||||||||
Fair value adjustments |
(3 | ) | | 313 | ||||||||
Other |
(21 | ) | (187 | ) | 96 | |||||||
|
7,044
|
|
|
(3,741
|
)
|
|
3,453
|
|
||||
Cash generated from operations
|
|
8,106
|
|
|
4,631
|
|
|
6,284
|
|
204 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
37. Reconciliation of net cash flow to
|
2016 £m |
2015 £m |
2014 £m |
||||||||||||||||||||||||||
Net debt at beginning of year |
(10,727 | ) | (14,377 | ) | (12,645 | ) | ||||||||||||||||||||||
Increase/(decrease) in cash and bank overdrafts |
(1,164 | ) | 1,503 | (1,287 | ) | |||||||||||||||||||||||
Decrease/(increase) in liquid investments |
| 2 | (1 | ) | ||||||||||||||||||||||||
Net increase in long-term loans |
| | (1,960 | ) | ||||||||||||||||||||||||
Net (increase in)/repayment of short-term loans |
(148 | ) | 2,412 | 1,709 | ||||||||||||||||||||||||
Net repayment of obligations under finance leases |
18 | 25 | 23 | |||||||||||||||||||||||||
Exchange adjustments |
(1,781 | ) | (268 | ) | (193 | ) | ||||||||||||||||||||||
Other non-cash movements |
(2 | ) | (24 | ) | (23 | ) | ||||||||||||||||||||||
Movement in net debt
|
|
(3,077
|
)
|
|
3,650
|
|
|
(1,732
|
)
|
|||||||||||||||||||
Net debt at end of year
|
|
(13,804
|
)
|
|
(10,727
|
)
|
|
(14,377
|
)
|
Analysis of changes in net debt |
At 1 January 2016 £m |
Exchange £m |
Other £m |
Reclass-
£m |
Acquisitions £m |
Cash flow £m |
At 31 December 2016 £m |
|||||||||||||||||||||
Liquid investments |
75 | 14 | | | | | 89 | |||||||||||||||||||||
Cash and cash equivalents |
5,830 | 297 | | | 41 | (1,271 | ) | 4,897 | ||||||||||||||||||||
Overdrafts |
(344 | ) | (14 | ) | | | | 66 | (292 | ) | ||||||||||||||||||
|
5,486
|
|
|
283
|
|
|
|
|
|
|
|
|
41
|
|
|
(1,205
|
)
|
|
4,605
|
|
||||||||
Debt due within one year: |
||||||||||||||||||||||||||||
Commercial paper |
| (27 | ) | | | | (1,067 | ) | (1,094 | ) | ||||||||||||||||||
European and US Medium Term Notes |
(850 | ) | (414 | ) | | (2,281 | ) | | 865 | (2,680 | ) | |||||||||||||||||
Other |
(114 | ) | (8 | ) | 3 | (16 | ) | | 72 | (63 | ) | |||||||||||||||||
|
(964
|
)
|
|
(449
|
)
|
|
3
|
|
|
(2,297
|
)
|
|
|
|
|
(130
|
)
|
|
(3,837
|
)
|
||||||||
Debt due after one year: |
||||||||||||||||||||||||||||
European and US Medium Term Notes |
(15,277 | ) | (1,624 | ) | | 2,281 | | | (14,620 | ) | ||||||||||||||||||
Other |
(47 | ) | (5 | ) | (5 | ) | 16 | | | (41 | ) | |||||||||||||||||
|
(15,324
|
)
|
|
(1,629
|
)
|
|
(5
|
)
|
|
2,297
|
|
|
|
|
|
|
|
|
(14,661
|
)
|
||||||||
Net debt
|
|
(10,727
|
)
|
|
(1,781
|
)
|
|
(2
|
)
|
|
|
|
|
41
|
|
|
(1,335
|
)
|
|
(13,804
|
)
|
For further information on significant changes in net debt see Note 31, Net debt.
205 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
38. Acquisitions and disposals
|
Details of the acquisition and disposal of significant subsidiaries and associates, joint ventures and other businesses are given below:
2016
Acquisitions
GSK completed two small business acquisitions during 2016.
Cash consideration of £24 million was paid in the year to acquire the HIV R&D preclinical and discovery stage portfolio from Bristol Myers Squibb. Further consideration, contingent on commercial milestones and future sales performance, may be due, and an initial estimate of £40 million was recognised for this contingent consideration. Intangible assets acquired were valued at £57 million and goodwill of £7 million was recognised.
GSK formed Galvani Bioelectronics Limited during the year and acquired intangible assets of £45 million and cash and cash equivalents of £41 million from Verily Life Sciences LLC in return for a 45% shareholding in Galvani Bioelectronics. The fair value of this shareholding was £47 million, and GSK also recognised a credit of £39 million in non-controlling interests representing Verilys share of the net assets it contributed.
Business disposals
GSK also made a number of small business disposals in the period for net cash consideration of £72 million. In addition, deferred consideration receivable of £43 million was recognised.
Cash flows
Business acquisitions £m |
Business
disposals £m |
|||||
Cash consideration (paid)/received after purchase adjustments |
(24 | ) | 72 | |||
Cash and cash equivalents acquired
|
|
41
|
|
|
||
Cash inflow
|
|
17
|
|
72
|
In addition, GSK made cash investments of £11 million into associates and joint ventures.
2015
Acquisitions
Novartis Consumer Healthcare and Vaccines businesses
The three-part inter-conditional transaction with Novartis AG involving the Consumer Healthcare, Vaccines and Oncology businesses completed on 2 March 2015.
GSK and Novartis have contributed their respective Consumer Healthcare businesses into a Consumer Healthcare Joint Venture in a non-cash transaction. GSK has an equity interest of 63.5% and majority control of the Joint Venture. In addition, GSK has acquired Novartis global Vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25 billion (£3.417 billion) with contingent consideration representing subsequent potential milestone payments of up to $1.8 billion (£1.2 billion) arising on the achievement of specified development targets and ongoing royalties based on the future sales performance of certain products, and so the total amount payable is unlimited. The first milestone of $450 million (£300 million) was paid on 26 March 2015.
Other business acquisitions
In addition, GSK completed one smaller Vaccines business acquisition for cash consideration of £120 million, net of cash acquired, and the fair value of existing investments of £15 million. This represented goodwill of £22 million and intangible assets of £124 million less other net liabilities of £11 million.
206 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
38. Acquisitions and disposals continued
|
The fair values of the assets acquired in business combinations, including goodwill, are set out in the table below.
Novartis Consumer Healthcare business £m |
Novartis
£m |
Other £m |
||||||||||
Net assets acquired: |
||||||||||||
Intangible assets |
6,003 | 2,680 | 124 | |||||||||
Property, plant and equipment |
249 | 434 | 1 | |||||||||
Inventory |
257 | 347 | | |||||||||
Trade and other receivables |
400 | 162 | 2 | |||||||||
Other assets including cash and cash equivalents |
304 | 283 | 19 | |||||||||
Trade and other payables |
(402 | ) | (107 | ) | (3 | ) | ||||||
Deferred tax liabilities |
(1,154 | ) | (78 | ) | (26 | ) | ||||||
Other liabilities
|
|
(165
|
)
|
|
(299
|
)
|
|
|
|
|||
5,492 | 3,422 | 117 | ||||||||||
Non-controlling interest |
(2,150 | ) | (19 | ) | | |||||||
Goodwill
|
|
774
|
|
|
576
|
|
|
22
|
|
|||
|
4,116
|
|
|
3,979
|
|
|
139
|
|
||||
Consideration settled by shares in GSK Consumer Healthcare Holdings |
4,116 | | | |||||||||
Cash consideration paid after purchase adjustments |
| 3,461 | 124 | |||||||||
Fair value of equity investment disposal |
| | 15 | |||||||||
Contingent consideration |
| 594 | | |||||||||
Deferred tax on contingent consideration |
| (52 | ) | | ||||||||
Loss on settlement of pre-existing relationships
|
|
|
|
|
(24
|
)
|
|
|
|
|||
Total consideration
|
|
4,116
|
|
|
3,979
|
|
|
139
|
|
The non-controlling interest in the Consumer Healthcare Joint Venture, calculated applying the full goodwill method, represents Novartis share of the net assets it contributed to the Joint Venture together with attributable goodwill.
The goodwill in the businesses acquired represents the potential for further synergies arising from combining the acquired businesses with GSKs existing businesses together with the value of the workforce acquired. The majority of the goodwill recognised is not expected to be deductible for tax purposes.
Total transaction costs recognised in 2014 and 2015 for the acquisitions from Novartis amounted to £102 million.
Between 2 March 2015 and 31 December 2015, turnover of £1,941 million arising from the Novartis Consumer Healthcare and Vaccines businesses was included in Group turnover. If the businesses had been acquired at the beginning of the year, it is estimated that Group turnover in 2015 would have been approximately £320 million higher. These businesses have been integrated into the Groups existing activities and it is not practical to identify the impact on the Group profit in the period.
Disposals
Oncology
GSK has divested its marketed Oncology business, related R&D activities and rights to its AKT inhibitor and also granted commercialisation partner rights for future oncology products to Novartis for consideration of $16 billion (£10,395 million) before purchase adjustments.
Other business disposals
GSK also made a number of small business disposals in the period for net cash consideration of £309 million. Profit on disposal of the businesses has been determined as follows:
207 | GSK Annual Report 2016 |
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|
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|
38. Acquisitions and disposals continued
|
Investments in associates and joint ventures
In March 2015, GSK sold half of its shareholding in Aspen, representing 6.2% of the issued share capital of the company, for £571 million in cash. As a result of the sale, the Group was no longer considered to have the ability to exert significant influence over Aspen and the Groups remaining investment was transferred from Investments in associates to Other investments.
£m | ||||
Cash consideration |
571 | |||
Net book value of shares |
(143 | ) | ||
Reclassification of exchange from other comprehensive income |
(30 | ) | ||
Transaction fees |
(7 | ) | ||
Other items
|
|
(5
|
)
|
|
Profit on disposal
|
|
386
|
|
Cash flows |
Business
acquisitions
|
Business
disposals
|
Associates and
JV disposals
|
Total £m |
||||||||||||||||||||
Cash consideration (paid)/received after purchase adjustments |
(3,585 | ) | 10,369 | 571 | 7,355 | |||||||||||||||||||
Cash and cash equivalents acquired/(divested) |
404 | (5 | ) | | 399 | |||||||||||||||||||
Deferred cash proceeds |
| (38 | ) | | (38 | ) | ||||||||||||||||||
Contingent consideration paid |
(338 | ) | | | (338 | ) | ||||||||||||||||||
Transaction costs and other
|
|
(22
|
)
|
|
(80
|
)
|
|
(7
|
)
|
|
(109
|
)
|
||||||||||||
Cash (outflow)/inflow in 2015
|
|
(3,541
|
)
|
|
10,246
|
|
|
564
|
|
|
7,269
|
|
In addition, GSK made cash investments of £16 million into associates and joint ventures.
2014
Acquisitions
There were no acquisitions in 2014.
Acquisition and integration costs of £141 million arising on the proposed three-part inter-conditional transaction with Novartis AG were expensed in 2014, of which £104 million was paid in cash in the year.
Disposals
During the year, £225 million was received as deferred consideration from the sale of the anti-coagulant business completed in 2013 and £1 million from the disposal of an associate.
GSK also made cash investments of £9 million into associates.
Cash flows |
Business acquisitions and disposals £m |
Associates and
£m |
Total
£m |
|||
Cash consideration paid |
| 9 | 9 | |||
Transaction costs paid
|
104
|
|
104
|
|||
Purchase of businesses and associates
|
104
|
9
|
113
|
|||
Net cash proceeds from disposals
|
225
|
1
|
226
|
208 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
39. Contingent consideration liabilities
|
The consideration for certain acquisitions includes amounts contingent on future events such as development milestones or sales performance. The Group has provided for the fair value of this contingent consideration as follows:
Shionogi- ViiV Healthcare £m |
Novartis Vaccines £m |
Other £m |
Total £m |
|||||||||||||
At 1 January 2014 |
923 | | 1 | 924 | ||||||||||||
Remeasurement through goodwill |
| | (4 | ) | (4 | ) | ||||||||||
Remeasurement through income statement |
768 | | 2 | 770 | ||||||||||||
Cash payments: operating cash flows |
(4 | ) | | | (4 | ) | ||||||||||
Cash payments: purchases of businesses |
(3 | ) | | | (3 | ) | ||||||||||
Other movements |
| | 41 | 41 | ||||||||||||
At 31 December 2014 |
1,684 | | 40 | 1,724 | ||||||||||||
Additions through business combinations |
| 594 | | 594 | ||||||||||||
Remeasurement through income statement |
1,874 | 111 | 1 | 1,986 | ||||||||||||
Cash payments: operating cash flows |
(121 | ) | | | (121 | ) | ||||||||||
Cash payments: purchases of businesses |
(38 | ) | (300 | ) | | (338 | ) | |||||||||
Other movements |
10 | | | 10 | ||||||||||||
At 31 December 2015 |
3,409 | 405 | 41 | 3,855 | ||||||||||||
Additions through business combinations |
154 | | 40 | 194 | ||||||||||||
Remeasurement through income statement |
2,162 | 152 | (33 | ) | 2,281 | |||||||||||
Cash payments: operating cash flows |
(351 | ) | (5 | ) | (2 | ) | (358 | ) | ||||||||
Cash payments: purchases of businesses |
(66 | ) | (7 | ) | | (73 | ) | |||||||||
Other movements |
(4 | ) | | 1 | (3 | ) | ||||||||||
At 31 December 2016
|
|
5,304
|
|
|
545
|
|
|
47
|
|
|
5,896
|
|
The additions in the year represented the recognition of the preferential dividends payable to Shionogi of £154 million and a contingent consideration liability on the acquisition of the HIV business from BMS of £40 million.
Of the contingent consideration payable at 31 December 2016, £561 million (2015 £306 million) is expected to be paid within one year. The consideration payable for the acquisition of the Shionogi-ViiV Healthcare joint venture and the Novartis Vaccines business is expected to be paid over a number of years. As a result, the total estimated liabilities are discounted to their present values, shown above. The Shionogi-ViiV Healthcare contingent consideration liability is discounted at 8.5% and the Novartis Vaccines contingent consideration liability is discounted partly at 8% and partly at 9%.
The Shionogi-ViiV Healthcare contingent consideration liability is calculated based on the forecast sales performance of specified products, principally dolutegravir, over the life of those products.
The table below shows on an indicative basis the income statement and balance sheet sensitivity to reasonably possible changes in key inputs to the valuations of the contingent consideration liabilities.
Increase/(decrease) in financial liability and loss/(gain) in Income statement |
Shionogi- ViiV Healthcare £m |
Novartis
Vaccines £m |
||||||
10% increase in sales forecasts |
535 | 66 | ||||||
10% decrease in sales forecasts |
(535 | ) | (62 | ) | ||||
1% increase in discount rate |
(233 | ) | (38 | ) | ||||
1% decrease in discount rate |
252 | 45 | ||||||
10% increase in probability of milestone success |
48 | |||||||
10% decrease in probability of milestone success |
(47 | ) | ||||||
10 cent appreciation of US Dollar |
358 | 34 | ||||||
10 cent depreciation of US Dollar |
(304 | ) | (5 | ) | ||||
10 cent appreciation of Euro |
94 | 17 | ||||||
10 cent depreciation of Euro |
(79 | ) | (8 | ) |
An explanation of the accounting for ViiV Healthcare is set out on page 58.
209 | GSK Annual Report 2016 |
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|
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40. Non-controlling interests
|
The Group has two subgroups that have material non-controlling interests, ViiV Healthcare Limited and its subsidiaries and GSK Consumer Healthcare Holdings Limited and its subsidiaries. Summarised financial information in respect of the ViiV Healthcare group and GSK Consumer Healthcare Joint Venture is set out below:
ViiV Healthcare
210 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
40. Non-controlling interests continued
|
Consumer Healthcare Joint Venture
211 | GSK Annual Report 2016 |
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|
||||||
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|
||||||
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|
41. Commitments
|
The commitments related to intangible assets include milestone payments, which are dependent on successful clinical development or on meeting specified sales targets, and which represent the maximum that would be paid if all milestones, however unlikely, are achieved. The amounts are not risk-adjusted or discounted. A number of commitments were made in 2016 under licensing and other agreements including arrangements with Janssen Sciences Ireland UC and Miltenyi Biotec GmbH. These new arrangements were offset by reduced commitments due on prior year transactions including amendments to the agreement with OncoMed Pharmaceuticals, Inc. and Five Prime Therapeutics, Inc.
In 2016, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions to eliminate the pension deficit identified at the 31 December 2014 actuarial funding valuation. A payment of £123 million is due in 2017 and each subsequent year up to, and including 2023. The table above includes this commitment, but excludes the normal ongoing annual funding requirement in the UK of approximately £130 million.
The Group also has other commitments which principally relate to revenue payments to be made under licences and other alliances.
Commitments in respect of future interest payable on loans are disclosed before taking into account the effect of interest rate swaps.
Commitments under non-cancellable operating leases are disclosed below. £186 million (2015 £314 million) is provided against these commitments on the Groups balance sheet.
212 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures
|
GSK uses a variety of financial instruments to finance its operations and derivative financial instruments to manage market risks from these operations. These derivatives, principally comprising interest rate swaps, foreign exchange forward contracts and swaps, are used to swap borrowings and liquid assets into currencies required for Group purposes and to manage exposure to financial risks from changes in foreign exchange rates and interest rates.
GSK does not hold or issue derivatives for speculative purposes and the Treasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities.
Capital management
GSKs financial strategy supports the Groups strategic priorities and is regularly reviewed by the Board. GSK manages the capital structure of the Group through an appropriate mix of debt and equity.
The capital structure of the Group consists of net debt of £13.8 billion (see Note 31, Net debt) and shareholders equity of £1.1 billion (see Consolidated statement of changes in equity on page 160). Total capital, including that provided by non-controlling interests, is £18.8 billion.
Our long-term credit rating with Standard and Poors is A+ (stable outlook) and with Moodys Investor Services (Moodys) it is A2 (negative outlook). The Groups short-term credit ratings are A-1 and P-1 with Standard and Poors and Moodys respectively.
Liquidity risk management
GSKs policy is to borrow centrally in order to meet anticipated funding requirements. The strategy is to diversify liquidity sources using a range of facilities and to maintain broad access to financial markets.
At 31 December 2016, GSK had £4.1 billion of borrowings repayable within one year and held £5.0 billion of cash and cash equivalents and liquid investments of which £3.2 billion was held centrally. GSK has access to short-term finance under a $10 billion (£8.1 billion) US commercial paper programme; $1.4 billion (£1.1 billion) was in issue at 31 December 2016 (2015 no issuances). GSK also has £1.9 billion five year committed facilities and $2.5 billion (£2.0 billion) of 364 day committed facilities. The five-year committed facilities were agreed in September 2015 and were extended by one year to 2021 in September 2016. The 364 day committed facilities were agreed in September 2016. These facilities were undrawn at 31 December 2016. GSK considers this level of committed facilities to be adequate, given current liquidity requirements.
GSK has a £15 billion European Medium Term Note programme and at 31 December 2016, £7.9 billion of notes were in issue under this programme. The Group also had $11.8 billion (£9.5 billion) of notes in issue at 31 December 2016 under a US shelf registration. GSK is currently in the process of renewing its US shelf registration statement in order to maintain access to the US debt markets. GSKs borrowings mature at dates between 2017 and 2045.
The put options owned by minority interest partners in ViiV Healthcare and the Consumer Healthcare JV business are exercisable immediately and from 2018, respectively. In reviewing liquidity requirements GSK considers that sufficient financing options are available should the put options be exercised.
Market risk
Interest rate risk management
GSKs objective is to minimise the effective net interest cost and to balance the mix of debt at fixed and floating interest rates over time. The policy on interest rate risk management limits the amount of floating interest payments to a prescribed percentage of operating profit.
Foreign exchange risk management
Foreign currency transaction exposures arising on external trade flows are not normally hedged. Foreign currency transaction exposures arising on internal trade flows are selectively hedged. The Groups objective is to minimise the exposure of overseas operating subsidiaries to transaction risk by matching local currency income with local currency costs where possible. GSKs internal trading transactions are matched centrally and inter-company payment terms are managed to reduce foreign currency risk. Foreign currency cash flows can be hedged selectively including hedges of the foreign exchange risk arising from acquisitions and disposals of assets. Where possible, GSK manages the cash surpluses or borrowing requirements of subsidiary companies centrally using forward contracts to hedge future repayments back into the originating currency.
In order to reduce foreign currency translation exposure, the Group seeks to denominate borrowings in the currencies of the principal assets and cash flows. These are primarily denominated in US Dollars, Euros and Sterling. Borrowings can be swapped into other currencies as required.
Borrowings denominated in, or swapped into, foreign currencies that match investments in overseas Group assets may be treated as a hedge against the relevant assets. Forward contracts in major currencies are also used to reduce exposure to the Groups investment in overseas assets (see Net investment hedges section of this note for further details).
213 | GSK Annual Report 2016 |
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42. Financial instruments and related disclosures continued
|
Credit risk
The Group considers its maximum credit risk at 31 December 2016 to be £11,002 million (31 December 2015 £11,423 million) which is the total of the Groups financial assets with the exception of Other investments (comprising equity investments) which bear equity risk rather than credit risk. See page 215 for details on the Groups total financial assets. At 31 December 2016, GSKs greatest concentration of credit risk was £0.9 billion with Citibank (A/A1) (2015 £0.8 billion with Citibank (A/A1)).
Treasury-related credit risk
GSK sets global counterparty limits for each of GSKs banking and investment counterparties based on long-term credit ratings from Moodys and Standard and Poors. Usage of these limits is monitored daily.
GSK actively manages its exposure to credit risk, reducing surplus cash balances wherever possible. This is part of GSKs strategy to regionalise cash management and to concentrate cash centrally as much as possible. The table below sets out the credit exposure to counterparties by rating for liquid investments, cash and cash equivalents and derivatives. The gross asset position on each
derivative contract is considered for the purpose of this table, although, under ISDA agreements, the amount at risk is the net position with each counterparty. Table (e) on page 219 sets out the Groups financial assets and liabilities on an offset basis.
At 31 December 2016, £93 million of cash is categorised as held with unrated or sub-investment grade rated counterparties (lower then BBB-/Baa3) of which £63 million is cash in transit. The remaining exposure is concentrated in overseas banks used for local cash management or investment purposes, including £19 million in Nigeria held with United Bank for Africa, Zenith Bank and Stanbic IBTC Bank, £4 million with BTV in Austria, £2 million with Islandsbanki in Iceland and £1 million with Produbanco in Ecuador.
Of the £388 million of bank balances and deposits held with BBB/ Baa rated counterparties, £42 million was held with BBB-/Baa3 rated counterparties, including balances or deposits of £12 million with State Bank of India and £27 million with HDFC Bank in India. These banks are used for either local cash management or local investment purposes.
Credit ratings are assigned by Standard and Poors and Moodys respectively. Where the opinions of the two rating agencies differ, GSK assigns the lower rating of the two to the counterparty. Where local rating agency or Fitch data is the only source available, the ratings are converted to global ratings equivalent to those of Standard and Poors or Moodys using published conversion tables.
214 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
|
GSKs centrally managed cash reserves amounted to £3.2 billion at 31 December 2016, all available within three months. This includes £1.6 billion centrally managed cash held by ViiV Healthcare, a 78.3% owned subsidiary. The Group has invested centrally managed liquid assets in bank deposits, Aaa/AAA rated US Treasury and Treasury repo only money market funds and Aaa/AAA rated liquidity funds.
Wholesale and retail credit risk
Outside the US, no customer accounts for more than 5% of the Groups trade receivables balance.
In the US, in line with other pharmaceutical companies, the Group sells its products through a small number of wholesalers in addition to hospitals, pharmacies, physicians and other groups. Sales to the three largest wholesalers amounted to approximately 82% of the sales of the US Pharmaceuticals and Vaccines businesses. At 31 December 2016, the Group had trade receivables due in 2016 from these three wholesalers totalling £1,323 million (2015 £990 million). The Group is exposed to a concentration of credit risk in respect of these wholesalers such that, if one or more of them encounters financial difficulty, it could materially and adversely affect the Groups financial results.
The Groups credit risk monitoring activities relating to these wholesalers include a review of their quarterly financial information and Standard & Poors credit ratings, development of GSK internal risk ratings, and establishment and periodic review of credit limits. However, the Group believes there is no further credit risk provision required in excess of the normal provision for bad and doubtful debts (see Note 24, Trade and other receivables).
Fair value of financial assets and liabilities
The table on page 215 presents the carrying amounts and the fair values of the Groups financial assets and liabilities at 31 December 2016 and 31 December 2015.
The fair values of the financial assets and liabilities are included at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following methods and assumptions were used to estimate the fair values:
| Cash and cash equivalents approximates to the carrying amount |
| Liquid investments based on quoted market prices or calculated based on observable inputs in the case of marketable securities; based on principal amounts in the case of non-marketable securities because of their short repricing periods |
| Other investments equity investments traded in an active market determined by reference to the relevant stock exchange quoted bid price; other equity investments determined by reference to the current market value of similar instruments or by reference to the discounted cash flows of the underlying net assets |
| Short-term loans, overdrafts and commercial paper approximates to the carrying amount because of the short maturity of these instruments |
| Long-term loans based on quoted market prices in the case of European and US Medium term notes and other fixed rate borrowings (a level 1 fair value measurement); approximates to the carrying amount in the case of floating rate bank loans and other loans |
| Contingent consideration for business acquisitions based on present values of expected future cash flows |
| Interest rate swaps, foreign exchange forward contracts, swaps and options based on the present value of contractual cash flows or option valuation models using market sourced data (exchange rates or interest rates) at the balance sheet date |
| Receivables and payables, including put options approximates to the carrying amount |
| Company-owned life insurance policies based on cash surrender value |
| Lease obligations approximates to the carrying amount. |
Fair value of investments in GSK shares
At 31 December 2016, the Employee Share Ownership Plan (ESOP) Trusts held GSK shares with a carrying value of £286 million (2015 £75 million) and a fair value of £667 million (2015 £409 million) based on quoted market price. The shares are held by the ESOP Trusts to satisfy future exercises of options and awards under employee incentive schemes. In 2016, the carrying value, which is the lower of cost or expected proceeds, of these shares has been recognised as a deduction from other reserves. At 31 December 2016, GSK held Treasury shares at a cost of £6,451 million (2015 £6,917 million) which has been deducted from retained earnings.
215 | GSK Annual Report 2016 |
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The valuation methodology used to measure fair value in the above table is described and categorised on page 214. Trade and other receivables, Other non-current assets, Trade and other payables, Other provisions, Other non-current liabilities and Contingent consideration liabilities are reconciled to the relevant Notes on pages 217 and 218.
216 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
|
(a) Financial instruments held at fair value
The following tables categorise the Groups financial assets and liabilities held at fair value by the valuation methodology applied in determining their fair value. Where possible, quoted prices in active markets are used (Level 1). Where such prices are not available, the asset or liability is classified as Level 2, provided all significant inputs to the valuation model used are based on observable market data. If one or more of the significant inputs to the valuation model is not based on observable market data, the instrument is classified as Level 3. Other investments classified as Level 3 in the tables below comprise equity investments in unlisted entities with which the Group has entered into research collaborations and also investments in emerging life science companies.
217 | GSK Annual Report 2016 |
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|
42. Financial instruments and related disclosures continued
|
The net losses of £2,283 million (2015 £1,994 million) attributable to Level 3 financial instruments which were recognised in the income statement were all attributable to financial instruments which were held at the end of the year. These net losses were reported in Other operating income. £2,162 million (2015 £1,874 million) arose from remeasurement of the contingent consideration payable for the acquisition of the former Shionogi-ViiV Healthcare joint venture and £152 million (2015 £111 million) arose from remeasurement of the contingent consideration payable on the acquisition in 2015 of the Novartis Vaccines business. Net gains of £29 million (2015 £36 million) attributable to Level 3 equity investments reported in Other comprehensive income as Fair value movements on available-for-sale investments included net gains of £21 million (2015 net losses of £8 million) in respect of equity investments held at the end of the year.
Financial liabilities measured using Level 3 valuation methods at 31 December included £5,304 million (2015 £3,409 million) in respect of contingent consideration payable for the acquisition in 2012 of the former Shionogi-ViiV Healthcare joint venture. This consideration is expected to be paid over a number of years and will vary in line with the future performance of specified products and movements in certain foreign currencies. They also included £545 million (2015 £405 million) in respect of contingent consideration for the acquisition of the Novartis Vaccines business. This consideration is expected to be paid over a number of years and will vary in line with the future performance of specified products, the achievement of certain milestone targets and movements in certain foreign currencies. Sensitivity analysis on these balances is provided in Note 39, Contingent consideration liabilities.
(b) Trade and other receivables and Other non-current assets in scope of IAS 39
The following table reconciles financial instruments within Trade and other receivables and Other non-current assets which fall within the scope of IAS 39 to the relevant balance sheet amounts. The financial assets are predominantly non-interest earning. Financial instruments within the Other non-current assets balance include company-owned life insurance policies. Non-financial instruments include tax receivables, pension surplus balances and prepayments, which are outside the scope of IAS 39.
