Annual Report 2018

Annual Report

2018

Contents

GSK Annual Report 2018

Strategic report

GSK at a glance 01

Chairman’s statement 02

CEO’s statement 03

Financial performance 04

Our long-term priorities 07

Key performance indicators 08

Industry trends 09

Stakeholder engagement 11

Our business model 12

Pharmaceuticals 13

Vaccines 18

Consumer Healthcare 21

Trust 24

Risk management 34

Group ﬁnancial review 37

Corporate Governance

Chairman’s Governance statement 66

Our Board 68

Our Corporate Executive Team 71

Leadership and effectiveness 72

Nominations Committee report 77

Accountability 79

Audit & Risk Committee report 79

Relations with stakeholders 89

Science Committee report 91

Corporate Responsibility

Committee report 92

Remuneration report

Chairman’s annual statement 96

Annual report on remuneration 98

2017 Remuneration policy summary 120

Financial statements

Directors’ statement of

responsibilities 126

Independent Auditor’s report 128

Financial statements 140

Notes to the ﬁnancial statements 144

Financial statements of

GlaxoSmithKline plc prepared

under UK GAAP 219

Investor information

Quarterly trend 224

Five-year record 229

Product development pipeline 235

Product, competition and

intellectual property 238

Principal risks and uncertainties 241

Share capital and share price 251

Dividends 253

Financial calendar 253

Annual General Meeting 2019 254

Tax information for shareholders 254

Shareholder services and contacts 256

US law and regulation 258

Group companies 260

Glossary of terms 271

Cautionary statement

See the inside back cover of this document for the cautionary statement

regarding forward-looking statements.

Non-ﬁnancial information statement

The following aligns to the non-ﬁnancial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006.

Description of the business model

GSK at glance 01

Our business model 12

Social matters

Global health 25

Health security 26

Affordability and availability 26

Employees

Employee engagement 28

Diversity 28

Wellbeing and development 29

Gender pay gap 28

Living our values and expectations 30

Board diversity 28

Human rights

Human rights 31

Data and engagement 31

Third parties 31

Anti-corruption and bribery

Living our values and expectations 30

Reporting and investigating concerns 30

Anti-bribery and corruption 30

Environmental matters

Carbon, water and waste 32

Policy, due diligence and outcomes

Summary of our principal risks 34

Principal risks and uncertainties 241

Viability statement 44

Audit & Risk Committee report 79

Our policies

All of our public policies, codes and standards

are available on gsk.com

Non-IFRS measures

We use a number of adjusted, non-IFRS, measures to report the performance of our business. Total reported results represent the Group's overall performance

under IFRS. Adjusted results and other non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented

in accordance with IFRS. Adjusted results and other non-IFRS measures are deﬁned on pages 40 to 42 and reconciliations to the nearest IFRS measures are

on pages 51 and 56.

We believe that Adjusted results, when considered together with Total results, provide investors, analysts and other stakeholders with helpful complementary

information to understand better the ﬁnancial performance and position of the Group from period to period, and allow the Group's performance to be more

easily compared against the majority of its peer companies. These measures are also used by management for planning and reporting purposes. They may

not be directly comparable with similarly described measures used by other companies.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Pharmaceuticals

Our Pharmaceuticals business

has a broad portfolio of innovative

and established medicines, with

leadership positions in respiratory

and HIV. We are strengthening

our pipeline through a focus on

immunology, human genetics and

advanced technologies to help

us identify the most promising

new medicines.

Read more on page 21

Turnover £m

Respiratory

6,928

HIV

4,722

Immuno-inﬂammation

472

Established Pharmaceuticals

5,147

Total

17,269

Turnover £m

Meningitis

881

Shingles

784

Inﬂuenza

523

Established Vaccines

3,706

Total

5,894

Turnover £m

Wellness

3,940

Oral health

2,496

Nutrition

643

Skin health

579

Total

7,658

We are a science-led global healthcare company.

Our purpose is to help people do more, feel better,

live longer.

GSK at a glance

We have three global businesses that discover, develop

and manufacture innovative pharmaceutical medicines,

vaccines and consumer healthcare products. Every day,

millions of patients and consumers across the world use

our products. In 2018, we delivered around 2.3 billion

packs of medicine, 770 million vaccine doses and

3.8 billion consumer healthcare products.

In 2018, our turnover was £30.8 billion, up 2% at actual

exchange rates (AER), 5% at constant exchange rates

(CER). The US is our largest single commercial market,

representing 39% of revenue, followed by International

at 35% and Europe at 26%.

Our 95,490 employees across the world are driven

by our purpose and our goal to become one of the

world’s most innovative, best-performing and trusted

healthcare companies.

Our strategy is to bring differentiated, high-quality

and needed healthcare products to as many people

as possible, with our three global businesses, scientiﬁc

and technical know-how and talented people.

We are a science-led healthcare company. In 2018,

we invested £3.9 billion in R&D and announced a new

approach to our R&D focusing on science related to

the immune system, human genetics and advanced

technologies.

Our three long-term priorities of Innovation, Performance

and Trust are designed to create long-term value for

patients, consumers and shareholders. Our values –

patient focus, transparency, respect and integrity –

and our expectations – courage, accountability,

development and teamwork – deﬁne our culture.

GSK Annual Report 2018

Research & development

Success in R&D will always be fundamental to shareholder returns.

A renewed focus on R&D was set out by Emma Walmsley when she

became CEO in 2017, and a new plan to improve the pipeline of new

medicines has now been launched by Dr Hal Barron, our new Chief

Scientiﬁc Ofﬁcer.

Progress is most evident in oncology, with some promising assets

in our own laboratories. We have also acquired Tesaro, an oncology

focused biotechnology company based in Boston, which has

a marketed oncology product and several pipeline assets with

development potential. Even more recently, we have proposed

an alliance with Merck KGaA, Darmstadt, Germany to develop

a promising new oncology medicine.

Through the Board Science Committee, the Directors continue

to engage closely with the executives on the actions being taken

to improve scientiﬁc innovation. A focus on world-class innovation

is essential to drive long-term value for investors.

Future direction

In addition to increasing investment in Pharmaceuticals, we also

took steps to strengthen the Consumer Healthcare business in 2018.

The ﬁrst step was the buyout of the put option held by Novartis in

respect of their minority stake in GSK Consumer Healthcare, which

was completed in June. The second step was the announcement

in December to create a new Consumer Healthcare Joint Venture

with Pﬁzer.

This latter transaction offers the opportunity to create substantial

value for shareholders through a new world-leading Consumer

Healthcare business and has a signiﬁcant bearing on the future

shape of the Group. This transaction would transform the scale

of GSK’s Consumer Healthcare business and therefore the Board

has stated that GSK intends to separate the Joint Venture within

three years of the completion of the transaction. This sets out a

path for GSK to create two focused new companies, with separate

listings and appropriate capital structures. Each business will be

well positioned to deliver attractive returns to shareholders and

beneﬁts to patients and consumers.