2016
|
2015
|
|||||||||||||||||||||||||||||||||||||||
At fair value
|
Loans and
|
Financial
|
Non-
financial
|
Total £m
|
At fair value
profit or loss £m
|
Loans and
|
Financial
|
Non-
financial
|
Total
|
|||||||||||||||||||||||||||||||
Trade and other receivables |
||||||||||||||||||||||||||||||||||||||||
(Note 24) |
| 5,135 | 5,135 | 891 | 6,026 | | 4,751 | 4,751 | 864 | 5,615 | ||||||||||||||||||||||||||||||
Other non-current assets |
||||||||||||||||||||||||||||||||||||||||
(Note 22)
|
|
361
|
|
|
364
|
|
|
725
|
|
|
474
|
|
|
1,199
|
|
|
279
|
|
|
363
|
|
|
642
|
|
|
348
|
|
|
990
|
|
||||||||||
|
361
|
|
|
5,499
|
|
|
5,860
|
|
|
1,365
|
|
|
7,225
|
|
|
279
|
|
|
5,114
|
|
|
5,393
|
|
|
1,212
|
|
|
6,605
|
|
The following table shows the ageing of such financial assets which are past due and for which no provision for bad or doubtful debts has been made:
2016 £m
|
2015 £m
|
|||||||
Past due by 130 days |
|
137 |
|
|
200 |
|
||
Past due by 3190 days |
|
178 |
|
|
136 |
|
||
Past due by 91180 days |
|
55 |
|
|
76 |
|
||
Past due by 181365 days |
|
53 |
|
|
49 |
|
||
Past due by more than 365 days |
|
98 |
|
|
90 |
|
||
|
521
|
|
|
551
|
|
218 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
|
(c) Trade and other payables, Other provisions, Other non-current liabilities and Contingent consideration liabilities in scope of IAS 39
The following table reconciles financial instruments within Trade and other payables, Other provisions, Other non-current liabilities and Contingent consideration liabilities which fall within the scope of IAS 39 to the relevant balance sheet amounts. The financial liabilities are predominantly non-interest bearing. Accrued wages and salaries are included within financial liabilities. Non-financial instruments includes payments on account, tax and social security payables and provisions which do not arise from contractual obligations to deliver cash or another financial asset, which are outside the scope of IAS 39.
|
2016
|
|
|
2015
|
|
|||||||||||||||||||||||||||||||||||
At fair value
profit or loss £m
|
Other
|
Financial
|
Non-financial
|
Total £m
|
At fair value
profit or loss
|
Other
|
Financial
|
Non-financial
|
Total £m
|
|||||||||||||||||||||||||||||||
Trade and other payables
|
| (11,041 | ) | (11,041) | (923 | ) | (11,964 | ) | | (8,199 | ) | (8,199 | ) | (686) | (8,885 | ) | ||||||||||||||||||||||||
Other
provisions
|
|
|
|
|
(113 |
) |
|
(113) |
|
|
(1,387 |
) |
|
(1,500 |
) |
|
|
|
|
(159 |
) |
|
(159 |
) |
|
(1,605) |
|
|
(1,764 |
) |
||||||||||
Other non-current liabilities (Note 30) |
|
|
|
|
(7,559 |
) |
|
(7,559) |
|
|
(886 |
) |
|
(8,445 |
) |
|
|
|
|
(6,390 |
) |
|
(6,390 |
) |
|
(717) |
|
|
(7,107 |
) |
||||||||||
Contingent consideration liabilities (Note 39)
|
|
(5,896
|
)
|
|
|
|
|
(5,896)
|
|
|
|
|
|
(5,896
|
)
|
|
(3,855)
|
|
|
|
|
|
(3,855
|
)
|
|
|
|
|
(3,855
|
)
|
||||||||||
|
(5,896
|
)
|
|
(18,713
|
)
|
|
(24,609)
|
|
|
(3,196
|
)
|
|
(27,805
|
)
|
|
(3,855)
|
|
|
(14,748
|
)
|
|
(18,603
|
)
|
|
(3,008)
|
|
|
(21,611
|
)
|
(d) Derivative financial instruments and hedging programmes
The following table sets out the fair values of derivatives held by GSK. All the derivatives have a maturity of less than one year.
|
2016 Fair value
|
|
|
2015
Fair value
|
|
|||||||||||
Assets £m
|
Liabilities £m
|
Assets £m
|
Liabilities
|
|||||||||||||
Net investment hedges Foreign exchange contracts
|
18 | (92 | ) | 3 | (97 | ) | ||||||||||
Cash flow hedges Foreign exchange contracts
(principal amount £170 million (2015 £69 million))
|
|
5
|
|
|
|
|
|
3
|
|
|
|
|
||||
Derivatives designated as at fair value through profit or loss
|
|
23
|
|
|
(92
|
)
|
|
6
|
|
|
(97
|
)
|
||||
Foreign exchange contracts
(principal amount £14,943 million (2015 £12,152 million)) |
133 | (99 | ) | 115 | (54 | ) | ||||||||||
Embedded and other derivatives
|
|
|
|
|
(3
|
)
|
|
4
|
|
|
(2
|
)
|
||||
Derivatives classified as held for trading under IAS 39
|
|
133
|
|
|
(102
|
)
|
|
119
|
|
|
(56
|
)
|
||||
Total derivative instruments
|
|
156
|
|
|
(194
|
)
|
|
125
|
|
|
(153
|
)
|
Foreign exchange contracts classified as held for trading under IAS 39
The principal amount on foreign exchange contracts is the absolute total of outstanding positions at the balance sheet date. The Groups foreign exchange contracts are for periods of 12 months or less. At 31 December 2016, the Group held outstanding foreign exchange contracts with a net asset fair value of £34 million (£133 million asset less £99 million liability). At December 2015, the fair value was a £61 million net asset (£115 million asset less £54 million liability).
The overall decrease in the net asset fair value has been due to the weakening of Sterling against all major currencies in 2016, in particular impacting the hedging of Euro and US Dollar denominated inter-company loan balances that are not designated as accounting hedges. Fair value movements are taken to the Income statement in the period to offset the exchange gains and losses on the related inter-company loan balances.
219 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
42. Financial instruments and related disclosures continued
|
Fair value hedges
At 31 December 2016, the Group had no designated fair value hedges.
Net investment hedges
During the year, certain foreign exchange contracts were designated as net investment hedges in respect of the foreign currency translation risk arising on consolidation of the Groups net investment in its European (Euro) foreign operations as shown in the table above. The hedges relating to the Japanese (Yen) foreign operations were closed out during the year.
The carrying value of bonds on page 215 includes £3,189 million (2015 £2,740 million) that are designated as hedging instruments in net investment hedges.
Cash flow hedges
During 2016, the Group entered into forward foreign exchange contracts which have been designated as cash flow hedges. These are hedging the foreign exchange exposure arising on Euro and US Dollar denominated coupon payments relating to the Groups European and US medium term notes and a number of highly probable forecast transactions denominated in US Dollars.
In addition, the Group carries a balance in reserves that arose from pre-hedging fluctuations in long-term interest rates when pricing bonds issued in prior years. The balance is reclassified to finance costs over the life of these bonds.
(e) Offsetting of financial assets and liabilities
The following tables set out the financial assets and financial liabilities which are subject to offsetting, enforceable master netting arrangements and similar agreements. Amounts which are set off against financial assets and liabilities in the Groups balance sheet are set out below. For Trade and other receivables, Trade and other payables, Derivative financial assets and Derivative financial liabilities, amounts not offset in the balance sheet but which could be offset under certain circumstances are also set out.
At 31 December 2016 |
Gross financial assets/ (liabilities) £m
|
Gross financial
set off £m
|
Net financial
per balance
£m
|
Related
set off in the
|
Net £m
|
|||||||||||
Trade and other receivables |
5,136 | (1 | ) | 5,135 | (29 | ) | 5,106 | |||||||||
Derivative financial assets |
156 | | 156 | (117 | ) | 39 | ||||||||||
Cash and cash equivalents
|
|
4,897
|
|
|
|
|
4,897
|
|||||||||
|
10,189
|
|
|
(1
|
)
|
10,188
|
||||||||||
Trade and other payables |
(11,042 | ) | 1 | (11,041) | 29 | (11,012) | ||||||||||
Derivative financial liabilities |
(194 | ) | | (194) | 117 | (77) | ||||||||||
Bank loans and overdrafts
|
|
(332
|
)
|
|
|
|
(332)
|
|||||||||
|
(11,568
|
)
|
|
1
|
|
(11,567)
|
||||||||||
At 31 December 2015
|
Gross financial assets/ (liabilities) £m
|
Gross financial
set off £m
|
Net financial
£m
|
Related amounts not
set off in the
£m
|
Net £m
|
|||||||||||
Trade and other receivables |
4,757 | (6 | ) | 4,751 | (17) | 4,734 | ||||||||||
Derivative financial assets |
125 | | 125 |
|
(98)
|
|
27
|
|||||||||
Cash and cash equivalents
|
|
5,833
|
|
|
(3
|
)
|
5,830
|
|||||||||
|
10,715
|
|
|
(9
|
)
|
10,706
|
||||||||||
Trade and other payables
|
|
(8,205
|
)
|
|
6
|
|
(8,199)
|
|
17
|
|
(8,182)
|
|||||
Derivative financial liabilities
|
|
(153
|
)
|
|
|
|
(153)
|
|
98
|
|
(55)
|
|||||
Bank loans and overdrafts |
|
(438
|
)
|
|
3
|
|
(435)
|
|||||||||
|
(8,796
|
)
|
|
9
|
|
(8,787)
|
The gross financial assets and liabilities set off in the balance sheet primarily relate to cash pooling arrangements with banks. Amounts which do not meet the criteria for offsetting on the balance sheet but could be settled net in certain circumstances principally relate to derivative transactions under ISDA (International Swaps and Derivatives Association) agreements where each party has the option to settle amounts on a net basis in the event of default of the other party.
220 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
|
(f) Debt interest rate repricing table
The following table sets out the exposure of the Group to interest rates on debt, including commercial paper. The maturity analysis of fixed rate debt is stated by contractual maturity and of floating rate debt by interest rate repricing dates. For the purpose of this table, debt is defined as all classes of borrowings other than obligations under finance leases.
An equivalent depreciation in the above currencies would cause the following increase/(decrease) in income £(66) million, £(16) million and £(1) million (2015 £(67) million, £(6) million and £1 million) for US Dollar, Euro and Yen exchange rates respectively.
221 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
42. Financial instruments and related disclosures continued
|
The equity impact, shown below, for foreign exchange sensitivity relates to derivative and non-derivative financial instruments hedging the Groups net investments in its European (Euro) foreign operations and cash flow hedges of its foreign exchange exposure arising on Euro and US Dollar denominated coupon payments relating to the Groups European and US medium term notes and a number of highly probable forecast transactions denominated in US Dollars.
2016
|
2015
|
|||||||
Equity impact of non-functional currency foreign exchange exposures
|
Increase/(decrease) in equity £m
|
Increase/(decrease) in equity £m
|
||||||
10 cent appreciation of the US Dollar |
11 | | ||||||
10 cent appreciation of the Euro |
(795 | ) | (676 | ) | ||||
10 yen appreciation of the Yen
|
|
|
|
|
(20
|
)
|
An equivalent depreciation in the above currencies would cause the following (decrease)/increase in equity: £(10) million, £670 million and £nil (2015 £nil, £584 million and £18 million) for US Dollar, Euro and Yen exchange rates respectively.
The table below presents the Groups sensitivity to foreign exchange rates based on the composition of net debt as shown in Note 31 adjusting for the effects of foreign exchange derivatives that are not part of net debt but affect future foreign currency cash flows.
2016
|
2015
|
|||||||
Impact of foreign exchange movements on net debt
|
(Increase)/decrease in net debt £m
|
(Increase)/decrease in net debt £m
|
||||||
10 cent appreciation of the US Dollar |
(746 | ) | (471 | ) | ||||
10 cent appreciation of the Euro |
190 | 221 | ||||||
10 yen appreciation of the Yen
|
|
(11
|
)
|
|
4
|
|
An equivalent depreciation in the above currencies would have the following impact on net debt: £634 million, £(160) million and £10 million for US Dollar, Euro and Yen exchange rates respectively (2015 £411 million, £(190) million and £(4) million).
Interest rate sensitivity
The Group is exposed to interest rate risk on its outstanding borrowings and investments where any changes in interest rates will affect future cash flows or the fair values of financial instruments.
The majority of debt is issued at fixed interest rates and changes in the floating rates of interest do not significantly affect the Groups net interest charge, although the majority of cash and liquid investments earn floating rates of interest.
The table below hypothetically shows the Groups sensitivity to changes in interest rates in relation to Sterling, US Dollar and Euro variable rate financial assets and liabilities. If the interest rates applicable to floating rate financial assets and liabilities were to have increased by 1% (100 basis points), and assuming other variables had remained constant, it is estimated that the Groups finance income for 2016 would have increased by approximately £3 million (2015 £37 million increase). A 1% (100 basis points) movement in interest rates is not deemed to have a material effect on equity.
2016
|
2015
|
|||||||
Income statement impact of interest rate movements
|
Increase/(decrease) in income £m
|
Increase/(decrease) in income £m
|
||||||
1% (100 basis points) increase in Sterling interest rates |
3 | 19 | ||||||
1% (100 basis points) increase in US Dollar interest rates |
(3 | ) | 14 | |||||
1% (100 basis points) increase in Euro interest rates
|
|
3
|
|
|
4
|
|
222 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
|
(h) Contractual cash flows for non-derivative financial liabilities and derivative instruments
The following tables provides an analysis of the anticipated contractual cash flows including interest payable for the Groups non-derivative financial liabilities on an undiscounted basis. The Group did not use interest rate swaps to manage its interest rate risk. For the purpose of this table, debt is defined as all classes of borrowings except for obligations under finance leases. Interest is calculated based on debt held at 31 December without taking account of future issuance. Floating rate interest is estimated using the prevailing interest rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at 31 December. Contractual cash flows in respect of operating lease vacant space provisions are excluded from the table below as they are included in the Commitments under non-cancellable operating leases table in Note 41, Commitments.
At 31 December 2016 |
Debt £m |
Interest on debt £m |
Obligations
under finance
£m |
Finance charge on
£m |
Trade payables and other liabilities not in net debt £m |
Total £m |
||||||||||||||||||
Due in less than one year |
(4,108 | ) | (705 | ) | (23 | ) | (2 | ) | (11,621 | ) | (16,459 | ) | ||||||||||||
Between one and two years |
(2,218 | ) | (566 | ) | (22 | ) | (1 | ) | (8,784 | ) | (11,591 | ) | ||||||||||||
Between two and three years |
(1,282 | ) | (503 | ) | (12 | ) | | (961 | ) | (2,758 | ) | |||||||||||||
Between three and four years |
| (496 | ) | (7 | ) | | (786 | ) | (1,289 | ) | ||||||||||||||
Between four and five years |
| (496 | ) | | | (705 | ) | (1,201 | ) | |||||||||||||||
Between five and ten years |
(4,117 | ) | (2,122 | ) | | | (3,474 | ) | (9,713 | ) | ||||||||||||||
Greater than ten years
|
|
(7,124
|
)
|
|
(4,522
|
)
|
|
|
|
|
|
|
|
(3,135
|
)
|
|
(14,781
|
)
|
||||||
Gross contractual cash flows
|
|
(18,849
|
)
|
|
(9,410
|
)
|
|
(64
|
)
|
|
(3
|
)
|
|
(29,466
|
)
|
|
(57,792
|
)
|
||||||
At 31 December 2015 |
Debt £m |
Interest on debt £m |
Obligations
£m |
Finance charge on
under finance
£m |
Trade payables and other liabilities not in net debt £m |
Total £m |
||||||||||||||||||
Due in less than one year |
(1,285 | ) | (638 | ) | (23 | ) | (2 | ) | (8,505 | ) | (10,453 | ) | ||||||||||||
Between one and two years |
(2,280 | ) | (625 | ) | (20 | ) | (1 | ) | (479 | ) | (3,405 | ) | ||||||||||||
Between two and three years |
(1,871 | ) | (510 | ) | (14 | ) | (1 | ) | (7,688 | ) | (10,084 | ) | ||||||||||||
Between three and four years |
(1,103 | ) | (457 | ) | (6 | ) | | (452 | ) | (2,018 | ) | |||||||||||||
Between four and five years |
| (451 | ) | (6 | ) | | (655 | ) | (1,112 | ) | ||||||||||||||
Between five and ten years |
(3,498 | ) | (2,047 | ) | (1 | ) | | (2,452 | ) | (7,998 | ) | |||||||||||||
Greater than ten years
|
|
(6,651
|
)
|
|
(4,554
|
)
|
|
|
|
|
(3
|
)
|
|
(2,635
|
)
|
|
(13,843
|
)
|
||||||
Gross contractual cash flows
|
|
(16,688
|
)
|
|
(9,282
|
)
|
|
(70
|
)
|
|
(7
|
)
|
|
(22,866
|
)
|
|
(48,913
|
)
|
The increase in contractual cash flows for non-derivative financial liabilities of £8.8 billion over the year resulted partially from the initial recognition of the ViiV Healthcare put option liability of £1.3 billion. In addition, there was an increase of £2.9 billion in forecast future cash flows in respect of contingent consideration payable for the acquisition of the former Shionogi-ViiV Healthcare joint venture in 2012 and for the acquisition of the Novartis Vaccines business in 2015.
Anticipated contractual cash flows for the repayment of debt and debt interest have increased by £2.3 billion over the year, principally due to the retranslation of US Dollar denominated debt which has been adversely impacted by the weakening of Sterling due to volatility in the markets compounded by political and economic events throughout 2016.
The table below provides an analysis of the anticipated contractual cash flows for the Groups derivative instruments, excluding embedded derivatives and equity options which are not material, using undiscounted cash flows. Cash flows in foreign currencies are translated using spot rates at 31 December. The gross cash flows of foreign exchange contracts are presented for the purpose of this table although, in practice, the Group uses standard settlement arrangements to reduce its liquidity requirements on these instruments.
The amounts receivable and payable in less than one year have increased compared with 31 December 2015 as a result of hedging of the US commercial paper programme and increased hedging of Euro receivables.
2016 | 2015 | |||||||||||||||
Receivables £m |
Payables £m |
Receivables £m |
Payables
|
|||||||||||||
Due in less than one year |
21,266 | (21,303 | ) | 18,283 | (18,318 | ) | ||||||||||
Between one and two years
|
|
20
|
|
|
(20
|
)
|
|
20
|
|
|
(20
|
)
|
||||
Gross contractual cash flows
|
|
21,286
|
|
|
(21,323
|
)
|
|
18,303
|
|
|
(18,338
|
)
|
223 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
43. Employee share schemes
|
GSK operates several employee share schemes, including the Share Value Plan, whereby awards are granted to employees to acquire shares or ADS in GlaxoSmithKline plc at no cost after a three year vesting period and the Performance Share Plan, whereby awards are granted to employees to acquire shares or ADS in GlaxoSmithKline plc at no cost, subject to the achievement by the Group of specified performance targets. The granting of these restricted share awards has replaced the granting of options to employees as the cost of the schemes more readily equates to the potential gain to be made by the employee. The Group also operates savings related share option schemes, whereby options are granted to employees to acquire shares in GlaxoSmithKline plc at a discounted price.
Grants of restricted share awards are normally exercisable at the end of the three year vesting or performance period. Awards are normally granted to employees to acquire shares or ADS in GlaxoSmithKline plc but in some circumstances may be settled in cash. Grants under savings-related share option schemes are normally exercisable after three years saving. In accordance with UK practice, the majority of options under the savings-related share option schemes are granted at a price 20% below the market price ruling at the date of grant. Options under historical share option schemes were granted at the market price ruling at the date of grant.
The total charge for share-based incentive plans in 2016 was £338 million (2015 £349 million; 2014 £346 million). Of this amount, £271 million (2015 £307 million; 2014 £302 million) arose from the Share Value Plan. See Note 9, Employee Costs for further details.
GlaxoSmithKline share award schemes
Share Value Plan
Under the Share Value Plan, share awards are granted to certain employees at no cost. The awards vest after two and a half to three years and there are no performance criteria attached. The fair value of these awards is determined based on the closing share price on the day of grant, after deducting the expected future dividend yield of 4.5% (2015 5.7%; 2014 5.2%) over the duration of the award.
Number of shares and ADS issuable |
Shares Number (000) |
Weighted
fair value |
ADS
Number (000) |
Weighted fair value |
||||||||||||
At 1 January 2014 |
|
31,067 |
|
|
20,838 |
|
||||||||||
Awards granted |
12,410 | £12.65 | 7,842 | $41.56 | ||||||||||||
Awards exercised |
(9,642 | ) | (6,787 | ) | ||||||||||||
Awards cancelled
|
|
(923
|
)
|
|
(666
|
)
|
||||||||||
At 31 December 2014 |
32,912 | 21,227 | ||||||||||||||
Awards granted |
13,019 | £11.57 | 7,198 | $35.66 | ||||||||||||
Awards exercised |
(11,476 | ) | (8,878 | ) | ||||||||||||
Awards cancelled |
(1,878 | ) | (2,027 | ) | ||||||||||||
At 31 December 2015 |
32,577 | 17,520 | ||||||||||||||
Awards granted |
12,983 | £14.97 | 6,589 | $39.18 | ||||||||||||
Awards exercised |
(11,198 | ) | (6,214 | ) | ||||||||||||
Awards cancelled
|
|
(1,507
|
)
|
|
(812
|
)
|
||||||||||
At 31 December 2016
|
|
32,855
|
|
|
17,083
|
|
Performance Share Plan
Under the Performance Share Plan, share awards are granted to Directors and senior executives at no cost. The percentage of each award that vests is based upon the performance of the Group over a defined measurement period with dividends reinvested during the same period. For awards granted from 2014 to Directors and members of the CET, the performance conditions are based on three equally weighted measures over a three year performance period. These are adjusted free cash flow, TSR and R&D new product performance.
For those awards made to all other eligible employees the performance conditions are based on both GSKs EPS growth compared with the increase in the UK Retail Prices Index over the three year measurement period and adjusted free cash flow. In addition, some businesses have an element of their award based on a strategic or operational business measure, over a three year measurement period, specific to the employees business area.
The fair value of the awards is determined based on the closing share price on the day of grant. For TSR performance elements, this is adjusted by the likelihood of that condition being met, as assessed at the time of grant.
During 2016, awards were made of 4.6 million shares at a weighted fair value of £11.01 and 1.2 million ADS at a weighted fair value of $31.78. At 31 December 2016, there were outstanding awards over 13.2 million shares and 3.3 million ADS.
Share options and savings-related options
For the purposes of valuing savings-related options to arrive at the share based payment charge, a Black-Scholes option pricing model has been used. The assumptions used in the model are as follows:
2016 Grant
|
2015 Grant
|
2014 Grant
|
||||||||||||
Risk-free interest rate |
0.32% | 0.88% | 0.7% | |||||||||||
Dividend yield |
4.9% | 6.5% | 5.8% | |||||||||||
Volatility |
23% | 21% | 19% | |||||||||||
Expected life |
3 years | 3 years | 3 years | |||||||||||
Savings-related options grant price (including 20% discount)
|
|
£12.95
|
|
|
£10.14
|
|
|
£11.31
|
|
224 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
43. Employee share schemes continued
|
Options outstanding |
|
Share option
schemes shares
|
|
|
Share option
schemes ADS
|
|
|
Savings-related
share option schemes
|
|
|||||||||||||||||||||||||||
Number 000 |
Weighted exercise price |
Number 000 |
Weighted exercise price |
Number 000 |
Weighted exercise price |
|||||||||||||||||||||||||||||||
At 31 December 2016
|
|
6,133
|
|
|
£12.37
|
|
|
7,547
|
|
|
$47.06
|
|
|
6,267
|
|
|
£10.89
|
|
||||||||||||||||||
Range of exercise prices on options outstanding at year end
|
|
£11.47
|
|
|
|
|
|
£14.88
|
|
|
$33.42
|
|
|
|
|
|
$58.00
|
|
|
£10.13
|
|
|
|
|
|
£12.95
|
|
|||||||||
Weighted average market price on exercise during year
|
|
£15.85
|
|
|
$42.08
|
|
|
£14.93
|
|
|||||||||||||||||||||||||||
Weighted average remaining contractual life
|
|
1.8 years
|
|
|
1.1 years
|
|
|
2.5 years
|
|
Options over 1.3 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value of £2.69. At 31 December 2016, 6.1 million of the savings-related share options were not exercisable. All of the other share options and ADS options are currently exercisable and all will expire if not exercised on or before 22 July 2020.
There has been no change in the effective exercise price of any outstanding options during the year.
Employee Share Ownership Plan Trusts
The Group sponsors Employee Share Ownership Plan (ESOP) Trusts to acquire and hold shares in GlaxoSmithKline plc to satisfy awards made under employee incentive plans and options granted under employee share option schemes. The trustees of the ESOP Trusts purchase shares with finance provided by the Group by way of loans or contributions. In 2016, Treasury shares with a carrying value of £466 million were purchased by the UK ESOP Trust to satisfy future awards. The costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves and amortised down to the value of proceeds, if any, receivable from employees on exercise by a transfer to retained earnings. The trustees have waived their rights to dividends on the shares held by the ESOP Trusts.
44. Post balance sheet events
|
On 28 February 2017, GSK completed the sale of its anaesthesia portfolio to Aspen, excluding the US and Canada markets, for £180 million together with milestones of up to £100 million.
225 | GSK Annual Report 2016 |
Strategic report
|
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
45. Principal Group companies
|
The following represent the principal subsidiaries and their countries of incorporation of the Group at 31 December 2016. The equity share capital of these entities is wholly owned by the Group except where its percentage interest is shown otherwise. All companies are incorporated in their principal country of operation except where stated.
England
|
US
|
|||||
Glaxo Group Limited |
Block Drug Company, Inc. (63.5%) | |||||
Glaxo Operations UK Limited |
Corixa Corporation | |||||
GlaxoSmithKline Capital plc |
GlaxoSmithKline Capital Inc. | |||||
GlaxoSmithKline Consumer Healthcare Holdings Limited (63.5%) |
GlaxoSmithKline Consumer Healthcare, L.P. (55.9%) | |||||
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited (63.5%) |
GlaxoSmithKline Holdings (Americas) Inc. | |||||
GlaxoSmithKline Export Limited |
GlaxoSmithKline LLC | |||||
GlaxoSmithKline Finance plc |
Human Genome Sciences, Inc. | |||||
GlaxoSmithKline Holdings Limited * |
Novartis Consumer Health, Inc. (63.5%) | |||||
GlaxoSmithKline Research & Development Limited |
Stiefel Laboratories, Inc. | |||||
GlaxoSmithKline Services Unlimited * |
ViiV Healthcare Company (78.3%) | |||||
GlaxoSmithKline UK Limited |
||||||
Setfirst Limited |
||||||
SmithKline Beecham Limited |
||||||
ViiV Healthcare Limited (78.3%) |
||||||
ViiV Healthcare UK Limited (78.3%) |
||||||
Europe
|
Others
|
|||||
GlaxoSmithKline Biologicals SA (Belgium) |
GlaxoSmithKline Argentina S.A. (Argentina) | |||||
GlaxoSmithKline Pharmaceuticals SA (Belgium) |
GlaxoSmithKline Australia Pty Ltd (Australia) | |||||
GlaxoSmithKline Biologicals S.A.S. (France) |
GlaxoSmithKline Consumer Healthcare Australia Pty Ltd (Australia) (63.5%) | |||||
GlaxoSmithKline Sante Grand Public SAS (France) (63.5%) |
GlaxoSmithKline Brasil Limitada (Brazil) | |||||
Laboratoire GlaxoSmithKline (France) |
GlaxoSmithKline Consumer Healthcare Inc. (Canada) (63.5%) | |||||
ViiV Healthcare SAS (France) (78.3%) |
GlaxoSmithKline Inc. (Canada) | |||||
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG |
ID Biomedical Corporation of Quebec (Canada) | |||||
(Germany) (63.5%) |
GlaxoSmithKline Limited (China (Hong Kong)) | |||||
GlaxoSmithKline GmbH & Co. KG (Germany) |
Sino-American Tianjin Smith Kline & French Laboratories Ltd (China) (34.9%) | |||||
GSK Vaccines GmbH (Germany) |
GlaxoSmithKline Consumer Healthcare Limited (India) (72.5%) | |||||
GlaxoSmithKline Consumer Healthcare S.p.A. (Italy) (63.5%) |
GlaxoSmithKline Pharmaceuticals Limited (India) (75%) | |||||
GlaxoSmithKline S.p.A. (Italy) |
GlaxoSmithKline Consumer Healthcare Japan K.K. (Japan) (63.5%) | |||||
GSK Vaccines S.r.l. (Italy) |
GlaxoSmithKline K.K. (Japan) | |||||
GlaxoSmithKline B.V. (Netherlands) |
ViiV Healthcare Kabushiki Kaisha (Japan) (78.3%) | |||||
GlaxoSmithKline Pharmaceuticals S.A. (Poland) |
GlaxoSmithKline Pakistan Limited (Pakistan) (82.6%) | |||||
GSK Services Sp z o.o. (Poland) |
Glaxo Wellcome Manufacturing Pte Ltd. (Singapore) | |||||
GlaxoSmithKline Trading Services Limited (Republic of Ireland) (i) |
GlaxoSmithKline Korea Limited (Republic of Korea) | |||||
GlaxoSmithKline S.A. (Spain) |
GlaxoSmithKline llaclari Sanayi ve Ticaret A.S. (Turkey) | |||||
Laboratorios ViiV Healthcare, S.L. (Spain) (78.3%) |
||||||
Novartis Consumer Health S.A. (Switzerland) (63.5%)
|
(i) | Exempt from the provisions of section 347 and 348 of the Companies Act 2014 (Ireland), in accordance with the exemptions noted in Section 357 of that Act. Further subsidiaries, as disclosed on pages 272 to 282, are exempt from these provisions as they are also consolidated in the group financial statements. |
* | Directly held wholly owned subsidiary of GlaxoSmithKline plc. |
The subsidiaries and associates listed above principally affect the figures in the Groups financial statements. Each of GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc is a wholly-owned finance subsidiary of the company, and the company has fully and unconditionally guaranteed the securities issued by each of GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc.
See pages 272 to 282 for a complete list of subsidiary undertakings, associates and joint ventures, which form part of these financial statements.
226 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
46. Legal proceedings
|
The Group is involved in significant legal and administrative proceedings, principally product liability, intellectual property, tax, anti-trust and governmental investigations, as well as related private litigation. The most significant of these matters, other than tax matters, are described below. The Group makes provision for these proceedings on a regular basis as summarised in Note 2, Accounting principles and policies and Note 29, Other provisions. The Group may become involved in significant legal proceedings in respect of which it is not possible to make a reliable estimate of the expected financial effect, if any, that could result from ultimate resolution of the proceedings. In these cases, appropriate disclosures about such cases would be included in this note, but no provision would be made for the cases.
With respect to each of the legal proceedings described below, other than those for which a provision has been made, the Group is unable to make a reliable estimate of the expected financial effect at this stage. The Group does not believe that information about the amount sought by the plaintiffs, if that is known, would be meaningful with respect to those legal proceedings. This is due to a number of factors, including, but not limited to, the stage of proceedings, the entitlement of parties to appeal a decision and clarity as to theories of liability, damages and governing law.
Legal expenses incurred and provisions related to legal claims are charged to selling, general and administration costs. Provisions are made, after taking appropriate legal and other specialist advice, where an outflow of resources is considered probable and a reliable estimate can be made of the likely outcome of the dispute. For certain product liability claims, the Group will make a provision where there is sufficient history of claims made and settlements to enable management to make a reliable estimate of the provision required to cover unasserted claims. At 31 December 2016, the Groups aggregate provision for legal and other disputes (not including tax matters described in Note 14, Taxation) was £344 million. The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
The Groups position could change over time, and, therefore, there can be no assurance that any losses that result from the outcome of any legal proceedings will not exceed by a material amount the amount of the provisions reported in the Groups financial statements. If this were to happen, it could have a material adverse impact on the results of operations of the Group in the reporting period in which the judgements are incurred or the settlements entered into.
Intellectual property
Intellectual property claims include challenges to the validity and enforceability of the Groups patents on various products or processes as well as assertions of non-infringement of those patents. A loss in any of these cases could result in loss of patent protection for the product at issue. The consequences of any such loss could be a significant decrease in sales of that product and could materially affect future results of operations for the Group.