The Board fully supports the proposed transaction with Pﬁzer and

is seeking approval from shareholders at a General Meeting which

will be held immediately after this coming Annual General Meeting.

A separate Circular recommending the transaction will be made

available to shareholders prior to the Annual General Meeting.

Capital allocation

Improving GSK’s pipeline of new medicines remains the ﬁrst priority

for investment. We also continue to invest behind key products,

including increasing the manufacturing capacity of Shingrix,

GSK’s very successful new vaccine to help prevent shingles.

Dividend payments form part of the Group’s capital allocation

framework and the Board recognises the importance of dividends

to shareholders. Total dividends of 80p per share were paid in 2018

and for the ﬁrst time in several years the cash ﬂow has covered the

dividend payments. The same level of dividend is expected in 2019.

Cash generation should remain a key focus given the marked

increase in net debt, most of which arose from taking full control

of the Consumer Healthcare business.

Financial reporting

I have noted before that commercial structures and reporting

requirements sometimes lead to more complexity in reporting

than we would like. We continue to evolve our ﬁnancial reporting

and over the course of 2018 we made further changes to give

greater prominence to Total results, which represent the Group’s

overall performance experienced by shareholders. The company

is committed to continuous improvement in this area in line with

evolving regulatory requirements and best practice.

Succession

In 2018, we announced that Simon Dingemans would step down

as Chief Financial Ofﬁcer at this coming AGM after more than eight

years with GSK. I would like to thank him for his service to GSK.

Succeeding Simon, is Iain Mackay, formerly Group Finance Director

for HSBC, who we welcomed to the Board in January 2019.

This will be my last Annual Report as Chairman, following my

decision at the start of the year to step down from the Board.

GSK is one of the world’s great businesses and it has been

an enormous privilege to serve as its Chairman.

Under Emma’s leadership, GSK has made very good progress.

With the announcement of the intended separation in a few years’

time, I believe this is the right moment to step down and allow

a new Chair to oversee this process through to its conclusion.

Our Senior Independent Director, Vindi Banga, is leading the

search to appoint my successor.

I would like to thank all of GSK’s employees and partners for

their hard work throughout 2018, and our shareholders and

customers for their continued support.

Philip Hampton

Chairman

Chairman’s statement

I am pleased to report that 2018 was a year of good ﬁnancial performance for

GSK with improvements in sales, earnings and, particularly, cash ﬂow generation.

The delivery against operating targets was excellent, with notably successful

launches of new products. It was also a year in which the strategic shape

of GSK in the coming years has been redeﬁned.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

We delivered improved operating performance, started to strengthen

our Pharmaceuticals pipeline, particularly in oncology, and undertook

several signiﬁcant transactions to support our strategy and reshape

the Group’s portfolio. Our focus for 2019 will be sustained delivery of

this progress and, in particular, continued development of the pipeline.

2018 performance

Group sales were £30.8 billion, up 2% at actual exchange rates

(AER) and up 5% at constant exchange rates (CER). Sales growth

was driven by new products. The standout continues to be Shingrix,

our vaccine for shingles, which had sales of £784 million – a

remarkable launch year for the vaccine. Our HIV medicines also

continued to grow with sales of £4.4 billion for our dolutegravir-

based products. And in respiratory we continued to build our new

portfolio with sales of £2.6 billion, including good performances

from Trelegy Ellipta – our new three-in-one medicine for chronic

obstructive pulmonary disease (COPD) – and Nucala, our biologic

medicine for severe asthma.

Total Group operating margin was 17.8%, up 4.3 percentage points

AER and 5.0 percentage points CER. Adjusted Group operating

margin was 28.4%, ﬂat AER and up 0.5 percentage points CER.

Total earnings per share more than doubled to 73.7p AER and

CER, and Adjusted earnings per share were up 7% AER, 12%

CER at 119.4p.

We remain focused on controlling costs and cash generation

and I was very pleased that free cash ﬂow was signiﬁcantly

improved at £5.7 billion, up 63% in actual terms compared with

2017. We delivered on our expectation of paying an 80p per share

dividend in 2018 and expect to pay 80p per share in 2019.

Strengthening the pipeline

I have consistently said our key priority is to strengthen the

Pharmaceuticals pipeline to develop the next generation of medicines

for patients, and 2018 demonstrated good progress against this

objective, particularly in oncology. By advancing key internal assets

as well as targeted business development, we will have 16

oncology

assets in clinical development – double the number we had at the

start of 2018. Our acquisition of Tesaro added a major new product

to our portfolio, Zejula, which is approved for use in ovarian cancer

and we see strong development prospects for this product and the

other assets acquired in this transaction. We are pleased that we

will be adding to our portfolio with our proposed global alliance

with Merck KGaA, Darmstadt, Germany to co-develop and

co-commercialise a novel immunotherapy asset.

In 2019, we expect major data readouts and other signiﬁcant

newsﬂow on several new medicines. We expect pivotal data

from three oncology assets which all have potential to be launched

in the next two years. We also expect an approval decision from the

US Food & Drug Administration (FDA) for dolutegravir + lamivudine

and FDA ﬁlings for two other new medicines in HIV, a phase III start

for a new treatment for rheumatoid arthritis, and results of a pivotal

respiratory study to support ﬁling of Trelegy Ellipta for use in asthma.

Accelerating our strategy and reshaping our business

In line with our capital allocation priorities, through 2018 we

undertook a series of transactions to accelerate our strategy

and reshape our business. In June, we acquired full ownership

of our Consumer Healthcare business by buying out Novartis’

minority stake, and in December we reached agreement with

Unilever to divest Horlicks and other consumer nutrition products.

Expected proceeds from the disposal will be used to reduce

debt and increase our investment ﬂexibility.

In December, we also announced the formation of a Consumer

Healthcare JV with Pﬁzer. When completed, this would create

a new global leader in Consumer Healthcare. The proposed

transaction also supports our key priority to strengthen the

Pharmaceuticals business by increasing cash ﬂows. And with

our intention to separate we have set a clear direction for the

Group with the ultimate aim of creating two exceptional UK-based,

global companies. One, a Pharmaceuticals/Vaccines company,

with an R&D approach focused on science related to the immune

system, human genetics and advanced technologies. The other,

a new world-leading Consumer Healthcare company.

Building Trust

Trust is the third long-term priority I set out alongside Innovation

and Performance and is vitally important to me and all employees

at GSK. In 2018, we set out new commitments to build Trust with

a strong focus on three principal areas: using our science and

technology to address health needs, making our products more

affordable and available, and being a modern employer.

We are committed to providing access to our medicines and

vaccines across the world, and I was pleased that we once again

topped the Access to Medicines Index. I was also delighted to see

the approval of tafenoquine for P. vivax malaria and the encouraging

data we published on our potential vaccine for tuberculosis (TB),

which remains the leading cause of death through infectious

disease worldwide.

We also continue to drive a necessary shift in culture towards

one that is focused on performance and based on living our values

(patient focus, transparency, respect and integrity) and expectations

(courage, accountability, development and teamwork). Employee

engagement is key to the progress we are making here, and our

people are encouraged to share their views and ideas on key topics

through regular conversations hosted by our leaders, including

myself and my executive team.

2019 will be an important year for GSK as we continue to strengthen

our Pharmaceuticals pipeline, execute on our announced transactions,

and sustain improved operating performance, particularly as we

navigate the introduction of generic Advair in the US, for which

we have anticipated and prepared. We will remain vigilant in what

is a dynamic operating environment and continue to invest in our

long-term priorities, so that we can bring beneﬁts to the patients

and consumers that we serve.

Finally, I want to sincerely thank all of our customers, suppliers,

investors and employees for their support and hard work in 2018

and I look forward to our continued partnership for an exciting

year ahead.

Emma Walmsley

Chief Executive Ofﬁcer

CEO’s statement

In 2018, GSK made signiﬁcant progress against our long-term priorities of

Innovation, Performance and Trust, underpinned by a continuing shift in culture.

1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,

Germany, expected to close in Q1 2019.

GSK Annual Report 2018

Financial performance

Total results

2018 2017 Growth

% of % of

£m turnover £m turnover £% CER%

Turnover 30,821 100 30,186 100 2 5

Cost of sales (10,241) (33.2) (10,342) (34.3) (1) –

Gross proﬁt 20,580 66.8 19,844 65.7 4 7

Selling, general and administration (9,915) (32.2) (9,672) (32.0) 3 5

Research and development (3,893) (12.6) (4,476) (14.8) (13) (12)

Royalty income 299 1.0 356 1.1 (16) (17)

Other operating income/(expense) (1,588) (5.2) (1,965) (6.5)

Operating proﬁt 5,483 17. 8 4,087 13.5 34 43

Net ﬁnance costs (717) (669)

Proﬁt on disposal of interest in associates 3 94

Share of after tax proﬁts of associates and joint ventures 31 13

Proﬁt before taxation 4,800 3,525 36 46

Taxation (754) (1,356)

Tax rate 15.7% 38.5%

Proﬁt after taxation 4,046 2,169 87 100

Proﬁt attributable to non-controlling interests 423 637

Proﬁt attributable to shareholders 3,623 1,532

Earnings per share 73.7p 31.4p >100 >100

How we performed

Cost of sales

Cost of sales as a percentage of turnover was 33.2%, down

1.0 percentage points AER and 1.4 percentage points CER.

This primarily reﬂected a favourable comparison with the write-

downs of assets in 2017 related to the decision to withdraw

Tanzeum, together with a more favourable product mix in

Vaccines and Consumer Healthcare.

Selling, general and administration

SG&A costs as a percentage of turnover were 32.2%, up

0.1 percentage points at both AER and CER. The increase

primarily reﬂected higher restructuring costs and investment

in promotional product support, particularly for new launches

in Respiratory, HIV and Vaccines.

Research and development

R&D expenditure was £3,893 million. (12.6% of turnover),

13% AER, 12% CER lower than in 2017. The reduction reﬂected

lower restructuring costs primarily due to the comparison with

the provision for obligations in 2017 as a result of the decision

to withdraw Tanzeum. In addition, there were lower intangible

asset impairments and a favourable comparison with the impact

of the Priority Review Voucher purchased and utilised in 2017.

Other operating income/(expense)

Other operating expense primarily reﬂected accounting charges

arising from the remeasurements of the contingent consideration

liability related to the acquisition of the former Shionogi-ViiV

Healthcare joint venture and the Consumer Healthcare Joint Venture

put option previously held by Novartis, partly offset by the proﬁt

on a number of asset disposals.

Operating proﬁt

Total operating proﬁt was £5,483 million in 2018 compared with

£4,087 million in 2017. The increase primarily reﬂected a favourable

comparison with charges in 2017 arising from the impact of US

tax reform on the valuations of the Consumer Healthcare and HIV

businesses and reduced asset impairments and restructuring costs

in cost of sales and R&D.

Tax

The charge of £754 million represented an effective tax rate on

Total results of 15.7% (2017 – 38.5%) and reﬂected the different

tax effects of the various Adjusting items. The reduction in the

effective tax rate was driven primarily by a favourable comparison

with the impact of US tax reform, which resulted in a number of

charges in 2017.

Non-controlling interests

The allocation of earnings to non-controlling interests amounted

to £423 million (2017 – £637 million). The reduction was primarily

due to the lower allocation of Consumer Healthcare proﬁts following

the buyout of Novartis’ interest.

Earnings per share

Total earnings per share was 73.7p, compared with 31.4p in 2017.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Total and Adjusted results

Adjusting items

Intangible asset amortisation and impairment

Amortisation and impairment of intangible assets excludes computer

software and goodwill.

Major restructuring

Major restructuring costs, which include impairments of tangible

assets and computer software (under speciﬁc Board-approved

programmes that are structural, of a signiﬁcant scale and where

the costs of individual or related projects exceed £25 million),

including integration costs following material acquisitions.

Transaction-related

Transaction-related accounting or other adjustments related

to signiﬁcant acquisitions.

Divestments, signiﬁcant legal and other items

Proceeds and costs of disposals of associates, products and

businesses; signiﬁcant legal charges (net of insurance recoveries)

and expenses on the settlement of litigation and government

investigations; other operating income other than royalty income,

and other items.

Total reported results represent the Group’s overall performance.

GSK uses a number of Adjusted, non-IFRS, measures to report the

performance of its business. Adjusted results and other non-IFRS

measures may be considered in addition to, but not as a substitute

for or superior to, information presented in accordance with IFRS.

See page 40 for a fuller deﬁnition.

GSK believes that Adjusted results, when considered together with

Total results, provide investors, analysts and other stakeholders with

helpful complementary information to understand better the ﬁnancial

performance and position of the Group from period to period, and

allow the Group’s performance to be more easily compared against

the majority of its peer companies. These measures are also used

by management for planning and reporting purposes. They may not

be directly comparable with similarly described measures used by

other companies.

GSK encourages investors and analysts not to rely on any

single ﬁnancial measure but to review GSK’s Annual Reports,

including the ﬁnancial statements and notes, in their entirety.