Advair HFA , Flovent HFA , Ventolin HFA
On 29 September 2015, Mylan Pharmaceuticals (Mylan) filed a petition for an Inter Partes Review (IPR) with the United States Patent and Trademark Office (USPTO) seeking to invalidate a patent, U.S. Patent No. 6,743, 413 (413 patent). The 413 patent claims a method of treatment with a formulation containing an active medication and a propellant known as 134a, substantially free of surfactant, and its use in the hydrofluoroalkane (HFA) metered dose inhalers for Advair , Flovent and Ventolin . The Group exclusively licenses the patent from 3M and has the first right to enforce and defend it. The patent, which expires on 1 December 2021, is listed in the Orange Book. On 14 November 2016, the Group entered into a settlement agreement with Mylan resolving the IPR. The terms of the settlement agreement are confidential. The patent that was the subject of the IPR and settlement is one of a number of patents covering Advair , Flovent and Ventolin and their use in HFA metered dose inhalers.
On 15 February 2017, the Group received a Paragraph IV certification from Teva for Flovent HFA. This is the first Paragraph IV certification the Group has received from a generic pharmaceutical company seeking to make an AB rated version of Flovent HFA. Three patents are at issue. Teva alleges that their generic version of Flovent will not infringe two patents directed to actuation indicators listed in the Orange Book. Teva also alleges that the 413 patent, which was the subject of the Mylan IPR proceeding that was settled in November 2016, is not valid. The Group is evaluating Tevas Paragraph IV certification. The deadline for filing a patent infringement suit that would trigger a 30-month stay (a statutory preclusion of ANDA approval for the generic product for 30 months from the date of the Groups receipt of notice of the Paragraph IV certification) under the Hatch-Waxman Act is 2 April 2017.
Bexsero/ Men B vaccines
Following its acquisition of the Novartis Vaccine business, the Group has taken over litigation originally filed by Novartis against Pfizer, Inc. (Pfizer) in the UK, Italy and the United States related to meningococcal B (Men B) vaccines. On 18 February 2015, Novartis filed suit against Pfizer in the UK High Court (Patents Court) for a declaration that a European patent owned by Pfizer was not infringed by Bexsero and was invalid. Pfizer filed a Statement of Defence on 27 May 2015 and counterclaimed for infringement. Trial was held on 8-18 March 2016, and on 5 May 2016, the judge ruled that Pfizers patent was valid and infringed by the Bexsero product. The Group has appealed the decision, and the appeal hearing is expected to be heard in the week of 12 December 2017.
On 18 February 2015, Novartis filed suit against Pfizer in the Court of Rome for a declaration that a European patent owned by Pfizer was not infringed by Bexsero and was invalid. The Group has assumed responsibility for this matter. The Group is also prosecuting a lawsuit against Pfizer, originally filed by Novartis, for a declaration that a European patent issued to Pfizer related to meningitis B vaccines is not infringed by Bexsero . Pfizer has counterclaimed seeking a declaration that Bexsero infringes their patents and an order for damages. The Group is actively pursuing these actions.
227 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
46. Legal proceedings continued
|
On 18 February 2015, Novartis filed suit against Pfizer in the US District Court for the District of New Jersey for patent infringement. The complaint asserts six patents against Pfizer, alleging that Pfizers sale of Trumenba infringes those patents. On 27 April 2015, the Group filed a First Amended Complaint against Pfizer reasserting the six patents originally asserted by Novartis, but also asserting one additional recently-granted patent. The Group filed a Second Amended Complaint on 15 March 2016 asserting an additional five patents covering Trumenba against Pfizer. No dates have been set for summary judgement motions or trial.
On 25 July 2016, Pfizer filed a suit with the UK High Court against the Group, Novartis, and the Craig Venter Institute, seeking to invalidate six UK patents owned by the Group that have relevance to Pfizers Trumenba . These six patents, formerly owned by Novartis, have also been opposed in the European Patent Office (EPO) by Pfizer. Two of the six patents were revoked by the EPO Opposition Division. However, in September 2016, one of the patents was upheld by the EPO Board of Appeal and another one was upheld by the EPO Opposition Division. The Group believes that Trumenba infringes both of these patents. Two trials have been set to cover the patents in issue. The first trial date is January 2018 and the second trial date is February 2018.
On 12 October 2016, the Group filed suit seeking injunctive relief against Pfizer in Ireland claiming infringement of four Group patents (including the Group patent upheld by the EPO Board of Appeals in September, 2016 and the other patent maintained in the first instance) by virtue of its manufacture of Trumenba and its proposed commercialisation in Ireland. The Groups application to enter the Commercial Division of the Irish High Court in order to expedite the case was successful. The hearing is likely to be scheduled for Q3 2017.
On 12 October 2016, the same day that the Group filed suit against Pfizer in the UK and Ireland, the Group filed suit in Austria seeking injunctive relief against Boehringer Ingelheim (BI), Pfizers contract manufacturer of the antigens for Trumenba , claiming infringement of a Group patent upheld by the EPO Board of Appeal in September 2016. BI has filed a response to the complaint. The trial is likely to be scheduled for some time in 2017.
On 25 November 2016, Pfizer filed suit in the Canadian Federal Court against the Group for infringement of a Pfizer Canadian patent covering Trumemba . Pfizer seeks damages but is not seeking an injunction. The trial is not likely to occur before 2019.
Coreg CR
Mylan sent a Paragraph IV certification, dated 26 August 2015, to the Group and Flamel Ireland Ltd. (Flamel) stating that it had submitted an Abbreviated New Drug Application (ANDA) to the US Food and Drug Administration (FDA) seeking approval of a generic version of Coreg CR . The notice asserted that the patents listed in the Orange Book for Coreg CR were either invalid or not infringed by Mylans product. On 9 October 2015, Flamel filed a civil complaint in the US District Court for the Northern District of West Virginia alleging that Mylans product infringes Flamels Orange Book-listed extended release formulation patent which expires on 11 March 2026. The Group is the exclusive licensee of this patent for Coreg CR. Mylan answered on 18 December 2015, asserting that Flamels patent was invalid or not infringed. Mylan also filed a third party complaint against the Group requesting a declaration that the Groups patent on carvedilol phosphate hemihydrate was invalid or not infringed. On 2 December 2016, the parties settled the matter on terms that are confidential.
Kivexa
The patent covering the combination of lamivudine and abacavir for Kivexa and the corresponding Supplementary Protection Certificates (SPCs) were challenged independently by Teva and Mylan in several major European markets. These challenges have been withdrawn pursuant to a confidential settlement agreement with Teva dated 18 May 2015 and a confidential settlement agreement with Mylan dated 10 May 2016.
In Q3 2016, challenges to the validity of the SPC for the combination patent for Kivexa were brought in Germany by Betapharm (Dr. Reddys), Hexal (Sandoz) and Hormosan (Lupin). ViiV Healthcare commenced proceedings for injunctive relief against all three companies. ViiV Healthcares application for injunctive relief against Hexal was denied. On 10 October 2016, a confidential settlement agreement was reached with Dr. Reddys covering a number of European markets. Pursuant to this agreement, the German actions involving Betapharm have been withdrawn. No trial dates have been set for the Hexal or Hormosan actions.
Sandoz also has filed nullity actions in Austria, Germany, Spain and Sweden in September and October 2016 alleging that the Kivexa SPC was invalid because the underlying patent covering the combination of lamivudine and abacavir was invalid. Sandoz launched an abacavir/lamivudine product in Austria, Spain and Sweden. ViiV Healthcare has commenced proceedings for injunctive relief in Austria and Sweden, with decisions on injunctive relief expected in the first half of 2017. ViiV Healthcare also has counterclaimed for infringement within the nullity action in Spain. No trial dates have been set in these jurisdictions.
228 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
46. Legal proceedings continued
|
DOC Generici filed an action in September 2016 in the Court of Rome seeking a declaration that the Italian SPC covering Kivexa was invalid because it is based upon the invalid combination patent. Company Eurogenerics has joined the action. No trial date has been set.
In Portugal, ViiV Healthcare initiated arbitration proceedings against Lupin, Vale Pharmaceuticals and Zentiva under the patent covering the combination of lamivudine and abacavir. All three companies had filed for marketing approval for a generic version of Kivexa . Sandoz joined the proceedings as the future holder of the Lupin marketing approval. No arbitration date has yet been scheduled in any of these actions.
In December 2016, Accord Healthcare Ltd. (Accord) filed a revocation action against the SPC in the UK. The action has been resolved in a confidential settlement between Accord and the Group. In February 2017, Kyowa Pharmaceuticals filed a nullity action relating to Kivexa in Japan. ViiV Healthcare is evaluating its options with regard to this action.
Lexiva
On 4 February 2016, Lupin filed a petition in the US Patent and Trademark Office (USPTO) seeking to challenge the validity of the patent claims covering Lexiva in an Inter Partes Review (IPR). This is the second petition for IPR that Lupin has filed against this patent. In the earlier petition, the USPTO instituted an IPR on broad claims in the patent, but denied instituting a challenge to the specific claims to Lexiva , which are now being challenged. The patent expires on 24 June 2018. On 2 August 2016, the USPTO granted the petition and instituted a trial on the remaining claims in the Lexiva patent. An oral hearing is scheduled for 5 April 2017. Under the relevant rules, the USPTO must issue a decision on the IPR by 2 August 2017.
Additionally, on 9 February 2017, Lupin sent ViiV Healthcare a Paragraph IV certification under the Hatch-Waxman Act alleging that the patent covering Lexiva is not valid. The patent expires on 24 December 2017 and has pediatric exclusivity extending to 24 June 2018. ViiV Healthcare is evaluating the certification.
Product liability
Pre-clinical and clinical trials are conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory bodies. Notwithstanding these efforts, when drugs and vaccines are introduced into the marketplace, unanticipated safety issues may become, or be claimed by some to be, evident. The Group is currently a defendant in a number of product liability lawsuits related to the Groups Pharmaceutical, Vaccine and Consumer Healthcare products. The Group has been able to make a reliable estimate of the expected financial effect of the matters discussed in this category and has included a provision, as appropriate, for the matters below in the provision for legal and other disputes. Matters for which the Group has made a provision are also noted in Note 29, Other provisions.
Avandia
The Group has been named in product liability lawsuits on behalf of individuals asserting personal injury claims arising out of the use of Avandia . Economic loss actions have also been filed, seeking restitution and penalties under consumer protection and other laws. The federal cases filed against the Group are part of a multi-district litigation proceeding pending in the US District Court for the Eastern District of Pennsylvania (the MDL Court). Cases have also been filed in a number of state courts. In addition, the County of Santa Clara, California, has brought an action on behalf of California residents which is pending in the MDL Court, alleging violations of Californias False Advertising Act and seeking restitution, damages, and civil penalties.
As of February 2017, the Group has reached agreements to settle the substantial majority of federal and state cases pending in the US.
There are four purported class actions in the US seeking economic damages on behalf of third party payers (TPPs) asserting claims arising under various state and federal laws, including the Racketeer Influenced and Corrupt Organizations Act (RICO), state unfair trade practices and/or consumer protection laws. The MDL Court has consolidated these four actions for pre-trial proceedings, and has appointed a Plaintiffs Steering Committee. The Group was successful in obtaining an initial case management order that requires the four named plaintiffs to produce documentation relating to the merits of their claims. Two of the four named plaintiffs have filed motions to dismiss voluntarily their claims, which the Group has opposed in order to require these plaintiffs to comply with their discovery obligations. The Group has filed a motion for summary judgement on the basis of pre-emption in the TPP actions. Oral argument on the motions was heard on 13 February 2017, and the Court has taken the matter under advisement.
In the Santa Clara County action, the Group has pending a motion for summary judgement on the basis of pre-emption and also is seeking partial summary judgement on the Countys restitution claim. However, no decision is expected until the MDL Court first disposes of Santa Claras motion to dismiss based on lack of federal jurisdiction. Oral argument was heard on 12 November 2015 on Santa Claras motion to dismiss for lack of jurisdiction. The Court has not yet issued its decision.
There are fifteen class actions in Canada, two of which are active. In the two active cases, class certification hearings were held. On 7 December 2016, the court issued a decision certifying a nationwide class of all users of Avandia . The Group has filed a notice of intent to appeal.
229 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
46. Legal proceedings continued
|
Seroxat/Paxil and Paxil CR
The Group has received numerous lawsuits and claims alleging that use of Paxil (paroxetine) has caused a variety of injuries. Most of these lawsuits contain one or more of the following allegations: (i) that use of Paxil during pregnancy caused congenital malformations or persistent pulmonary hypertension; (ii) that Paxil treatment caused patients to commit suicidal or violent acts; and (iii) that the Group failed to warn that patients could experience certain symptoms on discontinuing Paxil treatment.
| Pregnancy |
The Group has reached agreements to settle the majority of the US claims relating to the use of Paxil during pregnancy as of February 2017, but a number of claims related to use during pregnancy are still pending in various courts in the US. Other matters have been dismissed without payment.
There are nine cases pending in the Philadelphia, Pennsylvania Mass Tort Program (MTP). Rader v. GSK went to trial on 17 March 2016. On 4 April 2016, the judge presiding over the trial granted the Groups motion for non-suit, ending the trial in the Groups favour when he ruled that the plaintiff failed to introduce the necessary evidence to proceed. On 17 June 2016, the court denied plaintiffs motion for post-trial relief, which sought a new trial. Plaintiffs appeal was docketed on 19 July 2016 and is proceeding.
Following their loss in Rader, plaintiffs counsel asked the MTP Court to stay the remaining eight cases until an issue in Rader was addressed by the Pennsylvania appellate courts. The Group opposed that request. On 19 April 2016, the MTP Court granted plaintiffs counsels request and entered an Order staying all the cases until the resolution of the Rader appeal. The Group then moved to lift the Order granting the stay, arguing that a host of dispositive issues in these cases did not depend on the outcome of the Rader appeal. The Court denied the Groups motions on
13 July 2016.
There are eight cases pending in a single California state court pursuant to a coordination order. Motions to quash for personal jurisdiction and forum non conveniens were denied. On 6 December 2016, the Group filed writs seeking review by the California Court of Appeals. The court has not yet issued a ruling.
Fourteen cases were filed in state court in St. Louis, Missouri. The Group removed each of the cases to the Federal Court for the Eastern District of Missouri and, concurrently, filed motions to dismiss for lack of personal jurisdiction, or in the alternative, to transfer to the federal court in the plaintiffs respective home states. As of 15 February 2017, all fourteen cases have been dismissed.
On 10 October 2016, the parties agreed to a settlement of the 65-plaintiff case in state court in St. Louis, Missouri. In Meyers, the denial of the Groups motion to dismiss on personal jurisdiction grounds was affirmed by the Illinois appellate court. In El-Massri, the Connecticut federal court granted the Groups motion for summary judgement on 1 February 2017. The Kiker case that had been set for trial on 21 January 2017 was settled.
In Canada, the Bartram action, which was certified as a national class action in British Columbia, was settled in December 2016, eliminating the need for a trial. The Singh action in Alberta, also a proposed national class action, seeks to certify a class relating to birth defects generally. A hearing on the motion to certify this class, previously scheduled for early 2015, was adjourned at plaintiffs request so that additional evidence could be filed. A revised hearing date has not been set, but is likely to be in mid-2017. There is also one inactive proposed national class action in British Columbia (Wakeman). A new class action, Jensen, alleging Paxil (and other SSRI) use and autism was filed in Saskatchewan in January 2017.
| Acts of violence |
As of February 2017, there were six pending claims or cases concerning allegations that patients who took paroxetine or Paxil committed or attempted to commit suicide or acts of violence: five claims or cases are in the US and one case is in Canada. Trial on one of the US cases, Dolin, begins on 14 March 2017 in federal court in Chicago, Illinois.
| Discontinuation |
In the UK, one hundred and three cases remain. These were the subject of a hearing held on 14 December 2015. The judgement from the hearing was published on 4 February 2016 and allowed the remaining claims to continue under court management. Further case management conferences were held on 29 July 2016 and 23 February 2017 and a new timetable ordered for the proceedings.
Zofran
Plaintiffs allege that their children suffered birth defects as a result of the mothers ingestion of Zofran and/or generic ondansetron for pregnancy-related nausea and vomiting. Plaintiffs assert that the Group sold Zofran knowing it was unsafe for pregnant women, failed to warn of the risks, and illegally marketed Zofran off-label for use by pregnant women. As of February 2017, the Group is a defendant in 312 personal injury lawsuits in the US. Three hundred and two of the cases are part of a multi-district litigation proceeding (MDL) in the District of Massachusetts. The MDL cases are in discovery. On 27 January 2016, the MDL court issued an order denying the Groups motion to dismiss all claims of the grounds that they are pre-empted under federal law. The Group may renew the motion at a later date. The MDL continues with monthly status conferences where issues such as the sufficiency of the pleadings and the scope of discovery will be addressed. The Group continues to seek the dismissal of individual cases as appropriate.
There has been no significant activity in 2016 in the ten state court cases in the US, eight of which are located in California. The Group is also a defendant in four proposed class actions in Canada. There has been no significant activity in 2016 in the Canadian class actions.
230 |
GSK Annual Report 2016 |
|||
Notes to the financial statements continued
46. Legal proceedings continued
|
Sales and marketing and regulation
The Groups marketing and promotion of its Pharmaceutical and Vaccine products are the subject of certain governmental investigations and private lawsuits brought by litigants under various theories of law. The Group has been able to make a reliable estimate of the expected financial effect of the matters discussed in this category, and has included a provision for such matters in the provision for legal and other disputes, except as noted below. Matters for which the Group has made a provision are also noted in Note 29, Other provisions.
SEC/DOJ and SFO Anti-corruption enquiries
On 30 September 2016, the Group reached a global resolution with the US Securities and Exchange Commission (SEC) regarding the SECs investigation under the US Foreign Corrupt Practices Act (FCPA) into the Groups commercial practices in countries outside of the US. As part of the resolution, the Group agreed to pay a civil penalty of $20 million to the US Government. The US Department of Justice (DOJ) also confirmed that it had concluded its investigation into the Groups commercial practices and would take no action against the Group. The SEC and DOJ investigations were initiated as part of an industry-wide inquiry in 2010 into whether pharmaceutical companies had violated the US FCPA. The Group agreed to the resolution without admitting or denying the SECs allegations.
On 27 May 2014, the UK Serious Fraud Office (SFO) began a formal criminal investigation into the Groups commercial operations in a number of countries, including China. The SFO has requested information from the Group on its commercial operations in these countries. The Group is responding to the SFOs requests. The Group is unable to make a reliable estimate of the expected financial effect of these investigations, and no provision has been made for them.
US Vaccines subpoena
On 25 February 2016, the Group received a subpoena from the US Attorneys Office for the Southern District of New York requesting documents relating to the Groups Vaccines business. The Group is responding to the subpoena. The Group is unable to make a reliable estimate of the expected financial effect of this matter, and no provision has been made for it.
US subpoena relating to Imitrex and Amerge
On 7 March 2016, the Group received a subpoena from the US Attorneys Office for the Southern District of New York requesting documents relating to the Groups US contracts for Imitrex and Amerge . The Group is responding to the subpoena. The Group is unable to make a reliable estimate of the expected financial effect of this matter, and no provision has been made for it.
Avandia
The Group is defending an action by the County of Santa Clara, California, which was brought under Californias consumer protection laws seeking civil penalties and restitution as a result of the Groups marketing of Avandia . The Group has filed a number of dispositive motions which are pending before the MDL Court. The County of Santa Clara recently has filed a motion to dismiss the action from federal court for lack of federal jurisdiction. This motion has been briefed and argued by the parties.
Average wholesale price
The Attorney General in Illinois filed suit against the Group and a number of other pharmaceutical companies claiming damages and restitution due to average wholesale price (AWP) and/or wholesale acquisition cost (WAC) price reporting for pharmaceutical products covered by the states Medicaid programmes. The case alleges that the Group reported or caused to be reported false AWP and WAC prices, which, in turn, allegedly caused the state Medicaid agency to reimburse providers more money for covered medicines than the agency intended. The state has sought recovery on behalf of itself as payer and on behalf of in-state patients as consumers. The case is ongoing, and no trial date has yet been set.
Cidra third-party payer litigation
On 25 July 2013, a number of major US healthcare insurers filed suit against the Group in the Philadelphia, Pennsylvania County Court of Common Pleas seeking compensation for reimbursements they made for medicines manufactured at the Groups former Cidra plant in Puerto Rico. These insurers claim that the Group knowingly and illegally marketed and sold adulterated drugs manufactured under conditions non-compliant with cGMP (current good manufacturing practices) and that they, as third-party insurers, were unlawfully induced to pay for them. The suit alleges both US federal and various state law causes of action. The Court denied the Groups motion to dismiss, and discovery is scheduled to be completed in 2017, with trial expected to be scheduled sometime in 2018.
Anti-trust/competition
Certain governmental actions and private lawsuits have been brought against the Group alleging violation of competition or anti-trust laws. The Group has been able to make a reliable estimate of the expected financial effect of the matters discussed in this category and has included a provision for such matters in the provision for legal and other disputes, except as noted below. Matters for which the Group has made a provision are also noted in Note 29, Other provisions.
UK Competition and Markets Authority investigation
On 12 February 2016, the UK Competition and Markets Authority (CMA) issued a decision fining the Group and two other pharmaceutical companies for infringement of the Competition Act. The CMA imposed a fine of £37.6 million on the Group, as well as fines totalling £7.4 million against the other companies. This relates to agreements to settle patent disputes between the Group and potential suppliers of generic paroxetine formulations, entered between 2001 and 2003. The Group terminated the agreements at issue in 2004. The Group believes it has strong grounds to appeal the CMAs finding to the Competition Appeal Tribunal (CAT) such that the fine is overturned or substantially reduced. The appeal to the CAT is due to commence on 28 March 2017. No provision has been made for this matter.
231 | GSK Annual Report 2016 |
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|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
46. Legal proceedings continued
|
Lamictal
Purported classes of direct and indirect purchasers filed suit in the US District Court for the District of New Jersey alleging that the Group and Teva Pharmaceuticals unlawfully conspired to delay generic competition for Lamictal , resulting in overcharges to the purchasers, by entering into an allegedly anti-competitive reverse payment settlement to resolve patent infringement litigation. A separate count accuses the Group of monopolising the market. On 26 June 2015, the Court of Appeals reversed the trial courts decision to dismiss the case and remanded the action back to the trial court. On 26 October 2015, the trial court denied the Groups motion for a stay and set a schedule for early dispositive motions and discovery. The Group filed a petition for certiorari with the US Supreme Court on 19 February 2016. On 7 November 2016, the US Supreme Court denied the Groups petition for certiorari. In the trial court, on 22 March 2016, the Groups motion for judgement on the pleadings was granted in large part, dismissing, on statute of limitations grounds, most of the claims alleged by the purported indirect purchaser class. On 18 May 2016, the trial court denied the indirect purchaser class plaintiffs motion for reconsideration. As a result, the indirect purchaser class representatives have agreed to a settlement to exit the case and resolve their remaining claims. Terms of the settlement are confidential. The case will continue to move forward with document production and witness depositions with regard to the claims of the direct purchasers.
Wellbutrin XL
Plaintiffs claimed anti-trust injury related to allegedly sham patent litigation filed by Biovail against generic companies pursuing ANDAs for generic Wellbutrin XL . The Group initially was named as a party plaintiff in two patent infringement actions but later withdrew from those matters. The Group was not a party in the remaining two patent infringement actions relating to Wellbutrin XL . Plaintiffs alleged that a conspiracy to delay generic approval existed between Biovail and the Group, but the Court granted summary judgement in favour of the Group on those claims. The sole remaining claims in the matter relate to plaintiffs allegations that the Group entered into an anti-competitive reverse payment settlement to resolve the patent infringement litigation. The District Court granted summary judgement in favour of the Group on all claims, and the matter is currently pending on appeal before the US Court of Appeals for the Third Circuit Court.
Commercial and corporate
The Group is a defendant in certain cases which allege violation of US federal securities and ERISA laws. The Group has been able to make a reliable estimate of the expected financial effect of the matters discussed in this category and has included a provision for such matters in the provision for legal and other disputes, except as noted below. Matters for which the Group has made a provision are also noted in Note 29, Other provisions.
Securities/ERISA class actions Stiefel
There are currently three outstanding private lawsuits brought by former Stiefel Laboratories, Inc. (Stiefel) employees alleging that Stiefel and its officers and directors violated the US Employee Retirement Income Security Act (ERISA) and federal and state securities laws by inducing Stiefel employees to sell their shares in the employee stock plan back to Stiefel at a greatly undervalued price and without disclosing to employees that Stiefel was about to be sold to the Group.
The Fried case is currently on appeal to the US Court of Appeals for the Eleventh Circuit, with oral argument having taken place in February 2016. Stiefel won a complete defence verdict in this matter at a jury trial in federal court in Florida in October 2013 and the plaintiff appealed. Trial of a second Florida case has been stayed pending resolution of the Fried matter. Discovery also continues in a case pending in New York federal court.
In addition to the private litigant suits, on 12 December 2011, the US Securities and Exchange Commission (SEC) filed a formal complaint against Stiefel and Charles Stiefel in the US District Court for the District of Florida alleging that Stiefel and its principals violated federal securities laws by inducing Stiefel employees to sell their shares in the employee stock plan back to the company at a greatly undervalued price and without disclosing to employees that the company was about to be sold. The case had been stayed but was returned to active status in early summer 2015. Since then, the parties engaged in discovery and re-briefed their summary judgement motions at the courts request. However, although briefing on the motions was completed in July 2016, the court has not yet ruled on the motions.
Environmental matters
The Group has been notified of its potential responsibility relating to past operations and its past waste disposal practices at certain sites, primarily in the US. Some of these matters are the subject of litigation, including proceedings initiated by the US federal or state governments for waste disposal, site remediation costs and tort actions brought by private parties.
The Group has been advised that it may be a responsible party at approximately 21 sites, of which 11 appear on the National Priority List created by the Comprehensive Environmental Response Compensation and Liability Act (Superfund). These proceedings seek to require the operators of hazardous waste facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the US Government for cleanup costs. In most instances, the Group is involved as an alleged generator of hazardous waste.
Although Superfund provides that the defendants are jointly and severally liable for cleanup costs, these proceedings are frequently resolved on the basis of the nature and quantity of waste disposed of by the generator at the site. The Groups proportionate liability for cleanup costs has been substantially determined for 18 of the sites referred to above.
The Groups potential liability varies greatly from site to site. While the cost of investigation, study and remediation at such sites could, over time, be significant, the Group routinely accrues amounts related to its share of the liability for such matters.
232 |
GSK Annual Report 2016 |
|||
Financial statements of GlaxoSmithKline plc
prepared under UK GAAP (including FRS 101 Reduced Disclosure Framework)
Directors statement of responsibilities in relation to the companys financial statements
|
The Directors are responsible for preparing the parent company, GlaxoSmithKline plc, financial statements and the Remuneration report in accordance with applicable law and regulations.
UK company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the parent company financial statements in accordance with United Kingdom Accounting Standards and applicable law (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the parent company financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the parent company and its profit or loss for that period.
In preparing those financial statements, the Directors are required to:
| select suitable accounting policies and then apply them consistently; |
| make judgements and accounting estimates that are reasonable and prudent; |
| state with regard to the parent company financial statements that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and |
| prepare the financial statements on a going concern basis unless it is inappropriate to presume that the parent company will continue in business. |
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the companys transactions and disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the parent company financial statements and Remuneration report (on pages 111 to 136) comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The parent company financial statements for the year ended 31 December 2016, comprising the balance sheet for the year ended 31 December 2016 and supporting notes, are set out on pages 235 to 238 of this report.
The responsibilities of the auditors in relation to the parent company financial statements are set out in the Independent Auditors report on pages 233 to 234.
The financial statements for the year ended 31 December 2016 are included in the Annual Report, which is published in printed form and made available on our website. The Directors are responsible for the maintenance and integrity of the Annual Report on our website in accordance with UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different.
The Strategic Report and risk sections of the Annual Report, which represent the management report, include a fair review of the development and performance of the business and the position of the company and the Group taken as a whole, together with a description of the principal risks and uncertainties that it faces.
Disclosure of information to auditors
The Directors in office at the date of this Annual Report have each confirmed that:
| so far as he or she is aware, there is no relevant audit information of which the companys auditors are unaware; and |
| he or she has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the companys auditors are aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Going concern basis
Having assessed the principal risks and other matters considered in connection with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
The UK Corporate Governance Code
The Board considers that GlaxoSmithKline plc applies the principles and complies with the provisions of the UK Corporate Governance Code maintained by the Financial Reporting Council, as described in the Corporate Governance section on pages 79 to 110. The Board further considers that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Groups position and performance, business model and strategy.
As required by the Financial Conduct Authoritys Listing Rules, the auditors have considered the Directors statement of compliance in relation to those points of the UK Corporate Governance Code which are specified for their review.
Philip Hampton
Chairman
13 March 2017
233 | GSK Annual Report 2016 |
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|
||||
Independent Auditors report |
Governance and remuneration
|
|||||
Financial statements
|
||||||
Investor information
|
to the members of GlaxoSmithKline plc
Report on the parent company financial statements
|
Our Opinion
In our opinion, GlaxoSmithKline plcs parent company financial statements (the financial statements):
| give a true and fair view of the state of the parent companys affairs at |
| 31 December 2016; |
| have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and |
| have been prepared in accordance with the requirements of the Companies Act 2006. |
What we have audited
The financial statements, included within the Annual Report, comprise:
| the Company balance sheet at 31 December 2016; |
| the Company statement of changes in equity for the year then ended; and |
| the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. |
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, based on the work undertaken in the course of the audit;
| the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and |
| the Strategic Report and the Directors Report have been prepared in accordance with applicable legal requirements. |
In addition, in light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors Report. We have nothing to report in this respect.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)) we are required to report to you if, in our opinion, information in the Annual Report is:
| materially inconsistent with the information in the audited financial statements; or |
| apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit; or |
| otherwise misleading. |
We have no exceptions to report arising from this responsibility.
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006, we are required to report to you if, in our opinion:
| we have not received all the information and explanations we require for our audit; or |
| adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or |
| the financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns. |
We have no exceptions to report arising from this responsibility.
Directors remuneration
Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Directors Remuneration report Companies Act 2006 opinion
In our opinion, the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
234 |
GSK Annual Report 2016 |
|||
Independent Auditors report
to the members of GlaxoSmithKline plc continued
Report on the parent company financial statements continued
|
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Directors Statement of Responsibilities set out on page 232 the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the companys members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
| whether the accounting policies are appropriate to the parent companys circumstances and have been consistently applied and adequately disclosed; |
| the reasonableness of significant accounting estimates made by the directors; and |
| the overall presentation of the financial statements. |
We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material mis-statements or inconsistencies, we consider the implications for our report. With respect to the Strategic Report and Directors Report, we consider whether those reports include the disclosures required by applicable legal requirements.
Other matters
We have reported separately on the Group financial statements of GlaxoSmithKline plc for the year ended 31 December 2016 and on the information in the Directors Remuneration Report that is described as having been audited.