GSK has undertaken a number of Major restructuring programmes

in recent years in response to signiﬁcant changes in the Group’s

trading environment or overall strategy, or following material

acquisitions, including the Novartis transaction in 2015. Costs,

both cash and non-cash, of these programmes are provided

for as individual elements are approved and meet the accounting

recognition criteria. As a result, charges may be incurred over

a number of years following the initiation of a Major restructuring

programme.

GSK is committed to continuously improving its ﬁnancial reporting,

in line with evolving regulatory requirements and best practice and

has made a number of changes in recent years. In line with this

practice, GSK expects in 2019 to continue to review its reporting

framework (including, where relevant, the use of alternative

performance measures).

Adjusting items

Total

results

£m

Intangible

asset

amortisation

£m

Intangible

asset

impairment

£m

Major

restructuring

£m

Transaction

-related

£m

Divestments,

signiﬁcant

legal and

other items

£m

Adjusted

results

£m

Turnover 30,821 30,821

Cost of sales (10,241) 536 69 443 15 – (9,178)

Gross proﬁt 20,580 536 69 443 15 – 21,643

Selling, general and administration (9,915) 2 315 98 38 (9,462)

Research and development (3,893) 44 45 49 20 (3,735)

Royalty income 299 299

Other operating income/(expense) (1,588) 2 1,864 (278) –

Operating proﬁt 5,483 580 116 809 1,977 (220) 8,745

Net ﬁnance costs (717) 4 (3) 18 (698)

Proﬁt on disposal of associates 3 (3) –

Share of after tax proﬁts of associates and joint ventures 31 31

Proﬁt before taxation 4,800 580 116 813 1,974 (205) 8,078

Taxation (754) (109) (19) (170) (239) (244) (1,535)

Tax rate 15.7% 19.0%

Proﬁt after taxation 4,046 471 97 643 1,735 (449) 6,543

Proﬁt attributable to non-controlling interests 423 251 674

Proﬁt attributable to shareholders 3,623 471 97 643 1,484 (449) 5,869

Earnings per share 73.7p 9.6p 2.0p 13.1p 30.2p (9.2)p 119.4p

GSK Annual Report 2018

Financial performance continued

Adjusted results

2018 2017 Growth

% of % of

£m turnover £m turnover £% CER%

Turnover 30,821 100 30,186 100 2 5

Cost of sales (9,178) (29.8) (8,771) (29.1) 5 6

Gross proﬁt 21,643 70.2 21,415 70.9 1 4

Selling, general and administration (9,462) (30.7) (9,341) (30.9) 1 4

Research and development (3,735) (12.1) (3,862) (12.8) (3) (2)

Royalty income 299 1.0 356 1.2 (16) (17)

Operating proﬁt 8,745 28.4 8,568 28.4 2 6

Net ﬁnance costs (698) (657)

Share of after tax proﬁts of associates and joint ventures 31 13

Proﬁt before taxation 8,078 7,924 2 6

Taxation (1,535) (1,667)

Tax rate 19.0% 21.0%

Proﬁt after taxation 6,543 6,257 5 9

Proﬁt attributable to non-controlling interests 674 793

Proﬁt attributable to shareholders 5,869 5,464

Earnings per share 119.4p 111.8p 7 12

How we performed

Cost of sales

Cost of sales as a percentage of turnover was 29.8%,

up 0.7 percentage points at AER, 0.4 percentage points

at CER. The increase primarily reﬂected continued adverse

pricing pressure in Pharmaceuticals and Established Vaccines

as well as increased input costs.

Selling, general and administration

SG&A costs as a percentage of turnover were 30.7%, down

0.2 percentage points at AER, 0.3 percentage points at CER.

This decrease reﬂected the impact of sales growth partly offset

by a cost increase of 1% AER, 4% CER, primarily resulting from

increased investment in promotional product support, particularly

for new launches in Respiratory, HIV and Vaccines.

Research and development

R&D expenditure was £3,735 million (12.1% of turnover), down 3%

AER, 2% CER. This primarily reﬂected the favourable comparison

with the impact of the Priority Review Voucher purchased and

utilised in 2017 and the beneﬁt of the prioritisation initiatives

started in the second half of 2018.

Operating proﬁt

Adjusted operating proﬁt was £8,745 million, up 2% AER,

6% CER on a turnover increase of 5%. The Adjusted operating

margin of 28.4% was ﬂat at AER but up 0.5 percentage points

at CER. This reﬂected the beneﬁt from sales growth at CER in

all three businesses, a more favourable mix, primarily in Vaccines

and Consumer Healthcare, and reduced R&D expenditure.

Tax

Tax on Adjusted proﬁt was £1,535 million representing an effective

Adjusted tax rate of 19.0% (2017 – 21.0%). The reduction in the

effective rate was primarily driven by the reduction in the US federal

tax rate.

Non-controlling interests

The allocation of Adjusted earnings to non-controlling interests

amounted to £674 million (2017 – £793 million). The reduction

was primarily due to the lower allocation of Consumer Healthcare

proﬁts following the buyout of Novartis’ interest.

Earnings per share

Adjusted EPS of 119.4p was up 7% AER, 12% CER, compared

with a 6% CER increase in Adjusted operating proﬁt, primarily

as a result of a reduced non-controlling interest allocation of

Consumer Healthcare proﬁts and a lower Adjusted tax rate.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

We deliver our long-term priorities through each of our three

businesses. They are designed to create long-term value for patients,

consumers and shareholders, and are underpinned by our ambition

to build a culture with a greater performance focus, aligned to our

values and expectations.

This page sets out our 2018 objectives, highlights progress

in 2018 and our key objectives for 2019, with more detail provided

in the relevant business sections.

Our long-term priorities

Our long-term priorities apply to our three businesses

We invest in scientiﬁc and technical

excellence to develop and launch

a pipeline of new products that meet

the needs of patients, payers and

consumers.

2018 objectives

– Excellent execution of key launches:

Trelegy Ellipta, Juluca, and Shingrix

– Strengthen Pharmaceutical pipeline

through greater focus, improved medicines

development and business development

2018 progress

– Delivered industry-leading launches of

Shingrix and Trelegy Ellipta, with strong

start to sales of Juluca

– New R&D approach to focus on science

of the immune system, human genetics

and advanced technologies

– Strengthened pipeline through strategic

business development with 23andMe and

Tesaro and terminated or divested around

80 programmes to focus investment on

most promising assets

– Signiﬁcant progress in reshaping

Pharmaceuticals R&D portfolio, with 33

of 46 new medicines targeting modulation

of the immune system

2019 objectives

– Deliver continued strong sales of Trelegy

Ellipta, Nucala, HIV two-drug regimen

and Shingrix

– Continue to strengthen pipeline through

execution of new R&D approach,

accelerating priority assets and optimising

recent strategic business development

transactions

Innovation Performance Trust

We deliver growth based performance

by investing effectively in our

business, developing our people

and executing competitively.