The company has passed a resolution in accordance with section 506 of the Companies Act 2006 that the senior statutory auditors name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
13 March 2017
235 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Company balance sheet UK GAAP |
Investor information
|
(including FRS 101 Reduced Disclosure Framework) as at 31 December 2016
236 |
GSK Annual Report 2016 |
|||
Notes to the company balance sheet UK GAAP
(including FRS 101 Reduced Disclosure Framework)
A) Presentation of the financial statements
Description of business
GlaxoSmithKline plc is the parent company of GSK, a major global healthcare group which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.
Preparation of financial statements
The financial statements, which are prepared using the historical cost convention (as modified to include the revaluation of certain financial instruments) and on a going concern basis, are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework and with UK accounting presentation and the Companies Act 2006 as at 31 December 2016, with comparative figures as at 31 December 2015.
As permitted by section 408 of the Companies Act 2006, the income statement of the company is not presented in this Annual Report.
The company is included in the Group financial statements of GlaxoSmithKline plc, which are publicly available.
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101:
| Paragraphs 45(b) and 46 to 52 of IFRS 2, Share-based payment |
| IFRS 7, Financial Instruments Disclosures |
| Paragraphs 91-99 of IFRS 13, Fair value measurement |
| Paragraph 38 of IAS 1, Presentation of financial statements comparative information requirements in respect of paragraph 79(a) (iv) of IAS 1 |
| Paragraphs 10(d), 10(f), 16, 38(A), 38 (B to D), 40 (A to D), 111 and 134 to 136 of IAS 1, Presentation of financial statements |
| IAS 7, Statement of cash flows |
| Paragraph 30 and 31 of IAS 8, Accounting policies, changes in accounting estimates and errors |
| Paragraph 17 of IAS 24, Related party disclosures and the further requirement in IAS 24 to disclose related party transactions entered into between two or more members of a Group. |
Accounting convention and standards
The balance sheet has been prepared using the historical cost convention and complies with applicable UK accounting standards.
Accounting principles and policies
The preparation of the balance sheet in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual amounts could differ from those estimates.
The balance sheet has been prepared in accordance with the companys accounting policies approved by the Board and described in Note B. These policies have been consistently applied, unless otherwise stated.
B) Accounting policies
Foreign currency transactions
Foreign currency transactions are recorded at the exchange rate ruling on the date of transaction. Foreign currency assets and liabilities are translated at rates of exchange ruling at the balance sheet date.
Dividends paid and received
Dividends paid and received are included in the financial statements in the period in which the related dividends are actually paid or received.
Expenditure
Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated.
Investments in subsidiary companies
Investments in subsidiary companies are held at cost less any provision for impairment and also adjusted for movements in contingent consideration.
Impairment of investments
The carrying value of investments are reviewed for impairment when there is an indication that the investment might be impaired. Any provision resulting from an impairment review is charged to the income statement in the year concerned.
Share based payments
The issuance by the company to its subsidiaries of a grant over the companys shares, represents additional capital contributions by the company in its subsidiaries. An additional investment in subsidiaries results in a corresponding increase in shareholders equity. The additional capital contribution is based on the fair value of the grant issued, allocated over the underlying grants vesting period.
Taxation
Current tax is provided at the amounts expected to be paid applying tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are only recognised to the extent that they are considered recoverable against future taxable profits.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the temporary differences are expected to be realised or settled. Deferred tax liabilities and assets are not discounted.
Financial guarantees
Liabilities relating to guarantees issued by the company on behalf of its subsidiaries are initially recognised at fair value and amortised over the life of the guarantee.
Legal and other disputes
The company provides for anticipated settlement costs where an outflow of resources is considered probable and a reliable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the company. At 31 December 2016 provisions for legal and other disputes amounted to £23 million (2015 £40 million).
237 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
C) Key accounting judgements and estimates
Legal and other disputes
The company provides for anticipated settlement costs where an outflow of resources is considered probable and a reliable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the company. These estimates take into account the specific circumstances of each dispute and relevant external advice, are inherently judgemental and could change substantially over time as new facts emerge and each dispute progresses.
The companys Directors, having taken legal advice, have established provisions after taking into account the relevant facts and circumstances of each matter and in accordance with accounting requirements. At 31 December 2016 provisions for legal and other disputes amounted to £23 million (2015 £40 million).
F) Fixed assets invetsments
The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations. The position could change over time and, therefore, there can be no assurance that any losses that result from the outcome of any legal proceedings will not exceed the amount of the provisions reported in the companys financial statements by a material amount.
D) Operating profit
A fee of £12,053 (2015 £12,053) relating to the audit of the company has been charged in operating profit.
E) Dividends
The directors declared four interim dividends resulting in a dividend for the year of 80 pence, in line with the dividend for 2015. For further details, see Note 16 to the Group financial statements, Dividends.
2016 £m |
2015 £ m |
|||||||
Shares in GlaxoSmithKline Services Unlimited
|
|
613
|
|
|
613
|
|
||
Shares in GlaxoSmithKline Holdings (One) Limited
|
|
18
|
|
|
18
|
|
||
Shares in GlaxoSmithKline Holdings Limited
|
|
17,888
|
|
|
17,888
|
|
||
Shares in GlaxoSmithKline Mercury Limited
|
|
33
|
|
|
33
|
|
||
|
18,552 |
|
|
18,552 |
|
|||
Capital contribution relating to share based payments
|
|
1,139
|
|
|
1,139
|
|
||
Contribution relating to contingent consideration
|
|
545
|
|
|
405
|
|
||
|
20,236
|
|
|
20,096
|
|
|||
G) Trade and other receivables
|
||||||||
2016 £m |
2015 £m |
|||||||
Amounts due within one year: |
||||||||
UK Corporation tax recoverable |
|
201 |
|
|
201 |
|
||
Other receivables |
|
4 |
|
|
41 |
|
||
Amounts owed by Group undertakings
|
|
1,478
|
|
|
5,977
|
|
||
|
1,683 |
|
|
6,219 |
|
|||
Amounts due after more than one year:
|
||||||||
Amounts owed by Group undertakings
|
|
445
|
|
|
416
|
|
||
|
2,128
|
|
|
6,635
|
|
238 |
GSK Annual Report 2016 |
|||
Notes to the company balance sheet UK GAAP
(including FRS 101 Reduced Disclosure Framework) continued
H) Trade and other payables
At 31 December 2016, of the issued share capital, 42,710,419 shares were held in the ESOP Trusts, 458,205,950 shares were held as Treasury shares and 4,867,399,693 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values of the shares held in the ESOP Trusts are disclosed in Note 43, Employee share schemes.
L) Reserves
The loss of GlaxoSmithKline plc for the year was £111 million (2015 £656 million profit), which after dividends of £4,850 million (2015 £3,874 million), gave a retained loss of £4,961 million (2015 £3,218 million loss). No Treasury shares were purchased in the year (2015 £nil). After the effect of the £466 million Treasury shares transferred to a subsidiary company (2015 £nil), retained earnings at 31 December 2016 stood at £15,538 million (2015 £20,033 million), of which £4,096 million was unrealised (2015 £4,096 million).
M) Group companies
See pages 272 to 282 for a complete list of subsidiaries, associates and joint ventures, which forms part of these financial statements.
239 | GSK Annual Report 2016 |
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Governance and remuneration
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Financial statements
|
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Investor information
|
Investor information
|
||||||||
In this section | ||||||||
|
240 | |||||||
|
242 | |||||||
|
244 | |||||||
|
247 | |||||||
|
250 | |||||||
|
253 | |||||||
|
263 | |||||||
|
265 | |||||||
|
265 | |||||||
|
266 | |||||||
|
266 | |||||||
|
268 | |||||||
|
270 | |||||||
|
272 | |||||||
|
283
|
|||||||
|
||||||||
|
||||||||
|
240 |
GSK Annual Report 2016 |
|||
Financial record
|
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2016.
Income statement total
12 months 2016 | Q4 2016 | |||||||||||||||||||||||||||||||||
Reported | Pro-forma | Reported | ||||||||||||||||||||||||||||||||
£m | CER% | £% | CER% | £m | CER% | £% | ||||||||||||||||||||||||||||
Turnover |
||||||||||||||||||||||||||||||||||
Pharmaceuticals | 16,104 | 3 | 14 | 4 | 4,575 | 4 | 22 | |||||||||||||||||||||||||||
Vaccines | 4,592 | 14 | 26 | 12 | 1,137 | | 18 | |||||||||||||||||||||||||||
Consumer Healthcare
|
|
7,193
|
|
|
9
|
|
|
19
|
|
|
5
|
|
|
1,874
|
|
|
2
|
|
|
20
|
|
|||||||||||||
27,889 | 6 | 17 | 5 | 7,586 | 3 | 21 | ||||||||||||||||||||||||||||
Corporate and other unallocated turnover |
|
|
|
|
|
|
||||||||||||||||||||||||||||
Total turnover |
|
27,889 |
|
|
6 |
|
|
17 |
|
|
5 |
|
|
7,586 |
|
|
3 |
|
|
21 |
|
|||||||||||||
Cost of sales | (9,290 | ) | (1 | ) | 5 | (2,508 | ) | (9 | ) | (1 | ) | |||||||||||||||||||||||
Selling, general and administration | (9,366 | ) | (6 | ) | 1 | (2,711 | ) | (7 | ) | 9 | ||||||||||||||||||||||||
Research and development | (3,628 | ) | (6 | ) | 2 | (1,003 | ) | (16 | ) | (5 | ) | |||||||||||||||||||||||
Royalty income | 398 | 16 | 21 | 117 | 22 | 29 | ||||||||||||||||||||||||||||
Other operating income
|
|
(3,405
|
)
|
|
(886
|
)
|
||||||||||||||||||||||||||||
Operating profit/(loss)
|
|
2,598
|
|
|
(86
|
)
|
|
(75
|
)
|
|
595
|
|
|
>100
|
|
|
>100
|
|
||||||||||||||||
Net finance costs | (664 | ) | (173 | ) | ||||||||||||||||||||||||||||||
Share of after tax profits/(losses) of associates and joint ventures | 5 | 1 | ||||||||||||||||||||||||||||||||
Profit/(loss) before taxation | 1,939 | (92 | ) | (82 | ) | 423 | >100 | >100 | ||||||||||||||||||||||||||
Taxation | (877 | ) | (106 | ) | ||||||||||||||||||||||||||||||
Tax rate %
|
|
45.2
|
%
|
|
25.1
|
%
|
||||||||||||||||||||||||||||
Profit/(loss) after taxation for the period
|
|
1,062
|
|
|
(98
|
)
|
|
(87
|
)
|
|
317
|
|
|
97
|
|
|
>100
|
|
||||||||||||||||
Profit/(loss) attributable to non-controlling interests | 150 | 60 | ||||||||||||||||||||||||||||||||
Profit/(loss) attributable to shareholders | 912 | 257 | ||||||||||||||||||||||||||||||||
Basic earnings/(loss) per share (pence)
|
|
18.8
|
p
|
|
(99
|
)
|
|
(89
|
)
|
|
5.3
|
p
|
|
>100
|
|
|
>100
|
|
||||||||||||||||
Diluted earnings/(loss) per share (pence)
|
|
18.6
|
p
|
|
5.2
|
p
|
||||||||||||||||||||||||||||
Income statement core
|
||||||||||||||||||||||||||||||||||
Total turnover | 27,889 | 6 | 17 | 5 | 7,586 | 3 | 21 | |||||||||||||||||||||||||||
Cost of sales | (8,351 | ) | 5 | 11 | 3 | (2,195 | ) | (2 | ) | 6 | ||||||||||||||||||||||||
Selling, general and administration | (8,697 | ) | 2 | 10 | | (2,429 | ) | (1 | ) | 15 | ||||||||||||||||||||||||
Research and development | (3,468 | ) | 3 | 12 | 3 | (1,017 | ) | 6 | 20 | |||||||||||||||||||||||||
Royalty income
|
|
398
|
|
|
16
|
|
|
21
|
|
|
17
|
|
|
117
|
|
|
22
|
|
|
29
|
|
|||||||||||||
Operating profit
|
|
7,771
|
|
|
14
|
|
|
36
|
|
|
17
|
|
|
2,062
|
|
|
16
|
|
|
52
|
|
|||||||||||||
Net finance costs | (652 | ) | (170 | ) | ||||||||||||||||||||||||||||||
Share of after tax profits/(losses) of associates and joint ventures
|
|
5
|
|
|
1
|
|
||||||||||||||||||||||||||||
Profit before taxation | 7,124 | 16 | 40 | 1,893 | 18 | 58 | ||||||||||||||||||||||||||||
Taxation | (1,509 | ) | (410 | ) | ||||||||||||||||||||||||||||||
Tax rate %
|
|
21.2
|
%
|
|
21.7
|
%
|
||||||||||||||||||||||||||||
Profit after taxation for the period
|
|
5,615
|
|
|
14
|
|
|
37
|
|
|
1,483
|
|
|
12
|
|
|
51
|
|
||||||||||||||||
Profit attributable to non-controlling interests | 637 | 212 | ||||||||||||||||||||||||||||||||
Profit attributable to shareholders
|
|
4,978
|
|
|
1,271
|
|
||||||||||||||||||||||||||||
Adjusted earnings per share (pence)
|
|
102.4
|
p
|
|
12
|
|
|
35
|
|
|
26.1
|
p
|
|
11
|
|
|
45
|
|
|
The calculation of core results is described on page 57. |
241 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Quarterly trend continued
|
242 |
GSK Annual Report 2016 |
|||
Financial record continued
Pharmaceuticals turnover by therapeutic area 2016
|
Total | US | Europe | International | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 |
|
2015
(restated) |
|
Growth | 2016 | Growth | 2016 | Growth | 2016 | Growth | ||||||||||||||||||||||||||||||||||||||||||||||||
Therapeutic area/major products | £m | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||||||||||||||||||||||||||||||||||||||
Respiratory | 6,510 | 5,741 | 2 | 13 | 3,306 | 7 | 20 | 1,383 | (10 | ) | (2 | ) | 1,821 | 3 | 16 | |||||||||||||||||||||||||||||||||||||||||||
Anoro Ellipta |
201 | 79 | >100 | >100 | 139 | >100 | >100 | 39 | >100 | >100 | 23 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||||
Arnuity Ellipta |
15 | 3 | >100 | >100 | 14 | >100 | >100 | | | | 1 | (100 | ) | >100 | ||||||||||||||||||||||||||||||||||||||||||||
Avamys/Veramyst |
277 | 229 | 8 | 21 | 25 | (12 | ) | | 74 | 2 | 12 | 178 | 15 | 29 | ||||||||||||||||||||||||||||||||||||||||||||
Flixotide/Flovent |
637 | 623 | (8 | ) | 2 | 378 | (11 | ) | | 94 | (8 | ) | 2 | 165 | | 9 | ||||||||||||||||||||||||||||||||||||||||||
Incruse Ellipta |
114 | 14 | >100 | >100 | 86 | >100 | >100 | 23 | >100 | >100 | 5 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||||
Nucala |
102 | 1 | >100 | >100 | 71 | >100 | >100 | 23 | >100 | >100 | 8 | | | |||||||||||||||||||||||||||||||||||||||||||||
Relvar/Breo Ellipta |
620 | 257 | >100 | >100 | 344 | >100 | >100 | 140 | 60 | 75 | 136 | 67 | 97 | |||||||||||||||||||||||||||||||||||||||||||||
Seretide/Advair |
3,485 | 3,681 | (15 | ) | (5 | ) | 1,829 | (13 | ) | (2 | ) | 835 | (24 | ) | (18 | ) | 821 | (7 | ) | 2 | ||||||||||||||||||||||||||||||||||||||
Ventolin |
785 | 620 | 15 | 27 | 421 | 23 | 38 | 127 | 1 | 9 | 237 | 12 | 19 | |||||||||||||||||||||||||||||||||||||||||||||
Other |
274 | 234 | (1 | ) | 17 | (1 | ) | (100 | ) | 34 | 28 | (3 | ) | 5 | 247 | (2 | ) | 19 | ||||||||||||||||||||||||||||||||||||||||
Cardiovascular, metabolic and urology (CVMU) | 860 | 858 | (11 | ) | | 288 | (18 | ) | (8 | ) | 323 | 12 | 24 | 249 | (23 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||
Avodart |
635 | 657 | (14 | ) | (3 | ) | 70 | (63 | ) | (58 | ) | 317 | 13 | 25 | 248 | (8 | ) | 5 | ||||||||||||||||||||||||||||||||||||||||
Eperzan/Tanzeum |
121 | 41 | >100 | >100 | 118 | >100 | >100 | 3 | 100 | >100 | | | | |||||||||||||||||||||||||||||||||||||||||||||
Other |
104 | 160 | (42 | ) | (35 | ) | 100 | (17 | ) | (7 | ) | 3 | (60 | ) | (40 | ) | 1 | (98 | ) | (98 | ) | |||||||||||||||||||||||||||||||||||||
Immuno-inflammation | 340 | 263 | 15 | 29 | 311 | 14 | 29 | 21 | 27 | 40 | 8 | 17 | 33 | |||||||||||||||||||||||||||||||||||||||||||||
Benlysta |
306 | 230 | 19 | 33 | 277 | 18 | 33 | 21 | 20 | 40 | 8 | 33 | 33 | |||||||||||||||||||||||||||||||||||||||||||||
Other |
34 | 33 | (9 | ) | 3 | 34 | (9 | ) | 3 | | | | | | | |||||||||||||||||||||||||||||||||||||||||||
Other pharmaceuticals | 2,297 | 2,445 | (14 | ) | (6 | ) | 98 | (69 | ) | (65 | ) | 627 | (13 | ) | (4 | ) | 1,572 | (4 | ) | 4 | ||||||||||||||||||||||||||||||||||||||
Dermatology
|
393 | 412 | (12 | ) | (5 | ) | 16 | (63 | ) | (61 | ) | 146 | (2 | ) | 6 | 231 | (9 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||
Augmentin | 563 | 528 | | 7 | | | | 177 | (5 | ) | 4 | 386 | 2 | 8 | ||||||||||||||||||||||||||||||||||||||||||||
Other anti-bacterials |
169 | 184 | (15 | ) | (8 | ) | 4 | (50 | ) | (33 | ) | 49 | (14 | ) | (4 | ) | 116 | (13 | ) | (9 | ) | |||||||||||||||||||||||||||||||||||||
Rare diseases |
423 | 371 | | 14 | 49 | (4 | ) | 4 | 137 | 2 | 12 | 237 | (1 | ) | 17 | |||||||||||||||||||||||||||||||||||||||||||
Oncology |
161 | 255 | (38 | ) | (37 | ) | (1 | ) | (100 | ) | >(100 | ) | | | | 162 | 73 | 76 | ||||||||||||||||||||||||||||||||||||||||
Other |
588 | 695 | (23 | ) | (15 | ) | 30 | (72 | ) | (68 | ) | 118 | 2 | 13 | 440 | (19 | ) | (11 | ) | |||||||||||||||||||||||||||||||||||||||
Established products | 2,541 | 2,528 | (8 | ) | 1 | 702 | (3 | ) | 9 | 513 | (4 | ) | 4 | 1,326 | (12 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Coreg |
131 | 123 | (5 | ) | 7 | 131 | (5 | ) | 7 | | | | | | | |||||||||||||||||||||||||||||||||||||||||||
Hepsera |
58 | 63 | (17 | ) | (8 | ) | | | | | | | 58 | (16 | ) | (6 | ) | |||||||||||||||||||||||||||||||||||||||||
Imigran/Imitrex |
177 | 160 | 3 | 11 | 85 | 8 | 12 | 62 | 4 | 11 | 30 | (11 | ) | 7 | ||||||||||||||||||||||||||||||||||||||||||||
Lamictal |
614 | 531 | 5 | 16 | 313 | 5 | 18 | 106 | 1 | 10 | 195 | 9 | 15 | |||||||||||||||||||||||||||||||||||||||||||||
Lovaza |
43 | 93 | (59 | ) | (54 | ) | 43 | (59 | ) | (54 | ) | | | | | | | |||||||||||||||||||||||||||||||||||||||||
Requip |
116 | 93 | 8 | 25 | 13 | >100 | >100 | 30 | (7 | ) | 3 | 73 | 3 | 24 | ||||||||||||||||||||||||||||||||||||||||||||
Serevent |
96 | 93 | (6 | ) | 3 | 49 | | 14 | 35 | (11 | ) | (3 | ) | 12 | (14 | ) | (14 | ) | ||||||||||||||||||||||||||||||||||||||||
Seroxat/Paxil |
206 | 165 | 10 | 25 | 15 | (100 | ) | >(100 | ) | 40 | 6 | 14 | 151 | (8 | ) | 6 | ||||||||||||||||||||||||||||||||||||||||||
Valtrex |
118 | 165 | (37 | ) | (28 | ) | 16 | (30 | ) | (20 | ) | 25 | (4 | ) | 4 | 77 | (45 | ) | (36 | ) | ||||||||||||||||||||||||||||||||||||||
Zeffix |
111 | 134 | (24 | ) | (17 | ) | 2 | | | 7 | (14 | ) | | 102 | (25 | ) | (18 | ) | ||||||||||||||||||||||||||||||||||||||||
Other |
871 | 908 | (10 | ) | (4 | ) | 35 | (6 | ) | 9 | 208 | (8 | ) | | 628 | (11 | ) | (6 | ) | |||||||||||||||||||||||||||||||||||||||
HIV | 3,556 | 2,322 | 37 | 53 | 2,132 | 46 | 64 | 1,017 | 29 | 42 | 407 | 21 | 34 | |||||||||||||||||||||||||||||||||||||||||||||
Combivir |
23 | 34 | (38 | ) | (32 | ) | 3 | (75 | ) | (72 | ) | 6 | (35 | ) | (28 | ) | 14 | (16 | ) | (9 | ) | |||||||||||||||||||||||||||||||||||||
Epzicom/Kivexa |
568 | 698 | (27 | ) | (19 | ) | 195 | (32 | ) | (23 | ) | 251 | (25 | ) | (17 | ) | 122 | (21 | ) | (13 | ) | |||||||||||||||||||||||||||||||||||||
Lexiva/Telzir |
51 | 65 | (26 | ) | (22 | ) | 29 | (33 | ) | (24 | ) | 8 | (42 | ) | (36 | ) | 14 | 4 | (2 | ) | ||||||||||||||||||||||||||||||||||||||
Selzentry |
125 | 124 | (9 | ) | 1 | 65 | (2 | ) | 10 | 41 | (22 | ) | (14 | ) | 19 | 4 | 11 | |||||||||||||||||||||||||||||||||||||||||
Tivicay |
953 | 588 | 45 | 62 | 635 | 46 | 65 | 228 | 40 | 55 | 90 | 47 | 62 | |||||||||||||||||||||||||||||||||||||||||||||
Triumeq |
1,735 | 730 | >100 | >100 | 1,159 | >100 | >100 | 434 | >100 | >100 | 142 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||||
Trizivir |
16 | 26 | (42 | ) | (38 | ) | 5 | (54 | ) | (49 | ) | 10 | (35 | ) | (28 | ) | 1 | (42 | ) | (61 | ) | |||||||||||||||||||||||||||||||||||||
Other |
85 | 57 | 33 | 49 | 41 | (4 | ) | 8 | 39 | >100 | >100 | 5 | (66 | ) | (59 | ) | ||||||||||||||||||||||||||||||||||||||||||
Pharmaceuticals | 16,104 | 14,157 | 3 | 14 | 6,837 | 10 | 24 | 3,884 | | 9 | 5,383 | (3 | ) | 6 | ||||||||||||||||||||||||||||||||||||||||||||
Vaccines turnover 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | US | Europe | International | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 |
2015 (restated) |
Growth | 2016 | Growth | 2016 | Growth | 2016 | Growth | ||||||||||||||||||||||||||||||||||||||||||||||||||
Major products | £m | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||||||||||||||||||||||||||||||||||||||
Rotarix | 469 | 417 | 1 | 12 | 129 | (17 | ) | (7 | ) | 75 | 8 | 17 | 265 | 10 | 24 | |||||||||||||||||||||||||||||||||||||||||||
Synflorix |
504 | 381 | 19 | 32 | | | | 68 | 59 | 74 | 436 | 15 | 27 | |||||||||||||||||||||||||||||||||||||||||||||
Fluarix, FluLaval |
414 | 268 | 38 | 54 | 315 | 42 | 60 | 32 | 26 | 39 | 67 | 31 | 40 | |||||||||||||||||||||||||||||||||||||||||||||
Bexsero |
390 | 115 | >100 | >100 | 122 | >100 | >100 | 236 | >100 | >100 | 32 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||||
Menveo |
202 | 160 | 16 | 26 | 121 | 8 | 22 | 27 | (31 | ) | (25 | ) | 54 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||
Boostrix |
470 | 358 | 18 | 31 | 238 | 1 | 14 | 139 | 43 | 58 | 93 | 39 | 52 | |||||||||||||||||||||||||||||||||||||||||||||
Infanrix, Pediarix |
769 | 733 | (5 | ) | 5 | 338 | 12 | 26 | 335 | (8 | ) | 1 | 96 | (31 | ) | (27 | ) | |||||||||||||||||||||||||||||||||||||||||
Hepatitis |
602 | 540 | 1 | 11 | 294 | (4 | ) | 8 | 197 | 17 | 28 | 111 | (8 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||
Priorix, Priorix Tetra, Varilrix |
300 | 260 | 5 | 15 | | | | 152 | | 12 | 148 | 9 | 19 | |||||||||||||||||||||||||||||||||||||||||||||
Cervarix |
81 | 88 | (14 | ) | (8 | ) | 1 | (67 | ) | (67 | ) | 33 | (22 | ) | (11 | ) | 47 | (4 | ) | (2 | ) | |||||||||||||||||||||||||||||||||||||
Other |
391 | 336 | 6 | 17 | 41 | (27 | ) | (21 | ) | 129 | 19 | 27 | 221 | 8 | 22 | |||||||||||||||||||||||||||||||||||||||||||
Vaccines | 4,592 | 3,656 | 14 | 26 | 1,599 | 13 | 27 | 1,423 | 18 | 30 | 1,570 | 10 | 21 |
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
243 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Pharmaceuticals turnover by therapeutic area 2015
|
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
244 |
GSK Annual Report 2016 |
|||
Financial record continued
|
A record of financial performance is provided, analysed in accordance with current reporting practice. The information included in the Five year record is prepared in accordance with IFRS as adopted by the European Union and also with IFRS as issued by the International Accounting Standards Board.
With effect from 1 January 2016, GSK has reported turnover under three segments: Pharmaceuticals, which now includes HIV, Vaccines and Consumer Healthcare. Comparative turnover information in all four years has been restated accordingly. Comparative information has also been restated to reflect the current breakdown of the group by geographic region.
Comparative information for 2012 and 2013 is also reported including the effect of the divestments completed in 2013.
Group turnover by geographic region
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||
US |
10,197 | 8,222 | 7,409 | 8,695 | 8,330 | |||||||||||||||
Europe |
7,498 | 6,450 | 6,292 | 6,681 | 6,675 | |||||||||||||||
International
|
|
10,194
|
|
|
9,251
|
|
|
9,305
|
|
|
10,226
|
|
|
10,478
|
|
|||||
27,889 | 23,923 | 23,006 | 25,602 | 25,483 | ||||||||||||||||
Divestments
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
948
|
|
|||||
Total turnover including divestments
|
|
27,889
|
|
|
23,923
|
|
|
23,006
|
|
|
26,505
|
|
|
26,431
|
|
|||||
Group turnover by segment
|
||||||||||||||||||||
Pharmaceuticals |
16,104 | 14,157 | 15,438 | 17,359 | 17,349 | |||||||||||||||
Vaccines |
4,592 | 3,656 | 3,159 | 3,384 | 3,296 | |||||||||||||||
Consumer Healthcare
|
|
7,193
|
|
|
6,038
|
|
|
4,322
|
|
|
4,713
|
|
|
4,731
|
|
|||||
Segment turnover |
27,889 | 23,851 | 22,919 | 25,456 | 25,376 | |||||||||||||||
Corporate and other unallocated turnover
|
|
|
|
|
72
|
|
|
87
|
|
|
146
|
|
|
107
|
|
|||||
27,889 | 23,923 | 23,006 | 25,602 | 25,483 | ||||||||||||||||
Divestments completed in 2013
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
948
|
|
|||||
|
27,889
|
|
|
23,923
|
|
|
23,006
|
|
|
26,505
|
|
|
26,431
|
|
||||||
Pharmaceuticals turnover by therapeutic area
|
||||||||||||||||||||
Respiratory |
6,510 | 5,741 | 6,168 | 7,259 | 7,016 | |||||||||||||||
Cardiovascular, Metabolic and urogenital |
860 | 858 | 965 | 1,073 | 1,144 | |||||||||||||||
Immuno-inflammation |
340 | 263 | 214 | 161 | 70 | |||||||||||||||
Other pharmaceuticals |
2,297 | 2,445 | 3,582 | 3,611 | 3,394 | |||||||||||||||
Established Products |
2,541 | 2,528 | 3,011 | 3,869 | 4,351 | |||||||||||||||
HIV
|
|
3,556
|
|
|
2,322
|
|
|
1,498
|
|
|
1,386
|
|
|
1,374
|
|
|||||
Pharmaceuticals
|
|
16,104
|
|
|
14,157
|
|
|
15,438
|
|
|
17,359
|
|
|
17,349
|
|
|||||
Vaccine turnover
|
||||||||||||||||||||
|
4,592
|
|
|
3,656
|
|
|
3,159
|
|
|
3,384
|
|
|
3,296
|
|
||||||
Consumer Healthcare turnover
|
||||||||||||||||||||
Wellness |
3,726 | 2,970 | 1,565 | 1,807 | 1,941 | |||||||||||||||
Oral care |
2,223 | 1,875 | 1,806 | 1,892 | 1,814 | |||||||||||||||
Nutrition |
674 | 684 | 633 | 628 | 591 | |||||||||||||||
Skin health
|
|
570
|
|
|
509
|
|
|
318
|
|
|
386
|
|
|
385
|
|
|||||
|
7,193
|
|
|
6,038
|
|
|
4,322
|
|
|
4,713
|
|
|
4,731
|
|
245 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Five year record continued
|
Return on capital employed is calculated as total profit before taxation as a percentage of average net assets over the year.
246 |
GSK Annual Report 2016 |
|||
Financial record continued
Five year record continued
|
The 4pm buying rate on 3 March 2017 was £1= US$1.23.
247 | GSK Annual Report 2016 |
Strategic report
|
||||
Pipeline, products and competition |
Governance and remuneration
|
|||||
Financial statements
|
||||||
Investor information
|
Pharmaceuticals and Vaccines product development pipeline
|
Key | | In-licence or other alliance relationship with third party | ||
^ | ViiV Healthcare, a global specialist HIV company with GSK, Pfizer, Inc. and Shionogi Limited as shareholders, is responsible for developing and delivering HIV medicines. | |||
* | Also being developed for indications in another therapeutic area | |||
1 | Option-based alliance with Ionis Pharmaceuticals | |||
2 | Option-based alliance with Adaptimmune Ltd. | |||
3 | Option-based alliance with OncoMed Pharmaceuticals | |||
4 | Option-based alliance with Telethon and Ospedale San Raffaele | |||
5 | Option-based alliance with Valneva |
S | Month of first submission | |
BLA | Biological Licence Application | |
MAA | Marketing Authorisation Application (Europe) | |
NDA | New Drug Application (US) | |
Phase I | Evaluation of clinical pharmacology, usually conducted in volunteers | |
Phase II | Determination of dose and initial evaluation of efficacy, conducted in a small number of patients | |
Phase III | Large comparative study (compound versus placebo and/or established treatment) in patients to establish clinical benefit and safety |
MAA and NDA/BLA regulatory review milestones shown in the table below are those that have been achieved. Future filing dates are not included in this list.
248 |
GSK Annual Report 2016 |
|||
Pipeline, products and competition continued
Pharmaceuticals and Vaccines product development pipeline continued
|
249 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Pharmaceuticals and Vaccines product development pipeline continued
|
Brand names appearing in italics are trademarks either owned by and/or licensed to GlaxoSmithKline or associated companies
250 |
GSK Annual Report 2016 |
|||
Pipeline, products and competition continued
Pharmaceutical products, competition and intellectual property
|
* | See Principal risks and uncertainties on page 254 for details of uncertainty on the timing of follow-on competition. |
1 | See Note 46 to the financial statements, Legal proceedings. |
2 | Generic competition possible in 2017. |
3 | Includes Supplementary Protection Certificates which were granted in multiple countries in EU and patent term extensions granted in the US. |
4 | Data exclusivity expires 2025 (EU) and 2027 (US). |
5 | Generic competition exists in some markets. |
251 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Pharmaceutical products, competition and intellectual property continued
|
Vaccines products, competition and intellectual property
|
Major competitor brands |
Patent expiry dates 3 | |||||||||
|
||||||||||
Products
|
Compounds
|
Indication(s)
|
US
|
EU
|
||||||
Bexsero
|
meningococcal group-B vaccine
|
Meningitis group B prevention
|
Trumenba
|
2027
|
2028 1
|
|||||
Boostrix
|
diphtheria,
tetanus, acellular
|
diphtheria,
tetanus, acellular
|
Adacel |
2017 |
2017 |
|||||
Infanrix Hexa/Pediarix
|
diphtheria,
tetanus, pertussis,
|
Prophylaxis against
diphtheria,
|
Pentacel,
Pediacel,
|
2018 |
expired |
|||||
Cervarix |
HPV 16 & 18
virus like particles
|
human papilloma
virus type 16
|
Gardasil (Silgard) |
2020 |
2020 |
|||||
Fluarix Tetra |
split inactivated
influenza
|
seasonal influenza prophylaxis
|
Intenza, Flumist
QIV,
Fluzone QIV, Fluzone High Dose
|
2022 |
2022 |
|||||
FluLaval |
split inactivated
influenza
|
seasonal influenza prophylaxis |
Vaxigrip,
Mutagrip,
Intenza, Flumist
|
2022 |
2022 |
|||||
Menveo |
meningococcal group
A, C, W-
|
Meningitis group A,
C, W-135 and
|
Mencevax, Menactra |
2025 |
2025 |
|||||
Prepandrix |
derived split
inactivated influenza
|
pandemic H5N1
influenza
|
Aflunov, Vepacel |
|
2026 |
|||||
Priorix
2
, Priorix Tetra
a,b
|
live attenuated
measles, mumps,
|
measles, mumps,
rubella and
|
MMR II (M-M-RVaxPro)
|
2019 4 |
expired |
|||||
Rotarix
|
Human rotavirus RIX4414 strain
|
Rotavirus prophylaxis
|
Rotateq
|
|
2020
|
|||||
Synflorix |
conjugated
pneumococcal
|
Prophylaxis
against invasive
|
Prevenar (Prevnar) |
NA |
2024 |
1 | See Note 46 to the financial statements, Legal proceedings. |
2 | Generic competition commenced in many markets during 2016. |
3 | Includes Supplementary Protection Certificates which were granted in multiple countries in EU and patent term extensions granted in the US. |
4 | Refers to Priorix and Priorix Tetra , as all patents on Varilrix have expired. |
a | Related compounds/indications are measles, mumps and rubella vaccine/prophylaxis |
b | Related compound is varicella vaccine |
252 |
GSK Annual Report 2016 |
|||
Pipeline, products and competition continued
Consumer Healthcare products and competition
|
Brand | Products | Application | Markets | Competition | ||||
Wellness | ||||||||
Panadol
and
|
tablets, caplets, infant syrup drops |
paracetamol-based
treatment for
|
global (except US) |
Advil, Pfizer Aspirin, Bayer Tylenol, Johnson & Johnson
|
||||
Voltaren |
topical gel |
non-steroidal,
diclofenac based
|
global |
Advil, Pfizer Aspirin, Bayer Tylenol, Johnson & Johnson
|
||||
Otrivin |
nasal spray |
nasal decongestant |
Germany,
Poland,
|
Afrin, Merck Nasivin, Merck |
||||
Theraflu |
tablets and syrups |
cold and flu relief |
Russia, Poland,
Ukraine,
|
Tylenol Cold & Flu, Johnson & Johnson Mucinex, Reckitt Benckiser Lemsip, Reckitt Benckiser
|
||||
Flonase
|
nasal spray
|
allergy relief
|
US
|
Claritin, Bayer, Nasacort, Sanofi
|
||||
Flixonase, Piriton
|
nasal spray, tablets
|
allergy relief
|
UK, Ireland
|
Benadryl, Johnson & Johnson
|
||||
ENO |
effervescent |
immediate relief antacid |
global (except US) |
Estomazil, Hypermarca Gelusil, Pfizer
|
||||
Tums |
chewable tablets |
immediate relief antacid |
US |
Alka-Seltzer, Bayer Gaviscon, Reckitt Benckiser Rolaids, Sanofi
|
||||
Nicorette
(US),
(ex. Australia)
|
lozenges, gum
and trans-dermal
|
treatment of
nicotine withdrawal as
|
global |
Nicorette,
Johnson & Johnson
|
||||
Oral health |
||||||||
Sensodyne,
|
toothpastes,
toothbrushes, mouth
|
relief of dentinal
hypersensitivity.
|
global |
Colgate Sensitive
Pro-Relief,
Elmex, Colgate-Palmolive Oral B, Procter & Gamble
|
||||
Parodontax/
|
toothpaste,
medicated mouthwash,
|
helps prevent
bleeding gums, treats
|
Germany,
Ireland
|
Colgate Total Gum
Health,
Yunnan Baiyao, State Enterprise
|
||||
Polident,
|
denture adhesive, denture cleanser |
improve retention
and comfort of
|
global |
Fixodent and Kukident, Procter & Gamble, Steradent, Reckitt Benckiser
|
||||
Aquafresh |
toothpastes,
toothbrushes
|
aids prevention
of dental cavities,
|
global |
Colgate, Colgate-Palmolive Crest, Procter & Gamble Oral-B, Procter & Gamble
|
||||
Skin health |
||||||||
Zovirax
|
topical cream
and non-medicated
|
lip care to
treat and prevent the
|
global |
Compeed, Johnson
& Johnson
Blistex, Blistex Incorporated retail own label
|
||||
Nutrition |
||||||||
Horlicks |
malted drinks and foods |
nutritional beverages & food |
Indian
sub-continent,
|
Bournvita, Mondelez Complan, Heinz |
253 | GSK Annual Report 2016 |
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|
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Governance and remuneration
|
||||||
|
Financial statements
|
|||||
Investor information
|
||||||
The principal risks discussed below are the risks and uncertainties relevant to our business, financial condition and results of operations that may affect our performance and ability to achieve our objectives. The risks below are those that we believe could cause our actual results to differ materially from expected and historical results.
We must adapt to and comply with a broad range of laws and regulations. These requirements apply to research and development, manufacturing, testing, approval, distribution, sales and marketing of Pharmaceutical, Vaccine and Consumer Healthcare products and affect not only the cost of product development but also the time required to reach the market and the likelihood of doing so successfully.
Moreover, as rules and regulations change, and governmental interpretation of those rules and regulations evolves, the nature of a particular risk may change. Changes to certain regulatory regimes may be substantial. Any change in, and any failure to comply with, applicable law and regulations could materially and adversely affect our financial results.
Similarly, our business exposes us to litigation and government investigations, including but not limited to product liability litigation, patent and antitrust litigation and sales and marketing litigation. Litigation and government investigations, including related provisions we may make for unfavourable outcomes and increases in related costs such as insurance premiums, could materially and adversely affect our financial results.
More detail on the status and various uncertainties involved in our significant unresolved disputes and potential litigation is set out in Note 46, Legal proceedings, on pages 226 to 231.
UK regulations require a discussion of the mitigating activities a company takes to address principal risks and uncertainties. A summary of the activities that the Group takes to manage each of our principal risks accompanies the description of each principal risk below. The principal risks and uncertainties are not listed in order of significance.
Patient safety
|
Risk definition
Failure to appropriately collect, review, follow up, or report adverse events from all potential sources, and to act on any relevant findings in a timely manner.
Risk impact
The impact of this risk is potentially to compromise our ability to conduct robust safety signal detection and interpretation and to ensure that appropriate decisions are taken with respect to the risk/ benefit profile of our products, including the completeness and accuracy of product labels and the pursuit of additional studies/ analyses, as appropriate. This could lead to potential harm to patients, reputational damage, product liability claims or other litigation, governmental investigation, regulatory action such as fines, penalties or loss of product authorisation.
Context
Pre-clinical and clinical trials are conducted during the development of investigational Pharmaceutical, Vaccine and Consumer Healthcare Products to determine the safety and efficacy of the products for use by humans. Notwithstanding the efforts we make to determine the safety of our products through appropriate pre-clinical and clinical trials, unanticipated side effects may become evident only when products are widely introduced into the marketplace. Questions about the safety of our products may be raised not only by our ongoing safety surveillance and post-marketing studies but also by governmental agencies and third-parties that may analyse publicly available clinical trial results.
The Group is currently a defendant in a number of product liability lawsuits, including class actions, that involve significant claims for damages related to our products. Litigation, particularly in the US, is inherently unpredictable. Class actions that seek to sweep together all persons who take our products increase the potential liability. Claims for pain and suffering and punitive damages are frequently asserted in product liability actions and, if allowed, can represent potentially open-ended exposure and thus, could materially and adversely affect the Groups financial results.
Mitigating activities
The Chief Medical Officer (CMO) is responsible for medical governance for the Group under a global policy. Under that policy, safeguarding human subjects in our clinical trials and patients who take our products is of paramount importance, and the CMO has the authoritative role for evaluating and addressing matters of human safety.
Individual Medical Officers within the Pharmaceutical, Vaccines and Consumer Healthcare businesses and the Groups substantial Safety and Pharmacovigilance organisation keep track of any adverse issues reported for our products during the course of clinical studies. Once a Group product is approved for marketing, the Group has an extensive post-marketing surveillance and signal detection system. Information on possible side effects of products is received from several sources including unsolicited reports from health professionals and patients, regulatory authorities, medical and scientific literature and the media. It is our policy that employees are required to report immediately any issues relating to the safety or quality of our products. Each of our country managers is responsible for monitoring, exception tracking and training that helps assure the collection of safety information and reporting the information to the relevant central safety department, in accordance with Group policy and legal requirements.
Information that changes the risk/benefit profile of one of the Groups products will result in certain actions to characterise, communicate and minimise the risk. Proposed actions are discussed with regulatory authorities and can include modifying the prescribing information, communications to physicians and other healthcare providers, restrictions on product prescribing/availability to help assure safe use, and sometimes carrying out further clinical trials. In certain cases, it may be appropriate to stop clinical trials or to withdraw the medicine from the market. The Groups Global Safety Board (GSB), comprising senior physicians and representatives of supporting functions, is an integral component of the system. The GSB (including subsidiary boards dedicated to Consumer Healthcare Products and Vaccines) reviews the safety of investigational and marketed products across the Group and has the authority to stop a clinical trial if continued conduct of such trial is not ethically or scientifically justified in light of information that has emerged since the start of the trial.
In addition to the medical governance framework within the Group as described above, the Group uses several mechanisms to foster the early evaluation, mitigation, and resolution of disputes as they arise and of potential claims even before they arise. The goal of the programmes is to create a culture of early identification and evaluation of risks and claims (actual or potential), in order to minimise liability and litigation.
254 |
GSK Annual Report 2016 |
|||
Principal risks and uncertainties continued
Intellectual property
|
Risk definition
Failure to appropriately secure, maintain and enforce intellectual property rights.
Risk impact
Any failure to obtain or subsequent loss of patent protection in a market, including reducing the availability or scope of patent rights or compulsory licensing (in which a government forces a manufacturer to license its patents for specific products to a competitor), could materially and adversely affect our financial results in that market. Absence of adequate patent or data exclusivity protection in a market could limit the opportunity to rely on that market for future sales growth for our products, which could also materially and adversely affect our financial results in that market.
Context
As an innovative Pharmaceutical, Vaccine and Consumer Healthcare Products company, we seek to obtain appropriate intellectual property protection for our products. Our ability to obtain and enforce patents and other proprietary rights with regard to our products is critical to our business strategy and success. Pharmaceutical products are usually only protected from being copied by generic manufacturers during the period of exclusivity provided by an issued patent or related intellectual property rights such as regulatory data protection or orphan drug status. Following expiration of certain intellectual property rights, a generic manufacturer may lawfully produce a generic version of the product.
We operate in markets where intellectual property laws and patent offices are still developing and where governments may be unwilling to grant or enforce intellectual property rights in a fashion similar to more developed regions such as the EU, Japan and the US. Some developing countries have limited, or threatened to limit, effective patent protection for pharmaceutical products in order to facilitate early competition within their markets from generic manufacturers.
We face competition from manufacturers of proprietary and generic pharmaceutical products in all of our major markets. Introduction of generic products, particularly in the US where we have our highest turnover and margins, typically leads to a rapid and dramatic loss of sales and reduces our revenues and margins for our proprietary products. Since there is no abbreviated pathway that leads to substitutable generic vaccines, competition in that market arises from branded products or generic branded products and erosion of sales, revenues and margins is less dramatic. In addition, the proprietary technology used in manufacture and the capital investment in facilities create barriers to entry into the vaccine markets.
We depend on certain key products for a significant portion of our sales. One such product is our respiratory pharmaceutical product Seretide/Advair which accounts for significant Group sales worldwide. The patent for compositions containing the combination of active substances in Seretide/Advair has expired. Generic products containing the same combination of active substances as Seretide/Advair (in both dry powder inhalers and metered dose inhalers) have been launched by several manufacturers in a number of European markets. New drugs applications (ANDAs) have been filed in the US by generic competitors for Seretide/Advair Diskus. The date of such approvals is uncertain at this time but could come as early as March 2017. The timing of an ANDA for Advair HFA in the US is uncertain. We have patents on the formulation and device used in the metered dose inhaler, although the protection afforded by these patents is uncertain at present. Similar patents exist for Ventolin HFA and Flovent HFA.
The expiration dates for patents for our major products which may affect the dates on which generic versions of our products may be introduced are set out on pages 250 to 251. The listed annual expiration dates are not meant to indicate the certainty of exclusivity for the listed products, as patents may be designed around or invalidated prior to their expiration, resulting in earlier entry of a generic product. Legal proceedings involving patent challenges are set out in Note 46 to the financial statements, Legal proceedings.
Generic drug manufacturers have also exhibited a readiness to market generic versions of many of our most important products prior to the expiration of our patents. Their efforts may involve challenges to the validity or enforceability of a patent or assertions that their generic product does not infringe our patents. As a result, we are and may continue to be involved in legal proceedings involving patent challenges, which may materially and adversely affect our financial results. Moreover, in the US, it has become common for patent infringement actions to prompt claims that anti-trust laws have been violated during the prosecution of the patent or during litigation involving the defence of that patent. Such claims by direct and indirect purchasers and other payers are typically filed as class actions. The relief sought may include treble damages and restitution claims. Similarly, anti-trust claims may be brought by government entities or private parties following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of anti-trust laws. A successful anti-trust claim by a private party or government entity could materially and adversely affect our financial results.
Mitigating activities
Our Global Patents group focuses on securing, maintaining and enforcing our patent rights. This global group maintains internal processes designed to seek to ensure successful procurement, enforcement and defence of our patents with the goal of lawfully maintaining exclusive rights in markets for our products.
The Global Patents group monitors new developments in international patent law to seek to ensure appropriate protection of our assets. Sometimes acting through trade associations, we work with local governments to seek to secure effective and balanced intellectual property laws designed to meet the needs of patients and payers while supporting long-term investment in innovation.
255 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Product quality
|
Risk definition
Failure to comply with current Good Manufacturing Practices (cGMP) or inadequate controls and governance of quality in the supply chain covering supplier standards, manufacturing and distribution of products.
Risk impact
A failure to ensure product quality could have far reaching implications in terms of patient and consumer safety resulting in product launch delays, supply interruptions and product recalls which would have the potential to do damage to GSKs reputation. Associated regulatory, legal, and financial consequences could materially and adversely affect company reputation and financial results.
Context
Patients, consumers and healthcare professionals trust the quality of our products. Product quality may be influenced by many factors including product and process understanding, consistency of manufacturing components, compliance with GMP, accuracy of labelling, reliability of the external supply chain, and the embodiment of an overarching quality culture. The internal and external environment continues to evolve as new products, new markets and new legislation are introduced, with increasing scrutiny of data integrity, supply continuity and drug shortages. Review of inspections conducted across the industry by national regulatory authorities during 2016 highlighted an ongoing focus on data integrity, third party oversight and the timely escalation of pertinent issues to regulatory authorities.
Mitigating activities
We have developed and implemented a single Pharmaceutical Quality System (PQS) that defines the quality standards and systems for our businesses associated with Pharmaceuticals, Vaccines and Consumer Healthcare products and clinical trial materials. This system has a broad scope and is applicable throughout the product lifecycle from R&D to mature commercial supply.
There is no single external quality standard or system that governs the detailed global regulatory expectations for the quality of medicinal products. Requirements are often complex and fragmented across national and regional boundaries. Consequently, we have adopted the internationally recognised principles from the ICH Q10: Pharmaceutical Quality Systems framework as the basis for the GSK PQS. This is an industry standard which incorporates quality concepts throughout the product lifecycle. The GSK PQS is augmented by a consolidation of the numerous regulatory requirements defined by markets across the world, which assures that the GSK PQS meets external expectations for product quality in the markets supplied. The PQS is regularly updated to ensure that it keeps pace with the evolving external regulatory environment. New scientific understanding and operational improvements are incorporated into the PQS to support the delivery of consistent and reliable products.
An extensive global network of quality and compliance professionals is aligned with each business unit to provide oversight and assist with the delivery of quality performance and operational compliance, from site level to senior management level. Management oversight of those activities is accomplished through a hierarchy of Quality Councils and through an independent Chief Product Quality Officer and Global Product Quality Office. In 2016 we introduced a revised approach to monitoring Regulated Quality (GxP) performance to provide the Corporate Executive Team with an integrated assessment of key performance indicators (KPIs). The defined KPIs cover manufacturing practice, clinical practice, pharmacovigilance practice, regulatory practice, drug safety assessment, and animal welfare.
We have implemented a risk-based approach to assessing and managing third party suppliers that provide materials which are used in finished products. Contract manufacturers making our products are expected to comply with GSK standards and are regularly audited to provide assurance that standards are met.
All staff members are regularly trained to ensure that cGMP standards and behaviours based on our values are followed. Additionally, advocacy and communication programmes are routinely deployed to ensure consistent messages are conveyed across the organisation, whether they originate from changes in regulation, learnings from inspections, or regulatory submissions. There is a continued emphasis on the value of quality performance metrics to facilitate improvement and foster a culture of right first time.
256 |
GSK Annual Report 2016 |
|||
Principal risks and uncertainties continued
Financial controls and reporting
|
Risk definition
Failure to comply with current tax law or incurring significant losses due to treasury activities; failure to report accurate financial information in compliance with accounting standards and applicable legislation; failure to maintain adequate governance and oversight over third-party relationships.
Risk impact
Non-compliance with existing or new financial reporting and disclosure requirements, or changes to the recognition of income and expenses, could expose us to litigation and regulatory action and could materially and adversely affect our financial results. Changes in tax laws or in their application with respect to matters such as transfer pricing, foreign dividends, controlled companies, R&D tax credits, taxation of intellectual property or a restriction in tax relief allowed on the interest on intra-group debt, could impact our effective tax rate. Significant losses may arise from inconsistent application of treasury policies, transactional or settlement errors, or counterparty defaults. Any changes in the substance or application of the governing tax laws, failure to comply with such tax laws or significant losses due to treasury activities could materially and adversely affect our financial results.
Failure to adequately manage third party relationships could result in business disruption and exposure to risk ranging from sub-optimal contractual terms and conditions, to severe business sanctions and/ or significant reputational damage. Any of these consequences could materially and adversely affect our business operations and financial results.
Context
The Group is required by the laws of various jurisdictions to disclose publicly its financial results and events that could materially affect the financial results of the Group. Regulators routinely review the financial statements of listed companies for compliance with new, revised or existing accounting and regulatory requirements. The Group believes that it complies with the appropriate regulatory requirements concerning our financial statements and disclosure of material information including any transactions relating to business restructuring such as acquisitions and divestitures. However, should we be subject to an investigation into potential non-compliance with accounting and disclosure requirements, this may lead to restatements of previously reported results and significant penalties.
Our Treasury group deals in high value transactions, mostly foreign exchange and cash management transactions, on a daily basis. These transactions involve market volatility and counterparty risk. The Groups effective tax rate reflects rates of tax in the jurisdictions in which the Group operates that are both higher and lower than the UK rate and takes into account regimes that encourage innovation and investment in science by providing tax incentives which, if changed, could affect the Groups tax rate. In addition, the worldwide nature of our operations and cross-border supply routes can result in conflicting claims from tax authorities as to the profits to be taxed in individual countries. The tax charge included in our financial statements is our best estimate of the Groups tax liability pending audits by tax authorities.
There continues to be a significant international focus on tax reform, including the OECDs Base Erosion and Profit Shifting (BEPS) project and European Commission initiatives such as the increased use of fiscal state aid investigations. Together with domestic initiatives around the world, these may result in significant changes to established tax principles and an increase in tax authority disputes. These, regardless of their merit or outcomes, can be costly, divert management attention and may adversely impact our reputation.
Third parties are critical to our business delivery and are an integral part of the solution to improve our productivity, quality, service and innovation. We rely on third parties, including suppliers, distributors, individual contractors, licensees, and other pharmaceutical and biotechnology collaboration partners for discovery, manufacture, and marketing of our products and important business processes.
Third party business relationships present a material risk. For example, we share critical and sensitive information such as marketing plans, clinical data, and employee data with specific third parties who are conducting the relevant outsourced business operations. Inadequate protection or misuse of this information by third parties could have significant business impact. Similarly, we use distributors and agents in a range of activities such as promotion and tendering which have inherent risks such as inappropriate promotion or unethical business practices. Insufficient internal compliance and controls by the distributors could affect our reputation. These risks are further increased by the complexities of working with large numbers of third parties.
Mitigating activities
The Group maintains a control environment designed to identify material errors in financial reporting and disclosure. The design and operating effectiveness of key financial reporting controls are regularly tested by management and via independent business monitoring. This provides us with the assurance that controls over key financial reporting and disclosure processes have operated effectively.
We keep up to date with the latest developments in financial reporting requirements by working with our external auditors and legal advisors.
There is shared accountability for financial results across our businesses. Financial results are reviewed and approved by regional management and then reviewed with the Financial Controller and the Chief Financial Officer (CFO). This allows our Financial Controller and our CFO to assess the evolution of the business over time, and to evaluate performance to plan. Significant judgements are reviewed and confirmed by senior management. Business reorganisations and newly acquired activities are integrated into risk assessments and appropriate controls and reviews are applied. Counterparty exposure is subject to defined limits approved by the Board for both credit rating and individual counterparties.
In 2016, we created a Finance Risk and Controls Centre of Excellence to maintain the Finance control framework. We added resources to ensure processes and controls were maintained during business transformation, the upgrade of our financial systems and processes and the ongoing integration of the former Novartis businesses into our control and reporting framework. Additional risk mitigation was introduced by amending the programme timelines of system upgrades.
257 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Financial controls and reporting continued
|
The Group maintains a Disclosure Committee reporting to the Board, which reviews the Groups quarterly results and Annual Report and Form 20-F and determines throughout the year, in consultation with its legal advisors, whether it is necessary to disclose publicly information about the Group through Stock Exchange announcements. The Treasury Management Group meets on a regular basis to seek to ensure that liquidity, interest rate, counterparty, foreign currency transaction and foreign currency translation risks are all managed in line with the conservative approach as detailed in the associated risk strategies and policies which have been adopted by the Board.
Oversight of Treasurys role in managing counterparty risk in line with agreed policy is performed by a Corporate Compliance Officer, who operates independently of Treasury. Further details on mitigation of Treasury Risks can be found on pages 212 to 213 in Note 42, Financial instruments and related disclosures. Tax risk is managed by a set of policies and procedures to seek to ensure consistency and compliance with tax legislation. We seek to maintain open, positive relationships with governments and tax authorities worldwide. We monitor government debate on tax policy in our key jurisdictions to deal proactively with any potential future changes in tax law. We engage advisors and legal counsel to review tax legislation and the implications for our business. Where relevant we are active in providing relevant business input to tax policy makers. Significant decisions are considered and agreed by the Tax Governance Board, which meets quarterly and is made up of senior personnel from across the Finance group.
A centralised team of dedicated specialists are responsible for managing transactional tax reporting and compliance. We submit tax returns according to statutory time limits and engage with tax authorities to seek to ensure our tax affairs are current, entering into arrangements such as Continuous Audit Programmes and Advance Pricing Agreements to provide long-term certainty over tax treatment where appropriate. In exceptional cases where matters cannot be settled by agreement with tax authorities, we may have to resolve disputes through formal appeals or other proceedings.
Each business unit leadership team retains ultimate accountability for managing third party interactions and risks. When working with third parties, all employees are expected to manage external interactions and commitments responsibly. This expectation is embedded in our values and Code of Conduct. It is our responsibility that all activities are performed safely and in compliance with applicable laws and our values, standards and Code of Conduct.
To seek to guide and enforce our global principles for interactions with third parties, we have in place a policy framework applicable to buying goods and services, managing our external spend, paying and working with our third parties. This policy framework applies to all employees and complementary workers worldwide. The framework is complemented by technical and local standards designed to seek to ensure alignment with the nature of third party interactions, such as good manufacturing practice and adherence to local laws and regulations. Independent business monitoring of key financial and operational controls is in place and is supplemented by periodic checks from the companys independent Audit & Assurance function.
Continuous monitoring and performance of third parties is enhanced through the Third Party Oversight programme managed through the Global Ethics and Compliance organisation. The global programme, which completed deployment across LATAM and South East Asia countries in 2016, takes an enterprise wide view of third party related risks. The programme is strengthening risk assessment and due diligence efforts on third parties and improving the overall management of our third party risks through the lifecycle of the third party engagement.
258 |
GSK Annual Report 2016 |
|||
Principal risks and uncertainties continued
Anti-Bribery and Corruption
|
Risk definition
Failure of GSK employees, consultants and third parties to comply with our Anti-bribery and corruption (ABAC) principles and standards, as well as with all applicable legislation.
Risk impact
Failure to mitigate this risk could expose the Group and associated persons to governmental investigation, regulatory action and civil and criminal liability.
In addition to legal penalties, a failure to prevent bribery through complying with ABAC legislation and regulations could have substantial implications for the reputation of the company, the credibility of senior leaders, and an erosion of investor confidence in our governance and risk management.
Context
We are exposed to bribery and corruption risk through our global business operations. In some markets, the government structure and the rule of law are less developed, and this has a bearing on our bribery and corruption risk exposure. In addition to the global nature of our business, the healthcare sector is highly competitive and subject to regulation. This increases the instances where we are exposed to activities and interactions with bribery and corruption risk.
The Group has been subject to a number of ABAC inquiries. We have reached a resolution with US authorities in 2016 regarding their ABAC inquiry, whilst the inquiry of the UK authorities is ongoing. These investigations are discussed further in Note 46 Legal proceedings.
Mitigating activities
Our Code of Conduct, values and behaviours and commitment to zero tolerance are integral to how we mitigate this risk. In light of the complexity and geographic breadth of this risk, we constantly evolve our oversight of activities and data, reinforce to our employees and contractors clear expectations regarding acceptable behaviours, and maintain on-going communications between the Group headquarters and local markets.
The Group has an enterprise-wide ABAC programme designed to ensure compliance with the Groups ABAC policies and prevent the risk of bribery and corruption. It builds on our values and business standards to form a comprehensive and practical approach to compliance, and is flexible to the evolving nature of our business.
Our ABAC programme is built on best in class principles and a range of features which collectively enable us to manage the risk from top down and bottom up. For example, the programme comprises top-level commitment from the Group Board of Directors and leadership; a global risk assessment to enable targeted intervention and compliance monitoring activities. The programme is underpinned by a global ABAC policy and written standards that address commercial and other practices that give rise to ABAC risk and ongoing training and communications. In addition, the programme mandates enhanced controls over interactions with government officials and during business development transactions. All employees are required to complete comprehensive ABAC training dependent on role requirements.
Programme governance is provided by the Groups ABAC Governance Board which includes representation from key functional areas and business units. We have a dedicated ABAC team responsible for the implementation and evolution of the programme in response to developments in the internal and external environment. This is complemented with independent oversight and assurance undertaken by the Audit and Assurance and Independent Business Monitoring teams.
We continually benchmark our ABAC programme against other large multinational companies and use external expertise to drive improvements in the programme.
259 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Commercialisation
|
Risk definition
Failure to execute business strategies, or effectively manage competitive opportunities and threats in accordance with the letter and spirit of legal, industry, or the Groups requirements.
Risk impact
Failure to manage risks related to commercialisation could materially and adversely affect our ability to grow a diversified global business and deliver more products of value for patients and consumers. Failure to comply with applicable laws, rules and regulations may result in governmental investigation, regulatory action and legal proceedings brought against the Group by governmental and private plaintiffs. Failure to provide accurate and complete information related to our products may result in incomplete awareness of the risk/benefit profile of our products and possibly suboptimal treatment of patients and consumers. Any of these consequences could materially and adversely affect the Group.
Any practices that are found to be misaligned with our values could also result in reputational damage and dilute trust established with external stakeholders.
Context
We operate on a global basis in an industry that is both highly competitive and highly regulated. Our competitors may make significant product innovations and technical advances and may intensify price competition. In light of this competitive environment, continued development of commercially viable new products and the development of additional uses for existing products are critical to achieve our strategic objectives. As do other pharmaceutical vaccine and consumer companies, the Group faces downward price pressure in major markets, declining emerging market growth, and negative foreign exchange impact.