2018 objectives

– Grow sales in priority therapy areas,

categories and markets

– Increase operating margins and deliver

improved cash ﬂow

– Strengthen top talent proﬁle in key roles

2018 progress

– Group sales £30.8 billion, up 2% AER,

5% CER, with growth in new respiratory

product sales and HIV

– Total Group operating margin 17.8%,

up 4.3 percentage points AER, up

5.0 percentage points CER. Adjusted

Group operating margin 28.4%, ﬂat AER,

up 0.5 percentage points CER

– Net cash ﬂow from operations £8.4 billion,

up from £6.9 billion. Free cash ﬂow

£5.7 billion, up from £3.5 billion

– Announced transaction to create a

world-leading Consumer Healthcare Joint

Venture with Pﬁzer and bought out Novartis’

stake in GSK Consumer Healthcare

– Key leadership appointments in place

with 69% of top 125 leaders new in role

2019 objectives

– Continue to drive sales growth and

operational performance

– Successful integration of Tesaro

– Deliver restructuring beneﬁts and plan

for the integration of Pﬁzer’s consumer

healthcare business

– Accelerate capability build in priority areas

including digital data and analytics

We are a responsible company and

commit to use our science and

technology to address health needs,

make our products affordable and

available and to be a modern employer.

2018 objectives

– Focus on supply service levels

– Deﬁne new global health approach

– Competitive employee engagement

2018 progress

– Established new set of priorities and public

commitments to build trust

– Continued to simplify supply chain and

improve supply performance

– Received approval for tafenoquine, the ﬁrst

new treatment for P. vivax malaria in 60 years

– Candidate TB vaccine showed positive

results in phase IIb trial

– Competitive employee engagement through

focus on modern employer

– All employees globally to have access

to a preventive healthcare package

2019 objectives

– Focus on supply service levels, execute

portfolio and network simpliﬁcation

– Deliver progress on Trust commitments

– Progress global health research in TB

and HIV

– Deliver modern employer programmes

to empower employees to be themselves,

feel good and keep growing at GSK

Culture

We are committed to building a new culture at GSK to accelerate delivery of our long-term priorities. In 2018, our focus was to establish a new set of

expectations – courage, accountability, development and teamwork – alongside our values – patient focus, transparency, respect and integrity – and

introduce a new approach to performance and reward. In 2019, we aim to continue to embed organisational understanding of how our values and

expectations will support a change in culture, leading to improved culture scores, and further embed our new performance system.

Principal risks

Our Principal risks are patient safety: product quality; ﬁnancial controls and reporting; anti-bribery and corruption; commercial practices; privacy;

research practices; third party oversight; environment, health and safety, and sustainability; information security; and supply continuity. Our risk

management framework is designed to support our long-term priorities. More detailed information can be found on pages 34 to 36 and 241 to 250.

1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt, Germany, expected to close in Q1 2019.

GSK Annual Report 2018

Our 10 operating key performance indicators (KPIs) track progress

against our long-term priorities. They measure how we are performing

at an overall Group level and across our three businesses. They are

reviewed regularly by our Corporate Executive Team and the Board,

and employees are updated on progress every quarter. In 2018, we

launched a new performance system to align employees’ bonuses

to a relevant subset of our ten KPIs. The remuneration policy used

to reward the performance of our executives includes measures

linked to our KPIs (see pages 97, 101 and 103).

On this page we provide performance data for the operating KPIs

we are reporting externally. Due to commercial sensitivities we are

not planning to publish data for all operating KPIs.

We use a number of adjusted, non-IFRS, measures to report the

performance of our business, as described on pages 40 to 42,

including Adjusted results, free cash ﬂow and CER growth rates.

Non-IFRS measures may be considered in addition to, but not as

a substitute for or superior to, information presented in accordance

with IFRS.

Key performance indicators

Innovation

2018

£bn

2018 growth

2017

£bn

2016

£bn

£% CER%

Innovation sales

Sales of Pharmaceuticals and Vaccines products launched in the last ﬁve years

5.7 43 46 4.0

2.6

For internal purposes we also measure pipeline value and progress.

Performance

2018

£bn

2018 growth

2017

£bn

2016

£bn

£% CER%

Group turnover

30.8 2 5 30.2 2 7. 9

Operating proﬁt and margin

Total operating proﬁt 5.5 34 43 4.1 2.6

Adjusted operating proﬁt

8.7 2 6 8.6 7.7

Total margin

17.8% 13.5% 9.3%

Adjusted margin

28.4% 28.4% 27.5%

Free cash ﬂow

5.7 63 3.5

3.3

For internal purposes we also measure market share, and top talent in key roles.

Trust

2018 2017 2016

Employee engagement

Employee engagement scores from our global employee survey

78% 79%

For internal purposes we also measure supply service levels and corporate reputation.

Linked to Executive LTI awards and bonus, see pages 97, 101 and 103.

a Comparative information reﬂects sales of those products that meet the deﬁnition for 2018.

b Revised to include proceeds from the sale of intangible assets.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Global economic growth remained steady in 2018, with a projected

annual growth rate of 3.7%

. This was despite concerns over

international trade, the weaker economic performance in some

countries, notably Europe and Asia, and geopolitical friction.

In Europe, a lack of clarity about the nature of the UK’s future

relationship with the EU caused some political and economic

uncertainty (see page 36).

The global healthcare market continues to grow, despite signs of

economic slowdown in some countries. Worldwide pharmaceutical

sales totalled £731 billion

from September 2017–2018, up 5%.

North America remains the largest pharmaceutical market with

a 47% share of global sales, with Europe representing 16%

China is the second largest individual country for pharmaceutical

sales, representing 8% of global sales

. Global vaccine sales

rose to approximately £20.6 billion in 2018, up 7.3% from 2017

Global consumer healthcare sales are estimated to be

approximately £135 billion

Global trends: opportunities and challenges

Positive demographics

Demographic change is driving demand for both preventive and

therapeutic healthcare products. People are living longer, with

the number of over 65-year-olds due to double between 2017

and 2050, and the global population is expanding, with the

worldwide headcount due to grow by more than 1 billion between

2015 and 2030, to 8.5 billion. Increasing afﬂuence, changing

diets and lifestyles and longer lifespans are all contributing to

rising demand for healthcare, especially in areas such as cancer

and respiratory disease.

Advances in science and technology

Rapid advances in science and technology are transforming

healthcare and increasing the probability of success in R&D.