Developing new Pharmaceutical, Vaccine and Consumer Healthcare products is a costly, lengthy and an uncertain process. A product candidate may fail at any stage, including after significant Group economic and human resources have been invested. Our competitors products or pricing strategies or any failure on our part to develop commercially successful products, or to develop additional uses for existing products, could materially and adversely affect our ability to achieve our strategic objectives.
We are committed to the ethical and responsible commercialisation of our products to support our mission to improve the quality of human life by enabling people to do more, feel better, and live longer. To accomplish this mission, we engage the healthcare community in various ways to provide important information about our medicines.
Promotion of approved products seeks to ensure that healthcare professionals (HCPs) globally have access to information they need, that patients and consumers have access to the information and products they need and that products are prescribed, recommended or used in a manner that provides the maximum healthcare benefit to patients and consumers. We are committed to communicating information related to our approved, products in a responsible, legal, and ethical manner.
While business units within the Group are confronted by common types of commercialisation risks, differences do exist in the types of risks that present themselves, the degree of risk presented in that business unit and, consequently, how those risks are managed. This reflects the different nature and profile of the business units across the Group.
Mitigating activities
Our strategic objectives are designed to ensure the Group achieves its mission of helping people do more, feel better and live longer. The Group continues to strive for new product launches that are competitive and resourced effectively, as well as a healthy proportion of its sales ratio attributable to new product or innovation sales. This innovation helps the Group defray the effect, for example, of downward price pressure in major markets, declining emerging market growth and negative foreign exchange impact.
Establishing new products that are priced to balance expectations of patients and consumers, HCPs, payers, shareholders, and the community enables the Group to maintain a strong global business and remain relevant to the needs of patients and consumers. Our values provide a guide for how we lead and make decisions. We constantly strive to do the right thing and deliver quality products, seeking to ensure our behaviours reflect our values and the mission of our company.
We have taken action at all levels of the Group to enhance and improve standards and procedures for promotional interactions, based on our values of transparency, respect, integrity and patient focus. We have policies and standards governing promotional activities undertaken by the Group or on its behalf. All of these activities we conduct worldwide must conform to high ethical, regulatory, and industry standards. Where local standards differ from global standards, the more stringent of the two applies.
The Group has harmonised policies and procedures to guide above country commercial practices processes as well as clarified applicable standards when engaging in the markets. Each business unit within the Group has adopted GSKs Internal Control Framework to support the assessment and management of its risks. Commercial practices activities have appropriate monitoring programmes and oversight from both business unit Risk Management and Compliance Boards and Country Executive Boards that manage risks across in-country business activities.
All promotional materials and activities must be reviewed and approved according to the Groups policies and standards, and conducted in accordance with local laws and regulations, to seek to ensure that these materials and activities fairly represent the products or services of the Group. When necessary, we have disciplined (up to and including termination) employees who have engaged in misconduct and have broadened our ability to claw back remuneration from senior management in the event of misconduct.
The Group continues to evolve its commercial operating model, embedding industry leading changes in the compensation model for sales professionals and their managers who interact with HCPs. These changes eliminated rewards based on sales or market share of prescription products in individuals territories in favour of rewards based on the quality of the individuals interactions with HCPs. Furthermore, from the beginning of 2016, GSK stopped paying HCPs to deliver promotional presentations for GSK to other HCPs or sponsor their travel to medical educational conferences.
260 |
GSK Annual Report 2016 |
|||
Principal risks and uncertainties continued
Research practices
|
Risk definition
Failure to adequately conduct ethical and sound preclinical and clinical research. In addition, failure to engage in scientific activities that are consistent with the letter and spirit of the law, industry, or the Groups requirements.
Risk impact
The impacts of the risk include harm to human subjects, reputational damage, failure to obtain the necessary regulatory approvals for our products, governmental investigation, legal proceedings brought against the Group by governmental and private plaintiffs (product liability suits and claims for damages), and regulatory action such as fines, penalties, or loss of product authorisation. Any of these consequences could materially and adversely affect our financial results.
Context
Research relating to animals can raise ethical concerns. While we attempt to address this proactively, animal studies remain a vital part of our research. In many cases, they are the only method that can be used to investigate the effects of a potential new medicine in a living body before it is tested in humans, and they are generally mandated by regulators and ethically imperative. Animal research can provide critical information about the causes of diseases and how they develop. Nonetheless, we are continually seeking ways in which we can minimise our use of animals in research, whilst complying with regulatory requirements.
Clinical trials in healthy volunteers and patients are used to assess and demonstrate an investigational products efficacy and safety or further evaluate the product once it has been approved for marketing. We also work with human biological samples. These samples are fundamental to the discovery, development and safety monitoring of our products. The integrity of our data is essential to success in all stages of the research data lifecycle: design, generation, recording and management, analysis, reporting and storage and retrieval. Our research data is governed by legislation and regulatory requirements. Research data and supporting documents are core components at various stages of pipeline progression decision-making and also form the content of regulatory submissions. Poor data integrity can compromise our research efforts.
There are innate complexities and interdependencies required for regulatory filings, particularly given our global research and development footprint. Rapid changes in submission requirements in developing countries continue to increase the complexity of worldwide product registration. Scientific engagement (SE), defined as the interaction and exchange of information between GSK and external communities in order to advance scientific and medical understanding, including the appropriate development and use of our products, is an essential part of scientific discourse. Such non-promotional engagement with external stakeholder groups is vital to GSKs mission and necessary for scientific and medical advance. The scope of SE activities includes: advisory boards; scientific consultancies; pre-planned informal discussions with healthcare professionals (HCP); sharing medical information; publications (including abstracts to congresses); scientific interactions with payers, patients, governments and the media; and support for independent medical education. SE activities are essential but present legal, regulatory, and reputational risk if the sharing of data, invited media coverage or payments for service providers has, or is perceived to have, promotional intent. The risks are particularly high where HCP engagement and associated financial and/or transfer of value disclosures are required by GSK.
Mitigating activities
We established an Office of Animal Welfare, Ethics and Strategy (OAWES), led by the Chief of Animal Welfare, Ethics and Strategy, to seek to ensure the humane and responsible care of animals and increase the knowledge and application of non-animal alternatives for the Group. OAWES embeds a framework of animal welfare governance, promotes application of 3Rs (replacement, refinement and reduction of animals in research), explores opportunities for cross-industry data sharing, and conducts quality assessments.
We make information available on our studies, including summaries of the results whether positive or negative. GSK was the first company to publish clinical study reports that form the basis of submissions to regulatory agencies and we have publically posted more than 1,830 clinical study reports in addition to more than 6,000 study result summaries. Detailed patient-level data from approximately 2,000 clinical studies can be requested and accessed through clinicalstudydatarequest.com.
We have a Global Human Biological Samples Management (HBSM) governance framework in place to oversee the ethical and lawful acquisition and management of human biological samples. Our global HBSM network champions HBSM activities and provides an experienced group to support internal sample custodians on best practice. It remains an important priority to enhance our data integrity controls. A Data Integrity Committee was in place throughout the year to provide oversight and a Data Integrity Quality Assurance team began conducting assessments intended to provide independent business monitoring of our internal controls for R&D activities
The Chief Regulatory Officer oversees the activities of the Regulatory Governance Board which includes promoting compliance with regulatory requirements and Group-wide standards, making regulatory services more efficient and agile, and further aligning regulatory capabilities with our international business needs at the enterprise and local levels. The Group strictly prohibits promotional practices prior to marketing authorisation, and care is taken to seek to ensure that SE activity is not promotional.
Specific accountability and authorisation for SE resides within the Medical Governance framework that is overseen by the Global Medical Topic Board (GMTB), accountable to the Chief Medical Officer. GMTB is responsible for oversight of applicable policies and seeking to ensure the highest level of integrity and continuous development of SE at GSK. This framework seeks to ensure the right level of accountability and clear programme guidance at above country across R&D business units and in Local Operating Companies.
The Research Practices risk is now aligned with a new Enterprise framework that seeks to ensure strengthened governance across the R&D businesses in Pharmaceutical, Vaccines and Consumer Healthcare. Under the leadership of the Chief Research Practices Officer, management of the risk will take a practical approach to information sharing, streamlining risk identification and escalation while ensuring ownership stays at the business unit level and allows for a proportional risk treatment plan.
261 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Environment, health and safety and sustainability
|
Risk definition
Failure to manage environment, health and safety and substainability (EHS&S) risks in line with our objectives and policies and with relevant laws and regulations.
Risk impact
Failure to manage EHS&S risks could lead to significant harm to people, the environment and communities in which we operate, fines, failure to meet stakeholder expectations and regulatory requirements, litigation or regulatory action, and damage to the Groups reputation and could materially and adversely affect our financial results.
Context
The Group is subject to health, safety and environmental laws of various jurisdictions. These laws impose duties to protect people, the environment, and the communities in which we operate, as well as potential obligations to remediate contaminated sites. We have also been identified as a potentially responsible party under the US Comprehensive Environmental Response Compensation and Liability Act at a number of sites for remediation costs relating to our use or ownership of such sites in the US. Failure to manage these environmental risks properly could result in litigation, regulatory action and additional remedial costs that may materially and adversely affect our financial results. See Note 46 to the financial statements, Legal proceedings, for a discussion of the environmental related proceedings in which we are involved. We routinely accrue amounts related to our liabilities for such matters.
Mitigating activities
The Corporate Executive Team (CET) is responsible for EHS&S governance for the Group under a global policy. Under that policy, the CET seeks to ensure there is a control framework in place to manage the risks, impacts and legal compliance issues that relate to EHS&S and for assigning responsibility to senior managers for providing and maintaining those controls. Individual managers seek to ensure that the EHS&S control framework is effective and well implemented in their respective business area and that it is fully compliant with all applicable laws and regulations, adequately resourced, maintained, communicated, and monitored. Additionally, each employee is personally responsible for ensuring that all applicable local standard operating procedures are followed by them and expected to take responsibility for EHS&S matters.
Our risk-based, proactive approach is articulated in our refreshed Global EHS&S standard which supports our EHS&S policy and our objective to discover, develop, manufacture, supply and sell our products without harming people or the environment. In addition to the design and provision of safe facilities, plant and equipment, we operate rigorous procedures that help us eliminate hazards where practicable and protect employees health and well-being. Through our continuing efforts to improve environmental sustainability we have reduced our value chain carbon intensity per pack, water consumption and waste generation. We actively manage our environmental remediation obligations and seek to ensure practices are environmentally sustainable and compliant. Our EHS&S performance results are shared externally each year in our Responsible Business Supplement.
Information protection
|
Risk definition
The risk to GSK business activities if information becomes disclosed to those not authorised to see it, or if information or systems fail to be available or are corrupted.
Risk impact
Failure to adequately protect critical and sensitive systems and information may result in loss of commercial or strategic advantage, damage to our reputation, litigation, or other business disruption including regulatory sanction, which could materially and adversely affect our financial results.
Context
We rely on critical and sensitive systems and data, such as corporate strategic plans, sensitive personally identifiable information (PII), intellectual property, manufacturing systems and trade secrets. There is the potential that our computer systems or information may be exposed to misuse or unauthorised disclosure. We are also subject to various laws that govern the processing of PlI.
Mitigating activities
The Group has a global information protection policy that is supported through a dedicated programme of activity. To increase our focus on information security, the Group established the Information Protection & Privacy function to provide strategy, direction, and oversight while enhancing our global information security capabilities.
We assess changes in our information protection risk environment through briefings by government agencies, subscription to commercial threat intelligence services and knowledge sharing with other pharmaceutical and cross-industry companies.
We aim to use industry best practices as part of our information security policies, processes and technologies and invest in strategies that are commensurate with the changing nature of the security threat landscape. A Privacy Centre of Excellence has been established to ensure compliance prior to the deadline with the new General Data Protection Requirements (GDPRs). All employees are required to complete training on the appropriate handling and maintaining of PII.
The Groups Binding Corporate Rules (BCRs) have been approved by the UK Information Commissioners Office for human resource and research activities data. BCRs have been recognised by 29 European states and Switzerland allowing us to transfer PII internationally between the Groups entities without individual privacy agreements in each European Union country. The approval in the remaining two countries, Greece and Romania is expected in 2017.
262 |
GSK Annual Report 2016 |
|||
Principal risks and uncertainties continued
Supply continuity and crisis management
|
Risk definition
Failure to deliver a continuous supply of compliant finished product; inability to respond effectively to a crisis incident in a timely manner to recover and sustain critical operations, including key supply chains. This risk was previously called Crisis and continuity management.
Risk impact
We recognise that failure to supply our products can adversely impact consumers and patients who rely on them. A material interruption of supply or exclusion from healthcare programmes could expose us to litigation or regulatory action and financial penalties that could adversely affect the Groups financial results.
The Groups international operations, and those of its partners, expose our workforce, facilities, operations and information technology to potential disruption from natural events (e.g. storm or earthquake), man-made events (e.g. civil unrest, terrorism), and global emergencies (e.g. Ebola outbreak, Flu pandemic). It is important that GSK has robust crisis management and recovery plans in place to manage such events.
Context
Our supply chain operations are subject to review and approval by various regulatory agencies that effectively provide our licence to operate. Failure by our manufacturing and distribution facilities or by suppliers of key services and materials could lead to litigation or regulatory action such as product recalls and seizures, interruption of supply, delays in the approval of new products, and suspension of manufacturing operations pending resolution of manufacturing or logistics issues.
We rely on materials and services provided by third party suppliers to make our products, including active pharmaceutical ingredients (API), antigens, intermediates, commodities, and components for the manufacture and packaging of Pharmaceutical, Vaccine and Consumer Healthcare products. Some of the third party services procured, such as services provided by contract manufacturing and clinical research organisations to support development of key products, are important to ensure continuous operation of our businesses.
Although we undertake business continuity planning, single sourcing of certain components, bulk API, finished products, and services creates a supply risk in the event of regulatory non-compliance or physical disruption at the manufacturing sites or logistics system. If any of the small number of single-source, third party suppliers and service providers we use fail to fulfil their contractual obligations in a timely manner or experience regulatory non-compliance or physical disruption of their logistics and manufacturing sites, this could also result in delays or service interruptions.
We use effective crisis management and business continuity planning to provide for the health and safety of our people and to minimise impact to the Group, by maintaining functional operations following a natural or man-made disaster, or a public health emergency.
Mitigating activities
Our supply chain model is designed to ensure the supply, quality and security of our products globally, as far as possible. We closely monitor, through the Supply Chain Governance Committees, the inventory status and delivery of our products with the aim to ensure that customers have the Pharmaceutical, Vaccines and Consumer Healthcare products they need.
Improved links between commercial forecasting and manufacturing made possible by our core commercial cycle should, over time, reduce the risk associated with demand fluctuations and any impact on our ability to supply or the cost of write-offs where products exceed their expiry date. Each node of the supply chain is periodically reviewed to ensure adequate safety stock, while balancing working capital in our end-to-end supply chain. Safety stocks and backup supply arrangements for medically critical and high-revenue products are in place to help mitigate this risk. In addition, we routinely monitor the compliance of manufacturing external suppliers in order to identify and manage risks in our supply base. Where practical, minimise our dependence on single sources of supply for critical items. Where alternative sourcing arrangements are not possible, our inventory strategy aims to protect the supply chain from unanticipated disruption.
We continue to implement anti-counterfeit systems such as product serialisation in accordance with emerging supply chain requirements around the world. A corporate policy requires each business unit and functional area head to ensure effective crisis management and business continuity plans are in place that include authorised response and recovery strategies, key areas of responsibility and clear communication routes, before any business disruption occurs.
Corporate Security supports the business by: coordinating crisis management and business continuity training; facilitating simulation exercises; assessing Group preparedness and recovery capability; and providing assurance oversight of the Groups central repository of plans supporting our critical business processes. Each business unit has a governance board which performs risk oversight and monitoring including identifying new and emerging threats. The Group has a coordinated approach to evaluate and manage the implications for our business regarding the UKs exit from the European Union.
These activities help ensure an appropriate level of readiness and response capability is maintained. We also develop and maintain partnerships with external bodies like the Business Continuity Institute and the UN International Strategy for Disaster Risk Reduction, which helps improve our business continuity initiatives in disaster-prone areas and supports the development of community resilience to disasters.
263 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Shareholder information |
Financial statements
|
|||||
Investor information
|
Share capital and control
|
Details of our issued share capital and the number of shares held in Treasury as at 31 December 2016 can be found in Note 33 to the financial statements, Share capital and share premium account.
Our Ordinary Shares are listed on the London Stock Exchange and are also quoted on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADS). Each ADS represents two Ordinary Shares. For details of listed debt and where it is listed refer to Note 31 to the financial statements, Net debt.
Holders of Ordinary Shares and ADS are entitled to receive dividends (when declared), the companys Annual Report, to attend and speak at general meetings of the company, to appoint proxies and to exercise voting rights.
There are no restrictions on the transfer, or limitations on the holding, of Ordinary Shares and ADS and no requirements to obtain approval prior to any transfers. No Ordinary Shares or ADS carry any special rights with regard to control of the company and there are no restrictions on voting rights. Major shareholders have the same voting rights per share as all other shareholders. There are no known arrangements under which financial rights are held by a person other than the holder of the shares and no known agreements on restrictions on share transfers or on voting rights.
Shares acquired through our share schemes and plans rank equally with the other shares in issue and have no special rights. The trustees of our Employee Share Ownership Plan trusts have waived their rights to dividends on shares held by those trusts.
Exchange controls and other limitations affecting security holders
Other than certain economic sanctions, which may be in force from time to time, there are currently no applicable laws, decrees or regulations in force in the UK restricting the import or export of capital or affecting the remittance of dividends or other payments to holders of the companys shares who are non-residents of the UK. Similarly, other than certain economic sanctions which may be in force from time to time, there are no limitations relating only to non-residents of the UK under English law or the companys Articles of Association on the right to be a holder of, and to vote in respect of, the companys shares.
Interests in voting rights
Other than as stated below, as far as we are aware, there are no persons with significant direct or indirect holdings in the company. Information provided to the company pursuant to the Financial Conduct Authoritys (FCA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the companys website, www.gsk.com.
At 3 March 2017, the company had received notifications in accordance with the FCAs DTRs of the following notifiable interests in the voting rights in the companys issued share capital:
No. of shares
|
*Percentage of
capital (%)
|
|||||||
BlackRock, Inc.
|
|
327,305,939
|
|
|
6.66
|
|
* Percentage of Ordinary Shares in issue, excluding Treasury shares.
We have not acquired or disposed of any interests in our own shares during the period under review, with the exception of those transferred from Treasury to satisfy awards under the Groups share plans.
Share buy-back programme
The Board has been authorised to issue and allot Ordinary Shares under Article 9 of the companys Articles of Association. The power under Article 9 and the authority for the company to make purchases of its own shares are subject to shareholder authorities which are sought on an annual basis at our Annual General Meeting (AGM). Any shares purchased by the company may be cancelled or held as Treasury shares or used for satisfying share options and grants under Group employee share plans.
Our programme covers purchases of shares for cancellation or to be held as Treasury shares, in accordance with the authority renewed by shareholders at the AGM in May 2016, when the company was authorised to purchase a maximum of just over 487 million shares. Details of shares purchased, those cancelled, those held as Treasury shares and those subsequently transferred from Treasury to satisfy awards under the Groups share plans are disclosed in Note 33 to the financial statements, Share capital and share premium account.
In determining specific share repurchase levels, the company considers the development of free cash flow during the year. Given the impact of the sustained strength of Sterling on free cash flow, the company suspended its share repurchase programme during 2014 and no shares were purchased during the financial years ended 2015 or 2016.
The company confirms that it does not currently intend to make any further market purchases in 2017. The company will review the potential for future share buy-backs during 2018 in line with its usual annual cycle and subject to return and ratings criteria.
Market capitalisation
The market capitalisation, based on shares in issue excluding Treasury shares, of GSK at 31 December 2016 was £76.69 billion. At that date, GSK was the fifth largest company by market capitalisation in the FTSE index.
Share price |
2016 £
|
2015 £
|
2014 £
|
|||||||||
At 1 January |
|
13.73 |
|
|
13.76 |
|
|
16.12 |
|
|||
At 31 December |
15.62 | 13.73 | 13.76 | |||||||||
Increase/(decrease) |
13.8 | % | (0.2 | )% | (14.6 | )% | ||||||
High during the year |
17.22 | 16.42 | 16.91 | |||||||||
Low during the year
|
|
13.44
|
|
|
12.38
|
|
|
13.24
|
|
The table above sets out the middle market closing prices. The companys share price increased by 13.8% in 2016. This compares with an increase in the FTSE 100 index of 14.4% during the year. The share price on 3 March 2017 was £16.88.
264 |
GSK Annual Report 2016 |
|||
Shareholder information continued
Share capital and control continued
|
Nature of trading market
The following tables set out, for the periods indicated, the high and low middle market closing quotations in pence for the shares on the London Stock Exchange, and the high and low closing prices in US dollars for the ADS on the NYSE.
Ordinary Shares
|
ADS
|
|||||||
Pence per share
|
US dollars per share
|
|||||||
High
|
Low
|
High
|
Low
|
|||||
March 2017* |
1688 | 1667 | 41.99 | 41.38 | ||||
February 2017 |
1654 | 1535 | 41.63 | 39.30 | ||||
January 2017 |
1596 | 1520 | 39.73 | 38.72 | ||||
December 2016 |
1563 | 1459 | 38.55 | 37.38 | ||||
November 2016 |
1607 | 1496 | 40.40 | 37.80 | ||||
October 2016 |
1722 | 1618 | 43.46 | 40.01 | ||||
September 2016 |
1655 | 1592 | 44.27 | 42.51 | ||||
Quarter ended 31 December 2016 |
1722 | 1459 | 43.46 | 37.38 | ||||
Quarter ended 30 September 2016 |
1712 | 1592 | 45.51 | 42.51 | ||||
Quarter ended 30 June 2016 |
1604 | 1388 | 43.48 | 40.04 | ||||
Quarter ended 31 March 2016 |
1439 | 1344 | 42.06 | 38.53 | ||||
Quarter ended 31 December 2015 |
1421 | 1268 | 43.53 | 38.74 | ||||
Quarter ended 30 September 2015 |
1458 | 1238 | 45.14 | 37.56 | ||||
Quarter ended 30 June 2015 |
1642 | 1323 | 48.23 | 41.65 | ||||
Quarter ended 31 March 2015 |
1635 | 1357 | 48.81 | 41.68 | ||||
Year ended 31 December 2016 |
1723 | 1345 | 45.49 | 37.39 | ||||
Year ended 31 December 2015 |
1642 | 1238 | 48.81 | 37.56 | ||||
Year ended 31 December 2014 |
1691 | 1324 | 56.66 | 41.30 | ||||
Year ended 31 December 2013 |
1782 | 1359 | 53.68 | 43.93 | ||||
Year ended 31 December 2012
|
1508
|
1318
|
47.45
|
41.90
|
* to 3 March 2017
Analysis of shareholdings at 31 December 2016
|
Number of
|
% of total
|
% of total
|
Number of shares
|
|||||
Holding of shares |
||||||||
Up to 1,000 |
84,752 | 71.53 | 0.56 | 29,909,424 | ||||
1,001 to 5,000 |
26,603 | 22.46 | 1.07 | 57,343,549 | ||||
5,001 to 100,000 |
6,026 | 5.09 | 1.63 | 87,628,148 | ||||
100,001 to 1,000,000 |
737 | 0.62 | 4.81 | 258,261,583 | ||||
Over 1,000,000
|
360
|
0.30
|
91.93
|
4,935,173,358
|
||||
118,478
|
100.00
|
100.00
|
5,368,316,062
|
|||||
Held by |
||||||||
Nominee companies |
5,699 | 4.81 | 63.53 | 3,410,289,986 | ||||
Investment and trust companies |
23 | 0.02 | 0.22 | 11,672,809 | ||||
Insurance companies |
4 | 0.00 | 0.00 | 1,860 | ||||
Individuals and other corporate bodies |
112,750 | 95.17 | 12.04 | 646,321,560 | ||||
BNY (Nominees) Limited |
1 | 0.00 | 15.69 | 841,823,897 | ||||
Held as Treasury shares by GlaxoSmithKline
|
1
|
0.00
|
8.54
|
458,205,950
|
BNY Mellon is the Depositary for the companys ADS, which are listed on the NYSE. Ordinary Shares representing the companys ADR programme, which is managed by the Depositary, are registered in the name of BNY (Nominees) Limited. At 3 March 2017, BNY (Nominees) Limited held 848,389,001 Ordinary Shares representing 17.25% of the issued share capital (excluding Treasury shares) at that date.
At 3 March 2017, the number of holders of Ordinary Shares in the US was 1,022 with holdings of 1,091,064 Ordinary Shares, and the number of registered holders of ADS was 22,622 with holdings of 424,194,500 ADS. Certain of these Ordinary Shares and ADS were held by brokers or other nominees. As a result, the number of holders of record or registered holders in the US is not representative of the number of beneficial holders or of the residence of beneficial holders.
265 | GSK Annual Report 2016 |
Strategic report
|
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
|
The company pays dividends quarterly and continues to return cash to shareholders through its dividend policy. Dividends remain an essential component of total shareholder return and the company is committed to increasing its dividend over the long-term. Details of the dividends declared, the amounts and the payment dates are given in Note 16 to the financial statements, Dividends.
Dividends per share
The table below sets out the dividend per share and per ADS for the last five years. The dividend per ADS is translated into US dollars at applicable exchange rates.
Year
|
Dividend
|
pence
|
US$
|
|||||||
2016 |
80 | 1 | ||||||||
2015 |
Special* | 20 | 0.57 | |||||||
2015 |
80 | 2.37 | ||||||||
2014 |
80 | 2.59 | ||||||||
2013 |
78 | 2.47 | ||||||||
2012 |
74 | 2.35 |
1 | The Q4 2016 interim ordinary dividend and special dividend receivable by ADR holders will be calculated based on the exchange rate on 11 April 2017. An annual fee of $0.02 per ADS (or $0.005 per ADS per quarter) will be charged by the Depository. The cumulative dividend receivable by ADR holders for Q1, Q2 and Q3 2016 was 1.43 US$. |
* | The 2015 special dividend related to the return of part of the net cash proceeds from the Novartis transaction completed in March 2015. This was paid with the fourth quarter ordinary dividend for 2015. |
Dividend calendar
Quarter
|
ADS ex-dividend date
|
Ex-dividend date
|
Record date
|
Payment date
|
||||
Q4 2016 |
22 February 2017 | 23 February 2017 | 24 February 2017 | 13 April 2017 | ||||
Q1 2017 |
10 May 2017 | 11 May 2017 | 12 May 2017 | 13 July 2017 | ||||
Q2 2017 |
9 August 2017 | 10 August 2017 | 11 August 2017 | 12 October 2017 | ||||
Q3 2017 |
8 November 2017 | 9 November 2017 | 10 November 2017 | 11 January 2018 |
|
Event
|
Date
|
|
Quarter 1 results announcement |
April/May 2017 | |
Annual General Meeting |
May 2017 | |
Quarter 2 results announcement |
July 2017 | |
Quarter 3 results announcement |
October 2017 | |
Preliminary/Quarter 4 results announcement |
February 2018 | |
Annual Report publication |
February/March 2018 | |
Annual Report distribution |
March 2018 |
Information about the company, including the share price, is available on our website at www.gsk.com. Information made available on the website does not constitute part of this Annual Report.
Results announcements
Results announcements are issued to the London Stock Exchange and are available on its news service. They are also sent to the US Securities and Exchange Commission and the NYSE, issued to the media and made available on our website.
Financial reports
The company publishes an Annual Report which is made available on our website from the date of publication. Shareholders may elect to receive the Annual Report by contacting the registrar. Alternatively, shareholders may elect to receive notification by email of the publication of financial reports by registering on www.shareview.co.uk.
Copies of previous financial reports are available on our website. Printed copies can be obtained from our registrar in the UK (see page 268 for the contact details).
266 |
GSK Annual Report 2016 |
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Shareholder information continued
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2.30pm (UK time) on Thursday 4 May 2017
The Queen Elizabeth II Centre, Broad Sanctuary, Westminster, London SW1P 3EE.
The AGM is the companys principal forum for communication with private shareholders. In addition to the formal business, there will be a presentation by the CEO on the performance of the Group and its future development. There will be an opportunity for questions to be asked to the Board. Chairmen of the Boards Committees will take questions relating to those Committees.
Investors holding shares through a nominee service should arrange with that nominee service to be appointed as a proxy in respect of their shareholding in order to attend and vote at the meeting.
ADR holders wishing to attend the meeting must obtain a proxy from BNY Mellon, as Depositary, by notifying them of your request to do so. This will enable you to attend and vote on the business to be transacted. ADR holders may instruct BNY Mellon as to the way in which the shares represented by their ADR should be voted by completing and returning the voting card provided by the Depositary.
Documents on display
The Articles of Association of the company and Directors service contracts or, where applicable, letters of appointment between Directors and the company or any of its subsidiaries (and any side letters relating to severance terms and pension arrangements) are available for inspection at the companys registered office and will be made available for inspection at the AGM.
Tax information for shareholders
|
A summary of certain UK tax and US federal income tax consequences for holders of shares and ADR who are citizens of the UK or the US is set out below. It is not a complete analysis of all the possible tax consequences of the purchase, ownership or sale of these securities. It is intended only as a general guide. Holders are advised to consult their advisers with respect to the tax consequences of the purchase, ownership or sale of their shares or ADR and the consequences under state and local tax laws in the US and the implications of the current UK/US tax conventions.
US holders of ADR generally will be treated as the owners of the underlying shares for the purposes of the current US/UK double taxation conventions relating to income and gains (Income Tax Convention), estate and gift taxes (Estate and Gift Tax Convention), and for purposes of the Internal Revenue Code of 1986, as amended (the Code).
UK shareholders
This summary only applies to a UK resident shareholder that holds shares as capital assets.
Taxation of dividends
Different regimes apply to the taxation of dividend income payable to UK resident individuals in UK tax years up to 5 April 2016 and to those tax years commencing on or after 6 April 2016.
For UK tax years up to and including 2015/16, UK resident shareholders will generally be subject to UK income tax on the full amount of dividends paid, grossed up for the amount of a tax credit. The tax credit may be set against the individuals income tax liability in respect of the gross dividend, but is not repayable to shareholders with a tax liability of less than the associated tax credit. To the extent that individuals income exceeds the basic rate limit, but not the higher rate limit, an upper dividend rate applies, which is set at 32.5% of the grossed up dividend figure and for those whose income exceeds the higher rate limit of £150,000, an additional dividend rate of 37.5% will normally apply.
For UK tax years from 2016/17 onwards, dividend tax credits will no longer apply and UK resident individuals will be entitled instead to a dividend tax allowance of up to £5,000, so that the first £5,000 of dividends received in a tax year will be free of tax. Dividends in excess of this allowance will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
UK resident shareholders that are corporation taxpayers should note that dividends payable on ordinary shares are generally entitled to exemption from corporation tax.
Taxation of capital gains
UK shareholders may be liable for UK tax on gains on the disposal of shares or ADR. Different rates apply to the taxation of capital gains across the 2015/16 and 2016/17 tax years.