Better understanding of human biology and genetics is enabling

scientists to identify and develop novel, targeted treatments and

vaccines. Advances in digital technology, data and analytics

meanwhile allow researchers to explore and interpret a greater

volume of data much faster than before. The insights gained are

accelerating and improving the development of preventive and

therapeutic medicines and vaccines, and enabling manufacturers

and purchasers of healthcare products to better measure their

effectiveness. Technology is also now central to the way people

discover, assess and buy healthcare products, with 2018 US

research suggesting that 75% of consumers surveyed consider

that technology plays an important part in managing their

own health.

Pricing and access

The pricing of healthcare products continues to attract signiﬁcant

attention from governments and the public, with calls for better

transparency on how prices are set and a greater emphasis on health

outcome-based pricing. Specialty medicines continue to receive

particular attention; their pricing reﬂects the therapeutic beneﬁts

and small number of patients covered by targeted treatments.

Government and payer budgets remain subject to increasing reviews

as demand for healthcare grows, due to demographic change, the

push for universal health coverage and advances in preventive care

and treatment. Despite this, innovative medicines that are clearly

differentiated in areas of unmet medical need will continue to

attract strong coverage and funding in developed markets.

In the US, there is variability in how drugs are funded and reimbursed

across insurance programmes. The current administration is

undergoing a comprehensive review of drug pricing. During 2018,

it published the drug pricing Blue Print in an effort to lower prices of

pharmaceutical medicines for patients across the US. The Blue Print

focuses on improved competition, better government negotiation,

incentives for lower list prices and lowering out-of-pocket costs for

patients. The administration aims to achieve this through a number

of mechanisms, such as limiting rebates, introducing international

reference pricing to compare domestic drug prices with other

countries, value-based pricing pilots and reform of Medicare.

In Europe and emerging markets, international reference pricing

continues to gain traction, with over 70 markets now involved

globally, although many countries continue to negotiate conﬁdential

contracts with manufacturers. Increasingly, countries are also

cooperating on pricing, procurement and health technology

assessments (HTAs), which assess the clinical and cost-

effectiveness and broader impacts of healthcare treatments.

A new HTA regulation has been proposed in Europe that would

centralise the clinical assessments of new medicines and medical

devices. This is now going through the legislative process.

In China, the authorities accelerated progress towards bringing

innovative treatments to market. This included increasing the

pace and frequency of reimbursement coverage, especially

for oncology drugs.

In Japan, the government continues to seek to expedite and

expand drug development. However, in 2018 a signiﬁcant reduction

in the price maintenance premium, which exempts certain innovative

medicines from annual price reductions, eroded price stability

and plans to introduce a new HTA system have created further

uncertainty.

Industry trends

1 IMF World Economic Outlook Update, January 2019.

2 The volatility of the 2018 sterling exchange rate, and revised data collection methods at research

provider IQVIA, mean that this year’s global ﬁgure is not entirely comparable with 2017 (£738 billion).

3 IQVIA data.

4 Internal data.

The healthcare industry is changing rapidly and has strong growth

potential. Our strategy and long-term priorities, underpinned by

our culture, are designed to put us in the best position to be able

to respond to the opportunities and challenges that this presents.

GSK Annual Report 2018

Regulatory environment

Healthcare is a highly regulated industry, reﬂecting public

expectations that products comply to stringent levels of quality,

safety and efﬁcacy. Governments are increasingly extending the

regulatory remit to support accelerated development and the

introduction of new medicines with, for example, China, Japan and

the US recently introducing regulatory approaches to encourage

pharmaceutical innovation. Meanwhile, work on cross-border

harmonisation of pharmaceutical regulation is increasing through

supra-national bodies such as the International Conference of

Drug Regulatory Authorities and the International Council for

Harmonisation. In this context, the healthcare industry supports

close cooperation on medicine regulation systems and processes

between the UK and EU after Brexit.

Competition

The healthcare sector remains intensely competitive, with companies

increasingly pursuing acquisitions and collaborations to strengthen

their pipelines and portfolios. In 2018, notable M&A activity

included Takeda’s $59 billion acquisition of Shire Pharmaceuticals.

This momentum continued in early 2019, with Bristol-Myers Squibb

announcing its intention to buy Celgene for $74 billion.

Intellectual property (IP) protection is important to continue to

incentivise innovation. This helps research-based healthcare

companies ensure a reasonable return on their investments and

allows them to continue to conduct research, and develop new and

innovative medicines. Once IP protection expires, or if challenges

to a patent are upheld, generic competitors can rapidly capture

a large share of the market.

Vaccines and other biologics do not face such exposure to generic

competition through these ‘patent cliffs’. They are complex and

more dependent on technical manufacturing processes.

In consumer healthcare, the over-the-counter (OTC) sector has seen

the greatest consolidation while, in fast moving consumer goods

(FMCG), lower barriers to entry and fewer regulatory hurdles

have seen the rise of niche and e-commerce based companies

focusing successfully on fast-adapting consumer trends.

Societal expectations

Public trust in all large institutions – including media, governments,

NGOs and businesses – remains low, by historical standards,

particularly in developed markets, making it an important issue for

businesses as they face growing public scrutiny. Society increasingly

expects companies to earn their trust by demonstrating integrity,

fairness and transparency, and by making a positive contribution

to the wider community. The pharmaceutical sector still suffers from

a trust deﬁcit as a result of past challenges in relation to sales and

marketing practices and ethics and compliance issues.

Concern is also rising about the safeguarding of personal data.

In Europe, new legislation has tightened regulations on how

companies can use personal information. Loss or inappropriate

use of data could have major consequences for both individuals

and businesses.

There is a continuing focus on issues such as diversity, ranging from

equal pay to representation at senior management. The environment,

particularly climate change, ocean protection and plastic waste,

are issues where there is increased public concern and pressure

for action. Companies are also under increasing scrutiny on their

tax affairs, including their contribution and transparency. To be

successful companies must operate in a way that meets the

expectations of, and creates long-term value for, their wide range

of stakeholders, including shareholders, employees, customers

and suppliers.

Our strategic response

Our strategy – to bring differentiated, high-quality and needed

healthcare products to as many people as possible, with our three

global businesses, scientiﬁc and technical know-how and talented

people – is designed to respond to these trends. Our long-term

priorities, underpinned by our culture, will help us deliver our strategy:

Innovation: we invest in scientiﬁc and technical excellence to

develop and launch a pipeline of new products that meet the needs

of patients, payers and consumers.

Performance: we deliver growth based performance by investing

effectively in our business, developing our people and executing

competitively.

Trust: we are a responsible company and commit to use our science

and technology to address health needs, make our products

affordable and available and be a modern employer.

We are making important progress on these long-term priorities

(see page 7), which is enabling us to respond to the dynamic

environment in which we operate. To harness advances in science

and technology, we are forming partnerships to bring ground-

breaking products to patients faster. We aim to manage pricing

pressure by researching and developing differentiated medicines

that will attract the greatest coverage and funding, and by pricing

our medicines according to the value and outcomes they bring to

patients, providers and payers. We are committed to building trust

by addressing societal expectations and by operating responsibly

and transparently.