For disposals by individuals during the 2015/16 UK tax year and subject to the availability of any exemption or relief such as the annual exempt amount, a taxable capital gain accruing on a disposal of shares or ADR will be taxed at 28% if, after all allowable deductions, such shareholders taxable income for the tax year exceeds the basic rate income tax limit. In other cases, a taxable capital gain accruing on a disposal of shares or ADR may be taxed at 18% or 28% or at a combination of both rates. From 6 April 2016, these rates reduced to 20% and 10% or 20% respectively.
Corporation taxpayers may be entitled to an indexation allowance which applies to reduce capital gains to the extent that such gains arise due to inflation. Indexation allowance may reduce a chargeable gain but will not create an allowable loss.
Inheritance tax
Individual (UK-domiciled or otherwise) shareholders may be liable to UK inheritance tax on the transfer of shares or ADR. Tax may be charged on the amount by which the value of the shareholders estate is reduced as a result of any transfer by way of lifetime gift or other disposal at less than full market value. In the case of a bequest on death, tax may be charged on the value of the shares at the date of the shareholders death. If such a gift or other disposal were subject to both UK inheritance tax and US estate or gift tax, the Estate and Gift Tax Convention would generally provide for tax paid in the US to be credited against tax payable in the UK.
267 | GSK Annual Report 2016 |
Strategic report
|
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Tax information for shareholders continued
|
Stamp duty and Stamp Duty Reserve Tax
UK stamp duty and/or stamp duty reserve tax (SDRT) will, subject to certain exemptions, be payable on the transfer of shares at a rate of 0.5% (rounded up to the nearest £5 in the case of stamp duty) of the consideration for the transfer. Notwithstanding this, provided that an instrument is executed in pursuance of the agreement that gave rise to the charge to SDRT and that instrument is stamped within six years of the agreement (including being stamped as exempt) any SDRT charge should be cancelled and any SDRT which has already been paid will be repaid.
US shareholders
This summary only applies to a shareholder (who is a citizen or resident of the US or a domestic corporation or a person that is otherwise subject to US federal income tax on a net income basis in respect of the shares or ADR) that holds shares or ADR as capital assets, is not resident in the UK for UK tax purposes and does not hold shares for the purposes of a trade, profession or vocation that is carried on in the UK through a branch or agency.
The summary also does not address the tax treatment of holders that are subject to special tax rules, such as banks, tax-exempt entities, insurance companies, dealers in securities or currencies, persons that hold shares or ADR as part of an integrated investment (including a straddle) comprised of a share or ADR and one or more other positions, and persons that own (directly or indirectly) 10% or more of the voting stock of the company, nor does it address tax treatment that may be applicable as a result of international income tax treaties.
Taxation of dividends
The gross amount of dividends received is treated as foreign source dividend income for US tax purposes. It is not eligible for the dividend received deduction allowed to US corporations. Dividends on ADR are payable in US dollars; dividends on shares are payable in pounds Sterling. Dividends paid in pounds Sterling will be included in income in the US dollar amount calculated by reference to the exchange rate on the day the dividends are received by the holder. Subject to certain exceptions for short-term or hedged positions, an individual eligible US holder will be subject to US taxation at a maximum rate of 23.8% in respect of qualified dividends. A qualified dividend as defined by the US Internal Revenue Service is a dividend that meets the following criteria:
1. | Must be issued by a US corporation, a corporation incorporated in a US possession, or a corporation that is eligible for the benefits of a comprehensive income tax treaty deemed satisfactory, as published by the IRS. |
2. | The dividends are not listed with the IRS as dividends that do not qualify. |
3. | The required dividend holding period has been met. The shares must have been owned by you for more than 60 days of the holding period which is defined as the 121-day period that begins 60 days before the ex-dividend date, or the day in which the stock trades without the dividend priced in. For example, if a stocks ex-dividend date is October 1, the shares must be held for more than 60 days in the period between August 2 and November 30 of that year in order to count as a qualified dividend. |
Dividends that are not qualified are subject to taxation at the US federal graduated tax rates, at a maximum rate of 43.4%. Some types of dividends are automatically excluded from being qualified dividends, even if they meet the other requirements. These include (but are not limited to):
1. | Capital gains distributions |
2. | Dividends on bank deposits |
3. | Dividends held by a corporation in an Employee Stock Ownership Plan (ESOP) |
4. | Dividends paid by tax-exempt corporations |
US state and local tax rates on qualified and non-qualified dividends may vary and would be assessed in addition to the federal tax rates communicated above.
Taxation of capital gains
Generally, US holders will not be subject to UK capital gains tax, but will be subject to US tax on capital gains realised on the sale or other disposal of shares or ADR. Such gains will be long-term capital gains (subject to reduced rates of taxation for individual holders) if the shares or ADR were held for more than one year, from the date the shares were vested/released. Short-term capital gains can be subject to taxation of rates of up to 43.4%, whereas long-term capital gains may be subject to rates of up to 23.8%. State and local tax rates on capital gains may also apply.
Information reporting and backup withholding
Dividends and payments of the proceeds on a sale of shares or ADR, paid within the US or through certain US-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the US holder is a corporation or other exempt recipient or provides a taxpayer identification number and certifies that no loss of exemption has occurred. Non-US holders generally are not subject to information reporting or backup withholding, but may be required to provide a certification of their non-US status in connection with payments received. Any amounts withheld will be allowed as a refund or credit against a holders US federal income tax liability provided the required information is furnished to the Internal Revenue Service.
Estate and gift taxes
Under the Estate and Gift Tax Convention, a US shareholder is not generally subject to UK inheritance tax.
Stamp duty
UK stamp duty and/or SDRT will, subject to certain exemptions, be payable on any transfer of shares to the ADR custodian or depository at a rate of 1.5% of the amount of any consideration provided (if transferred on sale), or their value (if transferred for no consideration).
However, no stamp duty or SDRT should be payable on the transfer of, or agreement to transfer, an ADR.
268 |
GSK Annual Report 2016 |
|||
Shareholder information continued
Shareholder services and contacts
|
Registrar
The companys registrar is:
Equiniti Limited
Aspect House, Spencer Road, Lancing, BN99 6DA
www.shareview.co.uk
Tel: 0371 384 2991 (in the UK)*
Tel: +44(0)121 415 7067 (outside the UK)
Equiniti provides a range of services for shareholders:
Service
|
What it offers
|
How to participate
|
||
Dividend Reinvestment Plan (DRIP) |
As an alternative to receiving cash dividends you may choose to reinvest your dividends to buy more GSK shares.
|
A DRIP election form can be downloaded from www.shareview.co.uk or requested by telephoning Equiniti.
|
||
Dividend payment direct to your bank account (Bank Mandate) |
If you currently receive your dividends by cheque through the post, you can instead have them paid directly into your bank or building society account. This is quicker, more secure and avoids the risk of your cheque going astray.
|
A dividend bank mandate form can be downloaded from www.shareview.co.uk or requested by telephoning Equiniti. | ||
Dividend payment direct to bank account for overseas shareholders |
Instead of waiting for a sterling cheque to arrive by post, Equiniti will convert your dividend into your local currency and send it direct to your local bank account. This service is available in over 100 countries worldwide.
|
For more details on this service and the costs involved please contact Equiniti. | ||
Electronic communications |
Shareholders may elect to receive electronic notifications of company communications including our Annual Report, dividend payments (if paid by way of a Bank Mandate), access to electronic tax vouchers and the availability of online voting for all general meetings. Each time GSK mails out hard copy shareholder documents you will receive an email containing a link to the document or relevant website.
|
You can register at www.shareview.co.uk | ||
Shareview portfolio service |
This enables you to create a free online portfolio to view your share balance and movements, update your address and dividend payment instructions and register your votes for our AGM.
|
You can register at www.shareview.co.uk | ||
Duplicate publications or mailings |
If you receive duplicate copies of this report or other mailings, please contact Equiniti and they will arrange for your accounts to be merged into one for your convenience and to avoid waste and unnecessary costs.
|
Please contact Equiniti. | ||
Share dealing service
(please note that market trading hours are from 8.00am to 4.30pm UK time, Monday to Friday (excluding public holidays in England and Wales)) |
Shareholders may trade shares, either held in certificated form or held in our Corporate Sponsored Nominee, by internet, telephone or by a postal dealing service provided by Equiniti Financial Services Limited. |
For internet transactions, please log on to www.shareview.co.uk/dealing.
For telephone transactions, please call 0345 603 7037 (in the UK) or +44 (0)121 415 7560 (outside the UK).
For postal transactions, please call 0371 384 2991* to request a dealing form.
|
||
Corporate Sponsored Nominee Account |
This is a convenient way to manage your shares without requiring a share certificate. The service provides a facility for you to hold your shares in a nominee account sponsored by the company. You will continue to receive dividend payments, annual reports and can attend and vote at the companys general meetings. Shareholders names do not appear on the publicly available share register and the service is free to join.
|
An application form can be requested from www.shareview.co.uk or by telephoning Equiniti on 0371 384 2991*. | ||
Individual Savings Accounts (ISAs) | The company has arranged for Equiniti Financial Services Limited to provide a GSK Corporate ISA to hold GSK Ordinary Shares. |
Details are available from www.shareview.co.uk or can be requested by telephoning Equiniti, on 0345 300 0430. Lines are open 8.00am to 4.30pm for dealing, and until 6.00pm for enquiries Monday to Friday (excluding public holidays in England and Wales).
|
* | UK lines are open from 8.30am to 5.30pm, Monday to Friday (excluding public holidays in England and Wales). |
| The provision of share dealing details is not intended to be an invitation or inducement to engage in an investment activity. |
Advice on share dealing should be obtained from a stockbroker or independent financial adviser. |
269 | GSK Annual Report 2016 |
Strategic report
|
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Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Shareholders services and contacts continued
|
ADR Depositary
The ADR programme is administered by The Bank of New York Mellon:
BNY Mellon Shareowner Services
PO Box 30170
College Station, TX 77842-3170
Overnight correspondence should be sent to:
BNY Mellon Shareowner Services
211 Quality Circle, Suite 210
College Station, TX 77845
www.mybnymdr.com
Tel: +1 877 353 1154 (US toll free)
Tel: +1 201 680 6825 (outside the US)
email: shrrelations@cpushareownerservices.com
The Depositary also provides Global BuyDIRECT , a direct ADS purchase/sale and dividend reinvestment plan for ADR holders. For details of how to enrol please visit www.mybnymdr.com or call the above helpline number to obtain an enrolment pack.
Glaxo Wellcome and SmithKline Beecham
Corporate PEPs
The Share Centre Limited
Oxford House, Oxford Road, Aylesbury, Bucks HP21 8SZ
Tel: +44 (0)1296 414 141
www.share.com
Donating shares to Save the Children
In 2013, GSK embarked on an ambitious global partnership with Save the Children to share our expertise and resources with the aim of helping to save the lives of one million children.
Shareholders with a small number of shares, the value of which makes it uneconomical to sell, may wish to consider donating them to Save the Children. Donated shares will be aggregated and sold by Save the Children who will use the funds raised to help them reach the above goal.
To obtain a share donation form, please contact our registrar, Equiniti, who is managing the donation and sale of UK shares to Save the Children free of charge.
| The provision of share dealing details is not intended to be an invitation or inducement to engage in an investment activity. |
Advice on share dealing should be obtained from a stockbroker or independent financial adviser. |
Contacts
Investor relations
Investor relations may be contacted as follows:
UK
980 Great West Road
Brentford, Middlesex, TW8 9GS
Tel: +44 (0)20 8047 5000
US
5 Crescent Drive
Philadelphia PA 19112
Tel: +1 888 825 5249 (US toll free)
Tel: +1 215 751 4611 (outside the US)
GSK Response Center
Tel: +1 888 825 5249 (US toll free)
Share scam alert
If you receive an unsolicited telephone call offering to sell or buy your shares, please take extra care. The caller may be part of a highly organised financial scam.
If you are a UK shareholder, please contact the Financial Conduct Authority for further information on this, or other similar activities, at www.fca.org.uk/consumers or on its consumer helpline:
Tel: 0800 111 6768 (in the UK)*
Tel: +44 20 7066 1000 (outside the UK)
* | Lines are open from 8.00am to 6.00pm, UK time, Monday to Friday, except UK public holidays, and 9.00am to 1.00pm on Saturdays. |
Responsible Business Supplement
We are publishing our Responsible Business Supplement 2016 online. This will outline GSKs approach to, and performance in, our key responsible business areas, Health for all, Our behaviour, Our people and Our planet.
270 |
GSK Annual Report 2016 |
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Other statutory disclosures
|
A number of provisions of US law and regulation apply to the company because our shares are quoted on the New York Stock Exchange (NYSE) in the form of ADSs.
NYSE rules
In general, the NYSE rules permit the company to follow UK corporate governance practices instead of those applied in the US, provided that we explain any significant variations. This explanation is contained in our Form 20-F, which can be accessed from the Securities and Exchange Commissions (SEC) EDGAR database or via our website. NYSE rules that came into effect in 2005 require us to file annual and interim written affirmations concerning the Audit & Risk Committee and our statement on significant differences in corporate governance.
Sarbanes-Oxley Act of 2002
Following a number of corporate and accounting scandals in the US, Congress passed the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley is a wide-ranging piece of legislation concerned largely with financial reporting and corporate governance.
As recommended by the SEC, the company has established a Disclosure Committee. The Committee reports to the CEO, the CFO and to the Audit & Risk Committee. It is chaired by the Company Secretary and the members consist of senior managers from finance, legal, corporate communications and investor relations.
External legal counsel, the external auditors and internal experts are invited to attend its meetings periodically. It has responsibility for considering the materiality of information and, on a timely basis, determining the disclosure of that information. It has responsibility for the timely filing of reports with the SEC and the formal review of the Annual Report and Form 20-F. In 2016, the Committee met 18 times.
Sarbanes-Oxley requires that the annual report on Form 20-F contain a statement as to whether a member of our Audit & Risk Committee (ARC) is an audit committee financial expert as defined by Sarbanes-Oxley. Such a statement for the relevant member of the ARC (Judy Lewent) is included in the Audit & Risk Committee report on page 97 and in her biography on page 85. Additional disclosure requirements arise under section 302 and section 404 of Sarbanes-Oxley in respect of disclosure controls and procedures and internal control over financial reporting.
Section 302: Corporate responsibility for financial reports
Sarbanes-Oxley also introduced a requirement for the CEO and the CFO to complete formal certifications, confirming that:
| they have each reviewed the annual report on Form 20-F |
| based on their knowledge, the annual report on Form 20-F contains no material misstatements or omissions |
| based on their knowledge, the financial statements and other financial information fairly present, in all material respects, the financial condition, results of operations and cash flows as of the dates, and for the periods, presented in the annual report on Form 20-F |
| they are responsible for establishing and maintaining disclosure controls and procedures that ensure that material information is made known to them, and have evaluated the effectiveness of these controls and procedures as at the year-end, the results of such evaluation being contained in the annual report on Form 20-F |
| they are responsible for establishing and maintaining internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
| they have disclosed in the annual report on Form 20-F any changes in internal controls over financial reporting during the period covered by the annual report on Form 20-F that have materially affected, or are reasonably likely to affect materially, the companys internal control over financial reporting, and they have disclosed, based on their most recent evaluation of internal control over financial reporting, to the external auditors and the ARC, all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to affect adversely the companys ability to record, process, summarise and report financial information, and any fraud (regardless of materiality) involving persons that have a significant role in the companys internal control over financial reporting. |
The Group has carried out an evaluation under the supervision and with the participation of its management, including the CEO and CFO, of the effectiveness of the design and operation of the Groups disclosure controls and procedures as at 31 December 2016.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
The CEO and CFO expect to complete these certifications and report their conclusions on the effectiveness of disclosure controls and procedures in March 2017, following which the certificates will be filed with the SEC as part of our Groups Form 20-F.
Section 404: Managements annual report on internal control over financial reporting
In accordance with the requirements of section 404 of Sarbanes-Oxley, the following report is provided by management in respect of the companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act of 1934, as amended (the Exchange Act):
| management is responsible for establishing and maintaining adequate internal control over financial reporting for the Group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS |
| management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework, Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) |
| there have been no changes in the Groups internal control over financial reporting during 2016 that have materially affected, or are reasonably likely to affect materially, the Groups internal control over financial reporting |
| management has assessed the effectiveness of internal control over financial reporting as at 31 December 2016 and its conclusion will be filed as part of the Groups Form 20-F, and |
271 | GSK Annual Report 2016 |
Strategic report
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Governance and remuneration
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Financial statements
|
||||||
Investor information
|
US law and regulation continued
|
PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Group for the year ended 31 December 2016, has also assessed the effectiveness of the Groups internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report will be filed with the Groups Form 20-F.
Section 13(r) of the Exchange Act
Section 13(r) of the Exchange Act requires issuers to make specific disclosure in their annual reports of certain types of dealings with Iran, including transactions or dealings with government-owned entities, as well as dealings with entities sanctioned for activities related to terrorism or proliferation of weapons of mass destruction, even when those activities are not prohibited by US law and do not involve US persons. The Group does not have a legal entity based in Iran, but it does export certain pharmaceutical and vaccine products to Iran, via sales by non-US entities, to two privately held Iranian distributors. The Group also does business, via non-US entities, in other jurisdictions targeted by sanctions laws, including Syria, Crimea, North Korea and Sudan.
We do not believe that any of the Groups direct dealings with Iran require specific disclosure under these requirements, and the Group limits sales to Iran, North Korea, Syria, Sudan and Cuba to essential medicines (determined in part using criteria set by the World Health Organization).
The Group has no direct knowledge of the identity of its distributors downstream customers in Iran, and it is possible that these customers include entities, such as government-owned hospitals and pharmacies, that are owned or controlled directly or indirectly by the Iranian government or by persons or entities sanctioned in connection with terrorism or proliferation activities. Because the Group has no direct knowledge of its distributors customers, it cannot establish the proportion of gross revenue or sales potentially attributable to entities affiliated with the Iranian government or parties sanctioned for disclosable activities. As a result, the Group is reporting the entire gross revenues (£2 million) and net profits (£1 million) from the Groups sales to Iran in 2016.
The Group is also aware that some hospitals or other medical facilities in Lebanon may be affiliated with or controlled by Hezbollah, which is designated by the United States as a terrorist organisation. Again, the Group does not deal directly with such facilities and sells through distributors. The Group is also unable to identify with certainty the degree or nature of any affiliation of the end customers with Hezbollah, and the Group is unable to establish the proportion of gross revenue or sales potentially attributable to reportable entities. As a result, the Group is reporting the entire gross revenues (£52 million) and net profits (£27 million) from the Groups sales to Lebanon in 2016.
Donations to political organisations and political expenditure
|
With effect from 1 January 2009, to ensure a consistent approach to political contributions across the Group, we introduced a global policy to stop voluntarily all corporate political contributions.
In the period from 1 January 2009 to 31 December 2016, the Group did not make any political donations to EU or non-EU organisations.
Notwithstanding the introduction of this policy, in accordance with the Federal Election Campaign Act in the US, we continue to support an employee-operated Political Action Committee (PAC) that facilitates voluntary political donations by eligible GSK employees.
The PAC is not controlled by GSK. Decisions on the amounts and recipients of contributions are made by participating employees exercising their legal right to pool their resources and make political contributions, which are subject to strict limitations. In 2016, a total of US$ 380,360 (2015 US$446,727) was donated to political organisations by the GSK employee PAC.
Notwithstanding our policy, the Companies Act 2006 requires companies to continue to obtain shareholder approval before they can make donations to EU political organisations or incur EU political expenditure. Therefore, while we do not make and do not intend to make donations to any EU political parties or organisations nor do we incur any EU political expenditure, the definitions of political donations, political expenditure and political organisations used in the legislation are so wide that we annually seek shareholder authorisation for any inadvertent expenditure. In particular, the definition of EU political organisations may extend to bodies such as those concerned with policy review, law reform, the representation of the business community and special interest groups such as those concerned with the environment, which the company and its subsidiaries might wish to support. As a result, the definitions may cover legitimate business activities not in the ordinary sense considered to be political donations or political expenditure.
Such activities are not designed to support any political party or independent election candidate. The authority which the Board has sought annually is a precautionary measure to ensure that the company and its subsidiaries do not inadvertently breach the legislation.
This authorisation process, for expenditure of up to £100,000 each year, dates back to the AGM held in May 2001, following the introduction of the Political Parties, Elections and Referendums Act 2000. The authority has since been renewed annually.
272 |
GSK Annual Report 2016 |
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Other statutory disclosures continued
|
In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, associates, joint ventures and joint arrangements, the address of the registered office and effective percentage of equity owned, as at 31 December 2016 are disclosed below. Unless otherwise stated the share capital disclosed comprises ordinary shares which are indirectly held by GlaxoSmithKline plc. The percentage held by class of share is stated where this is less than 100%. Unless otherwise stated, all subsidiary companies have their registered office in their country of incorporation. All subsidiary companies are resident for tax purposes in their country of incorporation unless otherwise stated.
Name
|
Security
|
Registered address
|
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Wholly owned subsidiaries
|
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|
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1506369 Alberta ULC | Common |
3500 855-2nd Street SW, Calgary, AB, T2P 4J8, Canada
|
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|
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Action Potential Venture Capital Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
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|
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Adechsa GmbH (iv) | Ordinary |
c/o PRV Provides Treuhandgesellschaft AG, Dorfstrasse 38, Baar, 6341, Switzerland
|
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|
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Affymax Research Institute | Common |
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N, Sacramento, California, CA, 95833, United States
|
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|
||||
Alenfarma Especialidades Farmaceuticas, Limitada (iv) |
Ordinary Quota |
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal
|
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|
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Allen & Hanburys Limited (iv) | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
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Allen & Hanburys Pharmaceutical Nigeria Limited | Ordinary |
24 Abimbola Way, Ilasamaja, Isolo, Lagos, Nigeria
|
||
|
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Allen Farmaceutica, S.A. | Ordinary |
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
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|
||||
Allen Pharmazeutika Gesellschaft m.b.H. | Ordinary |
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock,
|
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|
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Aners S.A (iv) |
Non-endorsable Nominative Ordinary |
Tucuman 1, piso 4to. Ciudad Autonoma de, Buenos Aires,
|
||
|
||||
Barrier Therapeutics, Inc. | Common |
Corporation Services Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
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|
||||
Beecham Group p l c | 20p Shares A; 5p Shares B |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Beecham Pharmaceuticals (Pte) Limited | Ordinary |
38 Quality Road, Jurong Industrial Estate, Jurong, 618809, Singapore
|
||
|
||||
Beecham Pharmaceuticals S.A (iv) (vi) | Nominative |
Av 10 De Agosto N36-239 y Naciones Unidas, Edificio Electroectuatoriana, 2do piso, Quito, Ecuador
|
||
|
||||
Beecham Portuguesa-Produtos Farmaceuticos e Quimicos, Lda | Ordinary Quota | Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal | ||
|
||||
Beecham S.A. (iv) | Ordinary |
Parc de la Noire Epine, rue Fleming 20, 1300 Wavre, Belgium
|
||
|
||||
Biddle Sawyer Limited | Equity |
252 Dr Annie Besant Road, Mumbai, 400 030, India
|
||
|
||||
Biovesta Ilaçlari Ltd. Sti. (iv) | Nominative |
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok Kat:4, 1.Levent, Istanbul, 34394, Turkey
|
||
|
||||
Burroughs Wellcome & Co (Australia) Pty Limited (in liquidation) | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
Burroughs Wellcome & Co (Bangladesh) Limited | Ordinary |
Fouzderhat Industrial Area, Dhaka Trunk Road, North Kattali, Chittagong - 4217, Bangladesh
|
||
|
||||
Burroughs Wellcome International Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Cascan GmbH & Co. KG | Partnership Capital |
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
|
||
|
||||
Castleton Investment Ltd (vi) | Ordinary |
C/o DTOS Ltd, 10th Floor, Standard Charted Tower, 19 Cybercity, Ebene, Mauritius
|
||
|
||||
Cellzome GmbH | Ordinary |
Meyerhofstrasse 1, Heidelberg, 69117, Germany
|
||
|
||||
Cellzome Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Cellzome Therapeutics, Inc. (iv) | Ordinary |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Cellzome, Inc. |
Ordinary Series A Preferred Series B Preferred Series C-1 Convertible Preferred Series C-3 Convertible Preferred
|
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Charles Midgley Limited (iv) |
Ordinary 7% Cumulative Preference |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Chiron Behring Vaccines Private Limited | Ordinary |
401-402, A, Wing, Floral Deck Plaza, Opp Rolta Bhavan, Central MIDC Road, Mumbai, Andheri (East), India
|
||
|
||||
Clarges Pharmaceuticals Limited |
Ordinary Preference (99.97) |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Colleen Corporation | Common |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Corixa Corporation | Common |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Coulter Pharmaceutical, Inc. (iv) | Common |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Dealcyber Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Desarrollo Energia Solar Alternativa S.L. | Ordinary |
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
||
|
||||
Domantis Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Duncan Flockhart Australia Pty Limited (iv) (vi) | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
273 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Group companies continued
|
274 |
GSK Annual Report 2016 |
|||
Other statutory disclosures continued
Group companies continued
|
Name
|
Security
|
Registered address
|
||
Wholly owned subsidiaries continued
|
||||
|
||||
GlaxoSmithKline Australia Pty Ltd | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
GlaxoSmithKline B.V. | Ordinary |
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
|
||
|
||||
GlaxoSmithKline Beteiligungs GmbH | Ordinary |
Prinzregentenplatz 9, Munchen, 81675, Germany
|
||
|
||||
GlaxoSmithKline Biologicals (Shanghai) Ltd. | Ordinary |
No. 277 Niudun Road, Zhangjiang Hi-Teck Park, Shanghai, China
|
||
|
||||
GlaxoSmithKline Biologicals Kft. | Ordinary |
2100 Gödöllõ, Homoki Nagy István utca 1, Hungary
|
||
|
||||
GlaxoSmithKline Biologicals S.A.S. | Ordinary |
637 Rue des Aulnois, Saint-Amand Les Eaux, 59230, France
|
||
|
||||
GlaxoSmithKline Biologicals SA | Ordinary; Preference |
Rue de lInstitut 89, B-1330 Rixensart, Belgium
|
||
|
||||
GlaxoSmithKline Brasil Limitada | Quotas |
Estrada dos Banderiantes, 8464, Camorim, Jacarepagua, Rio de Janeiro, 22783-110, Brazil
|
||
|
||||
GlaxoSmithKline Business Services S.A. (dissolved 20 January 2017) |
Ordinary |
300 metros al este de la Rotonda de la Betania, Mercedes de Montes de Oca, Sabanilla, Montes de Oca, San Jose, Costa Rica
|
||
|
||||
GlaxoSmithKline Capital Inc. | Ordinary |
Wilmington Trust SP Services Inc., 1105 North Market Street, Suite 1300, Wilmington, Delaware, DE, 19801, United States
|
||
|
||||
GlaxoSmithKline Capital plc | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Caribbean Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Chile Farmaceutica Limitada | Social Capital |
Avenue Andrés Bello No. 2687, Piso 19, Las Condes, Santiago, C.P. 7550611, Chile
|
||
|
||||
GlaxoSmithKline Colombia S.A. | Ordinary |
Avenida El Dorado, #69B-45/Piso 9, Bogota, Colombia
|
||
|
||||
GlaxoSmithKline Consumer Healthcare Investments (Ireland) Limited (ii) (v) |
Ordinary |
6900 Cork Airport Business Park, Kinsale Road, Cork, County Cork, Ireland