Industry trends continued

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Stakeholder engagement

Investors

We maintain regular and constructive dialogue with investors to

communicate our strategy and performance in order to promote

investor conﬁdence and ensure our continued access to capital.

– One-to-one meetings between Board members, senior executives

and institutional investors

– Running investor roadshows; attending conferences and events

– Annual General Meeting

R&D partners and academia

We partner with scientiﬁc institutions, business partners, and

academia to further advance scientiﬁc discovery and development.

– Establishing joint ventures to improve efﬁciency and strengthen

and improve innovation

– R&D collaborations such as our gene sequencing initiative

with 23andMe and UK Biobank

– Working with academic researchers to accelerate discovery

and development of new medicines

NGOs and multilateral organisations

We work with partners to improve access to healthcare services

and our products, and to advocate for the policy environment

in which we can be successful.

– Working with non-governmental organisations (NGOs) and partners

to research and develop products to support global health

– Partnering with NGOs and generic manufacturers to manufacture

and supply our products to developing countries

– Working with multilateral organisations to drive progress on key

global health priority areas

Patients and consumers

Insights from patient organisations and consumers enable us

to develop products and advocate for policies that better meet

their needs.

– Advisory boards and Patient Advocacy Leaders Summits provide

patient insights

– Engaging with and supporting patient groups (disclosed on gsk.com)

and supporting initiatives that empower patients to get more involved

in medicine development

– Our market research and consumer sensory labs help us understand

consumer needs

Healthcare professionals and medical experts

We work with healthcare professionals (HCPs) and medical experts

to understand patient needs and to ensure our products are being

administered in the right way.

– Advisory boards to gather insights related to scientiﬁc research

and disease management

– Collaboration on clinical trials and research

– Peer-to-peer scientiﬁc dialogue to increase understanding

of diseases and develop effective prevention

Governments and regulators

We work with governments and regulators to advocate for policies

that encourage innovation, promote efﬁcient management of

healthcare spending and give patients the support they need.

– Engaging with regulatory bodies during drug development

– Engaging with government health agencies to demonstrate

the value of our products

– Working with governments to build a strong operating

environment for life sciences

Employees

We involve and listen to employees to help us maintain strong

employee engagement and retain talented people.

– Conducting a twice-yearly global employee survey so we can

act on employee feedback

– Promoting informal dialogue and collaboration through our new

internal tech platform

– Let’s Talk events with leaders and members of the Corporate

Executive Team

– Established a Board-level Workforce Engagement Director

(Dr Vivienne Cox) (see page 90)

Suppliers

We work with thousands of suppliers, large and small, who provide

goods and services that support us in delivering high-quality,

safe products for our patients and consumers.

– Engaging with suppliers through our Third Party Oversight

programme and external platforms to help monitor performance

– Providing a platform for our suppliers to share best practices

in environmental performance through our Supplier Exchange

online community

– Auditing our suppliers’ quality processes to ensure they comply

with relevant regulations

Engaging with our stakeholders is key to our success and delivering

our strategy. We have various mechanisms that enable the Board and

management to understand and consider stakeholder views as part

of their oversight and decision-making (see page 89).

This page sets out our key stakeholder groups, why they are

important to us and some of the ways in which we engage

with them.

GSK Annual Report 2018

We discover, develop and manufacture innovative pharmaceutical

medicines, vaccines and consumer healthcare products. Our operations

span the value chain, from identifying and researching ground-breaking

discoveries, through development and testing to regulatory approval,

manufacturing and commercialisation.

Our values

Patient focus – Transparency – Respect – Integrity

Our expectations

Courage – Accountability – Development – Teamwork

Access to capital

Cash, equity and debt

enables us to invest in

our business over the

long term (see page 57).

Talented employees

Our people help deliver

our purpose with their

scientiﬁc and technical

know-how and their

expertise in regulation,

intellectual property and

commercialisation

(see page 28).

Partnerships

Business development helps

strengthen our pipeline and

complement our in-house

resources. We have important

relationships with external

organisations, suppliers and

third parties (see page 11).

Our resources: The value we create:

For patients and

consumers

We improve the

health of patients and

consumers around

the world through our

innovative medicines,

vaccines and consumer

healthcare products

(see pages 13, 18, 21).

For investors

We deliver growth

based performance

and in 2018 we paid a

dividend of 80p per

share to shareholders

(see pages 17, 20, 22).

For employees

We employ 95,490

people globally and

offer a broad range

of beneﬁts, including

preventative healthcare

services for all

employees, to attract,

retain and motivate

the best people to

support our business.

(see page 28).

How we create value:

Innovation Performance Trust

Our long-term priorities

Our purpose

To help people do more, feel better, live longer

Through our three global businesses we

improve health and create ﬁnancial value:

Invest in scientiﬁc research

We invested £3.9 billion in research and

development to bring new medicines, vaccines

and consumer healthcare products to patients,

payers and consumers.

Generate revenue and proﬁt

We generate revenue by executing new product

launches brilliantly and from the sales of our

existing portfolios.

Reinvest and distribute returns

As part of our capital allocation framework we

reinvest in our three businesses and also provide

returns to shareholders in the form of dividends.

Our business model

Culture

We are committed to building a culture with greater performance focus underpinned by our values and expectations.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Innovation

To strengthen our pipeline and deliver the next generation of

medicines that we see bringing the greatest value to patients,

we are embedding a new approach to R&D.

This approach focuses on science related to the immune system,

the use of human genetics, and advanced technologies, and is driven

by the multiplier effect of Science x Technology x Culture. It will

help us to accelerate the pace at which we develop and deliver

transformational medicines, prioritising those molecules with a higher

probability of success and terminating less promising programmes.

It will also enable us to increase our focus on specialty medicines

in areas such as oncology.

We have a broad clinical pipeline including 46 potential new

medicines in development for a range of diseases. This includes

oncology assets – double the number we had at the start of

2018. 33 of our potential new medicines are immunomodulators,

reﬂecting our scientiﬁc focus on immunology as the area where

we see the greatest potential. In 2019, we anticipate phase III data

read-outs in key areas including HIV, oncology and respiratory.

For us to focus more effectively and ensure we rapidly progress

only the best assets, our culture encourages smart risk-taking and

single-point accountable decision making. Dr Hal Barron, Chief

Scientiﬁc Ofﬁcer and President, R&D, has been instrumental in

driving scientiﬁc innovation since he joined GSK in January 2018.