|
||
|
||||
GlaxoSmithKline Consumer Healthcare Ireland IP Limited (ii) (v) |
Ordinary |
Currabinny, Carrigaline, County Cork, Ireland
|
||
|
||||
GlaxoSmithKline Consumer Holding B.V. | Ordinary |
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
|
||
|
||||
GlaxoSmithKline d.o.o | Quota |
Zmja od Bosne broj 7-7a, Sarajevo, 71000, Bosnia and Herzegovina
|
||
|
||||
GlaxoSmithKline d.o.o. | Equity Capital |
Ulica Damira Tomljanovica Gavrana 15, Zagreb, Croatia
|
||
|
||||
GlaxoSmithKline doo Beograd | Ordinary |
Omladinskih brigada 88, New Belgrade, City of Belgrade, 11070, Serbia
|
||
|
||||
GlaxoSmithKline Ecuador S.A. | Ordinary |
Av 10 De Agosto N36-239 y Naciones Unidas, Edificio Electroectuatoriana, 2do piso, Quito, Ecuador
|
||
|
||||
GlaxoSmithKline Eesti OU | Ordinary |
Lõõtsa 8a, Tallinn, 11415, Estonia
|
||
|
||||
GlaxoSmithKline ehf | Ordinary |
Thverholt 14, 105, Reykjavik, Iceland
|
||
|
||||
GlaxoSmithKline El Salvador S.A. de C.V. | Ordinary |
Avenida El Boqueron y Calle Izalco No 7 y 8 Parque Industrial El Boqueron, Santa Elen, Antiguo Custatlan, La Libertad, El Salvador
|
||
|
||||
GlaxoSmithKline EOOD | Ordinary |
115 G Tsarigradsko Shose Blvd., floor 9, Mladost Region, Sofia, 1784, Bulgaria
|
||
|
||||
GlaxoSmithKline Export Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Export Panama S.A. | Ordinary |
Panama City, Republic of Panama, Panama
|
||
|
||||
GlaxoSmithKline Far East B.V. | Ordinary |
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
|
||
|
||||
GlaxoSmithKline Finance plc | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline GmbH & Co. KG | Partnership Capital |
Prinzregentenplatz 9, Munchen, 81675, Germany
|
||
|
||||
GlaxoSmithKline Guatemala S.A. | Ordinary |
Novena Avenida 0-09, Zona 4, Guatemala City, Guatemala
|
||
|
||||
GlaxoSmithKline Holding AS | Ordinary |
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
|
||
|
||||
GlaxoSmithKline Holdings (Americas) Inc. | Common |
Wilmington Trust SP Services Inc., 1105 North Market Street,
|
||
Suite 1300, Wilmington, Delaware, DE, 19801, United States
|
||||
|
||||
GlaxoSmithKline Holdings (Ireland) Limited | Ordinary; Deferred |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Holdings (One) Limited (i) | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Holdings Limited (i) | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Holdings Pty Ltd | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
GlaxoSmithKline Honduras S.A. | Ordinary |
Tegucigalpa, MDC, Honduras
|
||
|
||||
GlaxoSmithKline IHC Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Ilaclari Sanayi ve Ticaret A.S. | Nominative |
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok Kat:4, 1.Levent, Istanbul, 34394, Turkey
|
||
|
||||
GlaxoSmithKline Inc. | Class A Common |
7333 Mississauga Road North, Mississauga, ON, L5N 6L4, Canada
|
||
Class C Preference
|
||||
|
||||
GlaxoSmithKline Insurance Ltd. | Ordinary |
19 Par-La-Ville Road, Hamilton, HM11, Bermuda
|
||
|
||||
GlaxoSmithKline Intellectual Property (No.2) Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Intellectual Property Development Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Intellectual Property Holdings Limited | A Ordinary; B Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Intellectual Property Limited | Ordinary; Deferred |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Intellectual Property Management Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline International Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Investigación y Desarrollo, S.L. | Ordinary |
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
||
|
||||
GlaxoSmithKline Investment Holdings Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Investment Services Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Investments (Ireland) Limited (ii) (v) | Ordinary |
Currabinny, Carrigaline, County Cork, Ireland
|
||
|
275 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Group companies continued
|
Name
|
Security
|
Registered address
|
||
Wholly owned subsidiaries continued
|
||||
|
||||
GlaxoSmithKline Investments Pty Ltd | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
GlaxoSmithKline K.K. | Ordinary |
4-6-15 Sendagaya, Shibuya-ku, Tokyo, 151-8566, Japan
|
||
|
||||
GlaxoSmithKline Korea Limited | Ordinary |
9F LS Yongsan Tower 92, Hangangdae-ro Yongsan-gu, Seoul, 140-702, Republic of Korea
|
||
|
||||
GlaxoSmithKline Latin America, S.A. | Ordinary |
Panama City, Republic of Panama, Panama
|
||
|
||||
GlaxoSmithKline Latvia SIA | Ordinary |
Duntes iela 11, Riga, Latvia
|
||
|
||||
GlaxoSmithKline Lietuva UAB | Ordinary |
Ukmerges st. 120, Vilnius, LT-08105, Lithuania
|
||
|
||||
GlaxoSmithKline Limited | Ordinary |
Units 2201, 2214 and 23/F, Tower 6, The Gateway, 9 Canton Road, Harbour City, Tsimshatsui, Kowloon, Hong Kong
|
||
|
||||
GlaxoSmithKline LLC | LLC Interests |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
GlaxoSmithKline (Malta) Limited | Ordinary |
1, First Floor, De La Cruz Avenue, Qormi, QRM2458, Malta
|
||
|
||||
GlaxoSmithKline Manufacturing SpA | Ordinary |
Via Alessandro Fleming 2, Verona, 37135, Italy
|
||
|
||||
GlaxoSmithKline Maroc S.A. | Ordinary |
42-44 Angle Bd, Rachidi et Abou Hamed El Glaza, Casablanca, Morocco
|
||
|
||||
GlaxoSmithKline Medical and Healthcare Products Limited | Ordinary |
H-1124, Csorsz utca 43, Budapest, Hungary
|
||
|
||||
GlaxoSmithKline Mercury Limited (i) | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Mexico, S.A. de C.V. | Ordinary |
Calzada, Mexico-Xochimilco 4900, Colonia San Lorenzo, Huipulco, Delegacion Tlalpan, 14370, Mexico
|
||
|
||||
GlaxoSmithKline NZ Limited | Ordinary |
Level 11, Zurich House, 21 Queen Street, Auckland, 1010, New Zealand
|
||
|
||||
GlaxoSmithKline Oy | Ordinary |
The Piispansilta 9A, P.O. Box 24, Espoo, FIN-02230, Finland
|
||
|
||||
GlaxoSmithKline Peru S.A. | Ordinary |
Av. Javier Prado Oeste, 995, San Isidro, LIMA 27, Peru
|
||
|
||||
GlaxoSmithKline Pharma A/S | Ordinary |
Nykaer 68, Brondby, DK-2605, Denmark
|
||
|
||||
GlaxoSmithKline Pharma GmbH | Ordinary |
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120, Austria
|
||
|
||||
GlaxoSmithKline Pharmaceutical Kenya Limited | Ordinary |
L.R. NO. 209/6921, 5th Floor, Icea Lion Centre, Riverside Park West Wing, Chiromo Road, Westlands P.O. Box 10643-00100, Nairobi, Kenya
|
||
|
||||
GlaxoSmithKline Pharmaceutical Nigeria Limited | Ordinary |
1 Industrial Avenue, Ilupeju, Ikeja, Lagos, PM B 21218, Nigeria
|
||
|
||||
GlaxoSmithKline Pharmaceutical Sdn Bhd | Ordinary |
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul Ehsan, 46300, Malaysia
|
||
|
||||
GlaxoSmithKline Pharmaceuticals (Pvt) Ltd | Ordinary |
121 Galle Road, Kaldemulla, Moratuwa, Sri Lanka
|
||
|
||||
GlaxoSmithKline Pharmaceuticals (Suzhou) Limited | Ordinary |
No 40 Su Hong Xi Road, Suzhou Industrial Park, Suzhou, 215021, China
|
||
|
||||
GlaxoSmithKline Pharmaceuticals Costa Rica S.A | Ordinary |
300 metros al este de la Rotonda de la Betania, Mercedes de Montes de Oca, Sabanilla, Montes de Oca, San Jose, Costa Rica
|
||
|
||||
GlaxoSmithKline Pharmaceuticals S.A. | Ordinary A; Ordinary B; |
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
|
||
Ordinary C; Ordinary D
|
||||
|
||||
GlaxoSmithKline Pharmaceuticals SA | Ordinary |
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
|
||
|
||||
GlaxoSmithKline Pharmaceuticals Ukraine LLC | Chartered Capital |
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
|
||
|
||||
GlaxoSmithKline Pte Ltd | Ordinary |
150 Beach Road, #21-00 Gateway West, 189720, Singapore
|
||
|
||||
GlaxoSmithKline Puerto Rico Inc. | Common |
Centro Internacional de Mercadeo, 90 Road # 165, Tower II, Suite 800, Guaynabo, 00968, Puerto Rico
|
||
|
||||
GlaxoSmithKline Republica Dominicana S.A. | Ordinary |
Av. Lope de Vega 29, Torre NovoCentro, Local 406, Santo Domingo, Dominican Republic
|
||
|
||||
GlaxoSmithKline Research & Development Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline S.A. | Ordinary |
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
||
|
||||
GlaxoSmithKline S.p.A. | Ordinary |
Via Alessandro Fleming 2, Verona, 37135, Italy
|
||
|
||||
GlaxoSmithKline s.r.o. | Ordinary |
Hvezdova 1734/2c, Prague, 4 140 00, Czech Republic
|
||
|
||||
GlaxoSmithKline Services GmbH & Co. KG (vi) | Partnership Capital |
Prinzregentenplatz 9, Munchen, 81675, Germany
|
||
|
||||
GlaxoSmithKline Services Inc. (iv) | Common |
Corporation Services Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
GlaxoSmithKline Services Unlimited (i) | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline SL Holdings, LLC | LLC Interests |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
GlaxoSmithKline SL LLC | LLC Interests |
Corporation Services Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
GlaxoSmithKline SL LP (iv) | Partnership |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Slovakia s.r.o. | Ordinary |
Galvaniho 7/A, Bratislava, 821 04, Slovakia
|
||
|
||||
GlaxoSmithKline South Africa (Pty) Limited | Ordinary |
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston 2021, South Africa
|
||
|
||||
GlaxoSmithKline Superannuation Company Pty Ltd (in liquidation)
|
Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
GlaxoSmithKline Trading Services Limited (ii) (v) | Ordinary |
Currabinny, Carrigaline, County Cork, Ireland
|
||
|
||||
GlaxoSmithKline Trading ZAO | Ordinary |
Yakimanskaya nab., 2, Moscow, 119180, Russian Federation
|
||
|
||||
GlaxoSmithKline Tunisia S.A.R.L. | Ordinary |
Immeuble Les Quatres R, Rue du Lac Lochness, Berges du Lac, Tunis, Tunisia
|
||
|
276 |
GSK Annual Report 2016 |
|||
Other statutory disclosures continued
Group companies continued
|
Name
|
Security
|
Registered address
|
||
Wholly owned subsidiaries continued
|
||||
|
||||
GlaxoSmithKline UK Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
GlaxoSmithKline Uruguay S.A. | Registered Shares Provisory Stock |
Salto 1105, CP 11.200 Montevideo, Uruguay
|
||
|
||||
GlaxoSmithKline Venezuela C.A. | Ordinary |
Urbanizacion La Trinidad, Calle luis De Camoems, Edif No 115-117 Apatado Posta, Caracas, 1010, Venezuela
|
||
|
||||
GlaxoSmithKline Vietnam Limited Liability Company (iv) (vi) | Equity Capital |
Metropolitan, 235 Dong Khoi, Ben Nghe Ward, District 1, Ho Chi Minh City, Viet Nam
|
||
|
||||
Glycovaxyn AG (vi) |
Common; Preferred A, Preferred B; Preferred C
|
Grabenstrasse 3, 8952 Schlieren, Switzerland | ||
|
||||
Group Laboratories South Africa (Pty) Limited (iv) (vi) | Ordinary |
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston 2021, South Africa
|
||
|
||||
Groupe GlaxoSmithKline S.A.S. | Ordinary |
100 Route de Versailles, Marly le Roi, 78160, France
|
||
|
||||
GSK Business Service Centre Sdn Bhd | Ordinary |
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul Ehsan, 46300, Malaysia
|
||
|
||||
GSK Commercial Sp. z o.o. | Ordinary |
ul. Rzymowskiego 53, Warsaw, 02-697, Poland
|
||
|
||||
GSK d.o.o., Ljubljana | Ordinary |
Amerika ulica 8,Ljubljana, 1000, Slovenia
|
||
|
||||
GSK Kazakhstan LLP | Partnership Interest |
273, Furmanov Street, Almaty, 050059, Kazakhstan
|
||
|
||||
GSK Services Sp z o.o. | Ordinary |
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
|
||
|
||||
GSK Vaccines GmbH | Ordinary |
Emil-von-Behring-Str.76, 35041 Marburg, Germany
|
||
|
||||
GSK Vaccines Institute for Global Health S.r.l. | Quotas |
Via Fiorentina 1, Siena, 53100, Italy
|
||
|
||||
GSK Vaccines S.r.l. | Quotas |
Via Fiorentina 1, Siena, 53100, Italy
|
||
|
||||
GSK Vaccines Vertriebs GmbH | Ordinary |
Rudolf-Diesel-Ring 27, Holzkirchen, 83607, Germany
|
||
|
||||
Herbridge Unlimited Company (ii) (vi) | Ordinary |
Currabinny, Carrigaline, County Cork, Ireland
|
||
|
||||
HGS France S.a.r.l. (iv) (vi) | Ordinary |
117 Avenue, Victor Hugo, Boulogne-Billancourt, 92100, France
|
||
|
||||
Horlicks Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
|
||||
Human Genome Sciences Pacific Pty Ltd (iv) (vi) | Ordinary |
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
|
||||
Human Genome Sciences, Inc. | Common |
Corporation Service Company,2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
ID Biomedical Corporation of Quebec | Common |
2323 Boul. du Parc Technologique, Québec, G1P 4R8, Canada
|
||
|
||||
ID Biomedical Corporation of Washington (iv) | Common |
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
|
||||
Instituto Luso Farmaco, Limitada (iv) | Ordinary Quota |
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal
|
||
|
||||
InterPharma Dienstleistungen GmbH | Quota |
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120, Austria
|
||
|
||||
J&J Technologies, LC (iv) | LLC Interests |
Corporation Service Company, Bank of America, 16th Floor, 1111 East Main Street, Richmond, Virginia, VA, 23219, United States
|
||
|
||||
Laboratoire GlaxoSmithKline | Ordinary |
100 Route de Versailles, Marly le Roi, 78160, France
|
||
|
||||
Laboratoire Pharmaceutique Algérien LPA Production SPA | Ordinary |
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
|
||
|
||||
Laboratoire Pharmaceutique Algérien SPA | Ordinary |
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
|
||
|
||||
Laboratoires Paucourt (iv) | Ordinary |
100 Route de Versailles, Marly le Roi, 78160, France
|
||
|
||||
Laboratoires Saint-Germain (iv) | Ordinary |
100 Route de Versailles, Marly le Roi, 78160, France
|
||
|
||||
Laboratorios Dermatologicos Darier, S.A de C.V. | Ordinary |
Calzada Mexico Xochimilco, 4900 San Lorenzo Huipulco, District Federal Mexico, 14370, Mexico
|
||
|
||||
Laboratorios Farmaceuticos Stiefel (Portugal) LTDA (iv) | Ordinary Quota |
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal
|
||
|
||||
Laboratorios Phoenix Sociedad Anonima Industrial Comercial Y Financiera | Non-endorsable Nominative Ordinary Shares |
Tucuman 1, piso 4to. Ciudad Autonoma de, Buenos Aires, C1049AAA, Argentina
|
||
|
||||
Laboratorios Stiefel de Chile Y Compañía Limitada | Social Capital |
Avenue Andrés Bello No. 2687, Piso 19, Las Condes, Santiago, C.P. 7550611, Chile
|
||
|
||||
Laboratorios Stiefel de Venezuela SA | Ordinary |
Calle Luis de Camoens, Edificio GlaxoSmithKline, No. 115-117, Urb. La Trinidad, Caracas, Venezuela
|
||
|
||||
Laboratorios Stiefel Ltda. | Ordinary |
Rua Professor Joao Cavalheiro Salem 1077, Guarulhos, Sao Paulo, Brazil
|
||
|
||||
Laboratorios Wellcome De Portugal Limitada (iv) | Ordinary Quota |
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal
|
||
|
||||
Maxinutrition Limited (In liquidation) | Ordinary |
55 Baker Street, London, W1U 7EU, England
|
||
|
||||
Mixis Genetics Limited | Ordinary |
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
Ordinary Euro
|
||||
|
||||
Montrose Fine Chemical Company Ltd | Ordinary |
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
|
||
|
||||
Montrose Pharma Company Limited | Ordinary Quota |
H-1124, Csorsz utca 43, Budapest, Hungary
|
||
|
||||
Montrose Pharma UAB (in liquidation) | Ordinary |
A.Gostauto 40A, Vilnius, LT-01112, Lithuania
|
||
|
||||
Novartis Vaccines and Diagnostics AG (in liquidation) | Ordinary |
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel, Switzerland
|
||
|
||||
Novartis Vaccines and Diagnostics Pty Ltd (iv) (vi) | Ordinary |
1061 Mountain Highway, Boronia, 3155, Australia
|
||
|
277 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Group companies continued
|
Name
|
Security
|
Registered address
|
||
Wholly owned subsidiaries continued
|
||||
Okairos AG (iv) (vi)
|
Common; Preferred A; Preferred B
|
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel, Switzerland
|
||
Penn Labs Inc. (iv)
|
Common
|
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
S.R. One International B.V.
|
Ordinary
|
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
|
||
S.R. One, Limited
|
Units (Common)
|
Corporation Service Company, 2595 Interstate Drive, Suite 103, Harrisburg, Pennsylvania, PA, 17110, United States
|
||
Setfirst Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
Smith Kline & French Laboratories Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
Smith Kline & French Portuguesa-Produtos Farmaceuticos, LDA (iv)
|
Ordinary Quota
|
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges, 1495-131, Portugal
|
||
SmithKline Beecham (Australia) Pty Ltd (in liquidation)
|
Ordinary
|
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
SmithKline Beecham (Bangladesh) Private Limited (iv)
|
Ordinary
|
14, Topkhana Road, Segunbagicha, Dhaka 1000, Bangladesh
|
||
SmithKline Beecham (Cork) Limited (ii)
|
Ordinary
|
Currabinny, Carrigaline, County Cork, Ireland
|
||
SmithKline Beecham (Export) Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham (H) Limited
|
Non-Cumulative Non-Redeemables; Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham (Investments) Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham (Manufacturing) Limited (ii)
|
Ordinary
|
Currabinny, Carrigaline, County Cork, Ireland
|
||
SmithKline Beecham (SWG) Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Animal Health Company (in liquidation)
|
Common
|
1959 Upper Water Sreet, Suite 800, Halifax, NS B3J 3N2, Canada
|
||
SmithKline Beecham Biologicals US Partnership
|
Partnership Interests
|
Corporation Service Company,2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
SmithKline Beecham Egypt L.L.C.
|
Quotas
|
Amoun Street, PO Box 3001, El Salam City, Cairo, 11491, Egypt
|
||
SmithKline Beecham Farma, S.A.
|
Ordinary
|
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
||
SmithKline Beecham Holdings (Australia) Pty. Limited (in liquidation)
|
Ordinary
|
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
SmithKline Beecham Inter-American Corporation (iv)
|
Shares No par Value (Common)
|
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
SmithKline Beecham Limited
|
Ordinary 6.25p
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Marketing and Technical Services Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Nominees Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Overseas Limited
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Pension Plan Trustee Limited (iv)
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Pension Trustees Limited (iv)
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
SmithKline Beecham Pharma GmbH & Co KG
|
Partnership Capital
|
Prinzregentenplatz 9, Munchen, 81675, Germany
|
||
SmithKline Beecham Pharma Verwaltungs GmbH
|
Ordinary
|
Prinzregentenplatz 9, Munchen, 81675, Germany
|
||
SmithKline Beecham Pharmaceuticals (Pty) Limited (iv) (vi)
|
Ordinary
|
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston 2021, South Africa
|
||
SmithKline Beecham Pharmaceuticals Co.
|
Shares No par Value (Common)
|
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE, 19808, United States
|
||
SmithKline Beecham Port Louis Limited (vi)
|
Ordinary
|
C/o CIM Global Business, 33 Edith Cavell Street, Port Louis, Mauritius
|
||
SmithKline Beecham Retirement Plan (Nominees) Pty Limited (in liquidation)
|
Ordinary
|
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
||
SmithKline Beecham Senior Executive Pension Plan Trustee Limited (iv)
|
Ordinary
|
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
|
||
Stiefel Distributors (Ireland) Limited (ii) (iv)
|
Ordinary
|
Finisklin Business Park, Sligo, Ireland
|
||
Stiefel Dominicana SRL (iv) (vi)
|
Ordinary
|
Ave. Lope de Vega 29, Torre NovoCentro, Local 406, Santo Domingo, Dominican Republic
|
||
Stiefel Farma, S.A
|
Ordinary
|
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid, 28760, Spain
|
||
Stiefel GmbH & Co. KG
|
Partnership Capital
|
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
|
||
Stiefel India Private Limited
|
Equity
|
401-402, A, Wing, Floral Deck Plaza, Opp Rolta Bhavan, Central MIDC Road, Mumbai, Andheri (East), India
|
||
Stiefel Laboratories (Ireland) Limited (ii)
|
Ordinary
|
Finisklin Business Park, Sligo, Ireland
|
||
Stiefel Laboratories (Maidenhead) Ltd
|
Ordinary
|
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire, SL6 4BY, England
|
||
Stiefel Laboratories (U.K.) Ltd
|
Ordinary
|
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire, SL6 4BY, England
|
||
Stiefel Laboratories Limited (iv)
|
Ordinary
|
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire, SL6 4BY, England
|
||
Stiefel Laboratories Pte Limited (iv)
|
Ordinary
|
103 Gul Circle, 629589, Singapore
|
||
Stiefel Laboratories Pty Ltd (in liquidation)
|
Ordinary
|
1061 Mountain Highway, Boronia, VIC, 3155, Australia
|
278 |
GSK Annual Report 2016 |
|||
Other statutory disclosures continued
Group companies continued
|
279 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Group companies continued
|
280 |
GSK Annual Report 2016 |
|||
Other statutory disclosures continued
Group companies continued
|
281 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
Group companies continued
|
282 |
GSK Annual Report 2016 |
|||
Other statutory disclosures continued
Group companies continued
|
Key
(i) | Directly owned by GlaxoSmithKline plc. |
(ii) | Exempt from the provisions of section 347 and 348 of the Companies Act 2014 (Ireland), in accordance with the exemptions noted in Section 357 of that Act. |
(iii) | Consolidated as a subsidiary in accordance with section 1162 (4)(a) of the Companies Act 2006 on the grounds of dominant influence. |
(iv) | Dormant company. |
(v) | Tax resident in the UK. |
(vi) | Entity expected to be disposed of or removed. |
(vii) | Incorporated in Sweden. |
283 | GSK Annual Report 2016 |
Strategic report
|
||||
Governance and remuneration
|
||||||
Financial statements
|
||||||
Investor information
|
|
Terms used in the Annual Report
|
US equivalent or brief description
|
|
Accelerated capital allowances |
Tax allowance in excess of depreciation arising from the purchase of fixed assets that delay the charging and payment of tax. The equivalent of tax depreciation.
|
|
American Depositary Receipt (ADR)
|
Receipt evidencing title to an ADS. Each GSK ADR represents two Ordinary Shares.
|
|
American Depositary Shares (ADS)
|
Listed on the New York Stock Exchange; represents two Ordinary Shares.
|
|
Basic earnings per share
|
Basic income per share.
|
|
Called up share capital
|
Ordinary Shares, issued and fully paid.
|
|
CER growth
|
Growth at constant exchange rates.
|
|
The company
|
GlaxoSmithKline plc.
|
|
Corporate Integrity Agreement (CIA) |
In 2012, the company entered into a settlement with the US Federal Government related to past sales and marketing practices. As part of the settlement the company entered into a Corporate Integrity Agreement with the US Department of Health and Human Services.
|
|
Currency swap |
An exchange of two currencies, coupled with a subsequent re-exchange of those currencies, at agreed exchange rates and dates.
|
|
Defined benefit plan
|
Pension plan with specific employee benefits, often called final salary scheme.
|
|
Defined contribution plan |
Pension plan with specific contributions and a level of pension dependent upon the growth of the pension fund.
|
|
Derivative financial instrument
|
A financial instrument that derives its value from the price or rate of some underlying item.
|
|
Diluted earnings per share
|
Diluted income per share.
|
|
Employee Share Ownership Plan Trusts
|
Trusts established by the Group to satisfy share-based employee incentive plans.
|
|
Equity Shareholders funds
|
Shareholders equity.
|
|
Finance lease
|
Capital lease.
|
|
Freehold
|
Ownership with absolute rights in perpetuity.
|
|
The Group
|
GlaxoSmithKline plc and its subsidiary undertakings.
|
|
GSK |
GlaxoSmithKline plc and its subsidiary undertakings.
|
|
Hedging |
The reduction of risk, normally in relation to foreign currency or interest rate movements, by making off-setting commitments.
|
|
Intangible fixed assets |
Assets without physical substance, such as computer software, brands, licences, patents, know-how and marketing rights purchased from outside parties.
|
|
Novartis transaction |
The three-part inter-conditional transaction with Novartis AG involving the Consumer Healthcare, Vaccines and Oncology businesses completed on 2 March 2015.
|
|
Ordinary Share |
A fully paid up ordinary share in the capital of the company.
|
|
Profit
|
Income.
|
|
Profit attributable to shareholders
|
Net income.
|
|
Share capital |
Ordinary Shares, capital stock or common stock issued and fully paid.
|
|
Share option |
Stock option.
|
|
Share premium account |
Additional paid-up capital or paid-in surplus (not distributable).
|
|
Shares in issue |
The number of shares outstanding.
|
|
Subsidiary |
An entity in which GSK exercises control.
|
|
Treasury share |
Treasury stock.
|
|
Turnover |
Revenue.
|
|
UK Corporate Governance Code |
As required by the UK Listing Authority, the company has disclosed in the Annual Report how it has applied the best practice corporate governance provisions of the Financial Reporting Councils UK Corporate Governance Code.
|
284 |
GSK Annual Report 2016 |
|||
Index
|
Page
|
Page
|
|||||||||
Accountability |
97 |
Major restructuring costs |
175 | |||||||
Accounting principles and policies |
162 | Movements in equity | 201 | |||||||
Acquisitions and disposals |
205 | Net debt | 198 | |||||||
Adjustments reconciling profit after tax to operating |
New accounting requirements | 168 | ||||||||
cash flows |
203 | Nominations Committee Report | 94 | |||||||
Annual General Meeting 2017 |
266 | Non-controlling interests | 209 | |||||||
Approach to tax |
55 | Non-controlling interests in ViiV Healthcare | 58 | |||||||
Assets held for sale |
188 | Non-Executive Directors fees | 126 | |||||||
Associates and joint ventures |
177 | Notes to the financial statements | 162 | |||||||
Audit & Risk Committee Report |
97 | Operating profit | 173 | |||||||
Cash and cash equivalents |
188 | Other intangible assets | 184 | |||||||
CEOs statement |
5 | Other investments | 187 | |||||||
Chairmans statement |
4 | Other non-current assets | 187 | |||||||
Chairmans Governance statement |
80 | Other non-current liabilities | 198 | |||||||
Chairmans Remuneration report statement |
112 | Other operating income | 173 | |||||||
Commitments |
211 | Other provisions | 197 | |||||||
Consolidated balance sheet |
159 | Our behaviour | 46 | |||||||
Consolidated cash flow statement |
161 | Our Board | 82 | |||||||
Consolidated income statement |
158 | Our business model | 12 | |||||||
Consolidated statement of changes in equity |
160 | Our global marketplace | 8 | |||||||
Consolidated statement of comprehensive income |
158 | Our integrated approach | 6 | |||||||
Consumer Healthcare |
34 | Our people | 48 | |||||||
Consumer Healthcare products and competition |
252 | Our planet | 50 | |||||||
Contingent consideration liabilities |
208 | Our strategy priorities | 14 | |||||||
Contingent liabilities |
199 | Pay for performance | 119 | |||||||
Corporate Executive Team |
86 | Pensions and other post-employment benefits | 189 | |||||||
Corporate governance |
79 | Pharmaceuticals | 20 | |||||||
Corporate Responsibility Committee Report |
108 |
Pharmaceutical products, competition and
|
|
250 |
|
|||||
Critical accounting policies |
76 | |||||||||
Directors and senior management |
134 | Pipeline | 247 | |||||||
Directors interests in shares |
127 | Post balance sheet events | 224 | |||||||
Directors statement of responsibilities |
148,232 | Presentation of the financial statements | 162 | |||||||
Dividends |
180,265 | Principal Group companies | 225 | |||||||
Donations to political organisations and
|
|
271 |
|
Principal risks and uncertainties | 18,253 | |||||
Property, plant and equipment | 181 | |||||||||
Earnings per share |
180 | Quarterly trend | 240 | |||||||
Employee costs |
174 | Reconciliation of net cash flow to movement in net debt | 204 | |||||||
Employee share schemes |
223 | Registrar | 268 | |||||||
Exchange rates |
168 | Related party transactions | 203 | |||||||
Executive Director remuneration |
116 | Relations with shareholders | 107 | |||||||
Finance expense |
176 | Remuneration governance | 124 | |||||||
Finance income |
176 | Remuneration policy report | 138 | |||||||
Financial calendar |
265 | Remuneration report | 112 | |||||||
Financial instruments and related disclosures |
212 | Reporting framework | 57 | |||||||
Financial position and resources |
72 | Research and development | 12,24,32,38 | |||||||
Financial statements of GlaxoSmithKline plc, prepared
|
|
232 |
|
Responsible business | 40 | |||||
Segment information | 169 | |||||||||
Five year record |
244 | Share capital and control | 263 | |||||||
Glossary of terms |
283 | Share capital and share premium account | 200 | |||||||
Goodwill |
182 | Share price | 263 | |||||||
Group companies |
272 | Shareholder information | 263 | |||||||
Group financial review |
52 | Shareholder services and contacts | 268 | |||||||
Health for all |
44 | Taxation | 178 | |||||||
How we manage risks |
18 | Tax information for shareholders | 266 | |||||||
Independent Auditors report |
149,233 | Trade and other payables | 189 | |||||||
Inventories |
188 | Trade and other receivables | 188 | |||||||
Investments in associates and joint ventures |
186 | US law and regulation | 270 | |||||||
Investor relations |
269 | Vaccines | 28 | |||||||
Key accounting judgements and estimates |
166 | Viability statement | 56 | |||||||
Key performance indicators |
16 | |||||||||
Leadership and effectiveness |
88 | |||||||||
Legal proceedings |
226 |
GSK Annual Report 2016 | ||
About GSK
GlaxoSmithKline plc was incorporated as an English public limited company on
6 December 1999. We were formed by a merger
Our shares are listed on the London
Stock Exchange and the
|
Brand names
Brand names appearing in italics throughout this report are
Acknowledgements
Design Friend www.friendstudio.com
Printing Pureprint Group, ISO 14001. FSC certified and Carbon Neutral.
Paper
This Annual Report is printed on Amadeus 100 Silk, a 100%
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Download PDFs:
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Cautionary statement regarding forward-looking statements
The Groups 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 Groups current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, intend, will, project, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and shareholders are cautioned not to place undue reliance on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Groups control or precise estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. |
Such factors include, but are not limited to, those discussed under Principal risks and uncertainties on pages 253 to 262 of this Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge and information available to the Directors on the date of this Annual Report.
A number of adjusted measures are used to report the performance of our business. These measures are defined on page 57 and a reconciliation of core results to total results is set out on page 66.
The information in this document does not constitute an offer to sell or an invitation to buy shares in GlaxoSmithKline plc or an invitation or inducement to engage in any other investment activities. Past performance cannot be relied upon as a guide to future performance. Nothing in this Annual Report should be construed as a profit forecast.
Assumptions related to 2016-2020 outlook
In outlining the expectations for the five-year period 2016-2020, the Group has made certain assumptions about the healthcare sector, the different markets in which the Group operates and the delivery of revenues and financial benefits from its current portfolio, pipeline and restructuring programmes.
For the Group specifically, over the period to 2020 GSK expects further declines in sales of Seretide/Advair . The introduction of a generic alternative to Advair in the US has been factored into the Groups assessment of its future performance. The Group assumes no premature loss of exclusivity for other key products over the period. The Groups expectation of at least £6 billion of revenues per annum on a CER basis by 2020 from products launched in the last three years includes contributions from the current pipeline asset Shingrix . This target is now expected to be met up to two years earlier. The Group also expects volume demand for its products to increase, particularly in Emerging Markets. |
The assumptions for the Groups revenue and earnings expectations assume no material mergers, acquisitions, disposals, litigation costs or share repurchases for the Company; and no change in the Groups shareholdings in ViiV Healthcare or Consumer Healthcare. They also assume no material changes in the macro-economic and healthcare environment.
The Groups expectations assume successful delivery of the Groups integration and restructuring plans over the period 2016-2020. Material costs for investment in new product launches and R&D have been factored into the expectations given. The expectations are given on a constant currency basis and assume no material change to the Groups effective tax rate.
Notice regarding limitations on Director Liability under English Law
Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Directors Report (for which see page 110), the Strategic report and the Remuneration report. Under English law the Directors would be liable to the company, but not to any third party, if one or more of these reports contained errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would otherwise not be liable. Pages 79 to 110, 148, 232 and 253 to 282 inclusive comprise the Directors Report, pages 2 to 78 inclusive comprise the Strategic report and pages 111 to 146 inclusive comprise the Remuneration report, each of which have been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with these reports shall be subject to the limitations and restrictions provided by such law.
Website
GSKs website www.gsk.com gives additional information on the Group. Notwithstanding the references we make in this Annual Report to GSKs 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.
|
|
do more feel better live longer |
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Head Office and Registered Office
GlaxoSmithKline plc 980 Great West Road Brentford, Middlesex TW8 9GS United Kingdom Tel: +44 (0)20 8047 5000
Registered number: 3888792
www.gsk.com
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