HIV

We have a long-standing commitment to advancing the treatment,

prevention and cure of HIV by developing medicines that suppress

or prevent the virus in new ways and help reduce the burden of

treatment. Our HIV business is managed through ViiV Healthcare,

a global specialist HIV company that GSK controls as majority

owner, with Pﬁzer and Shionogi also as shareholders. Its broad

portfolio of 13 antiretroviral medicines offers a wide range of

therapeutic options for people living with HIV. They include the

highly successful therapies, Tivicay and Triumeq, which are based

on dolutegravir, the world-leading core agent.

Marking a new era in HIV care, Juluca, the ﬁrst two-drug regimen

(2DR), once-daily, single-pill for the treatment of HIV, has now

been launched in the US, Japan and several European markets.

By containing fewer drugs than conventional HIV therapies,

Juluca – and the other potential 2DRs in the pipeline – reduces

patients’ exposure to multiple medicines during what is often

life-long treatment.

In 2018, we ﬁled regulatory submissions in the US and Europe for

another single-tablet 2DR, of dolutegravir and lamivudine. These

followed the phase III GEMINI 1 & 2 studies which demonstrated

similar efﬁcacy for the 2DR compared with traditional three-drug

regimens. Decisions on regulatory approvals are anticipated in 2019.

Our Pharmaceuticals business has a broad portfolio of innovative and

established medicines, with leadership positions in respiratory and HIV.

We are strengthening our pipeline through a focus on immunology,

human genetics and advanced technologies to help us identify the

most promising new medicines.

Progress against our long-term priorities

– New R&D approach with a focus on

science related to the immune system,

human genetics and advanced

technologies

– Strengthened pipeline with 33

of 46

medicines in development targeting

modulation of the immune system

– Accelerated our oncology pipeline by

doubling the number of assets in clinical

development via advancing key internal

assets, e.g. GSK ‘916, and targeted

business development, e.g. acquisition

of Tesaro and the proposed alliance

with Merck KGaA.

– Launched Juluca, the ﬁrst two-drug

HIV regimen, and expanded indications

for Trelegy Ellipta and Nucala

Innovation Performance Trust

– Total 2018 turnover £17.3 billion,

ﬂat AER, up 2% CER

– New Respiratory product sales

£2.6 billion, up 35% AER, 38% CER;

HIV sales £4.7 billion, up 9% AER,

11% CER

– Reﬁned the priority markets in

which we target our resources to

accelerate growth

– Simpliﬁed our Pharmaceuticals

supply chain, separating it from

Consumer Healthcare, to improve

competitiveness

– Approval of tafenoquine, the ﬁrst

new treatment for P. vivax malaria

in 60 years

– Partnering to increase access to

paediatric formulations of our HIV

medicines

– Trained over 15,000 healthcare

professionals across 21 countries

on the appropriate use of antibiotics

Pharmaceuticals

1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,

Germany, expected to close in Q1 2019.

GSK Annual Report 2018

Pharmaceuticals continued

We made further progress with the investigational once-monthly,

long-acting injectable 2DR of cabotegravir and rilpivirine, a new

option for patients that avoids daily, oral treatment. The LATTE-2

study showed high rates of virologic response and long-term

durability over a three-year period, while the FLAIR and ATLAS

studies both demonstrated similar efﬁcacy to Triumeq with a

once-monthly injection. Regulatory ﬁling with the FDA is planned

in 2019.

In other research, the INSPIRING phase IIIb study demonstrated

the efﬁcacy and safety of a dolutegravir-based treatment regimen

in HIV and tuberculosis co-infected patients.

A phase III study of fostemsavir on heavily treatment-experienced

patients with HIV, whose current antiretroviral medicines are

proving inadequate, also delivered positive results. An application

for regulatory approval of fostemsavir is expected to be ﬁled in 2019.

Oncology

Cancer is one of the leading causes of death in the developed world.

We are focused on delivering transformational therapies for people

living with cancer. Our pipeline is focused on immuno-oncology,

cell therapy and cancer epigenetics. In 2018, we made signiﬁcant

progress by doubling the number of oncology assets in clinical

development to 16.

Our goal is to achieve a sustainable ﬂow of

new treatments based on a diversiﬁed portfolio of investigational

medicines utilising modalities such as small molecules, antibodies,

antibody drug conjugates and cells, either alone or in combination.

Our antibody drug conjugate targeting BCMA, GSK 2857916,

has the potential to target multiple myeloma. It has been granted

European PRIME and FDA breakthrough status, potentially enabling

faster regulatory review, and has also been recognised as an orphan

drug. Despite advances in treatment of multiple myeloma over the last

decade, there remains no cure and high unmet need. We have an

extensive development plan exploring use in the fourth to ﬁrst line

settings. In fourth line, following encouraging efﬁcacy data from the

DREAMM-1 study, we initiated the pivotal DREAMM-2 study which

was fully recruited by October 2018. Data is expected in mid-2019

with potential regulatory submissions by year end. The second line

DREAMM-6 pilot study looking at use in combination with standard

of care was initiated in 2018. The results which will be available in

2019 will inform future pivotal studies. The DREAMM-5 pilot study

looking at ﬁrst line use in relapsed and refractory patients is planned

to start in 2019.

In 2018, we accelerated the strengthening of our pipeline with the

acquisition of Tesaro, an oncology-focused biopharmaceutical

company. Tesaro’s major marketed product, Zejula, is an oral poly

ADP ribose polymerase (PARP) inhibitor approved in the US and

Europe for adults with recurrent ovarian cancer. PARP inhibitors

are transforming the treatment of ovarian cancer, demonstrating

marked clinical beneﬁt in patients with and without germline

mutations in a BRCA gene. We believe they also offer signiﬁcant

opportunities for treating patients with many other cancer types.

Clinical trials to assess the use of Zejula as a monotherapy and in

combinations for the signiﬁcantly larger opportunity of ﬁrst line

maintenance treatment of ovarian cancer are under way. Results

from the ﬁrst of these studies, PRIMA, are expected in late 2019.

Zejula is also being investigated as a possible treatment in lung,

breast and prostate cancer, both as a monotherapy and in

combination with other medicines. In addition to Zejula, Tesaro

has several other oncology assets in its pipeline including a

PD-1 inhibitor (TSR-042, dostarlimab) currently being studied

for endometrial cancer. We expect pivotal data that could support

a regulatory ﬁling of dostarlimab in the second half of 2019.

In January 2019, we announced a proposed global strategic alliance

with Merck KGaA, Darmstadt, Germany, to jointly develop and

commercialise M7824 (bintrafusp alfa). M7824 is an investigational

bifunctional fusion protein immunotherapy that is currently in clinical

development, including potential registration studies, for multiple

difﬁcult-to-treat cancers. This includes a phase II trial to investigate

M7824 compared with pembrolizumab as a ﬁrst line treatment in

patients with PD-L1 expressing advanced non-small cell lung cancer

(NSCLC).

We have completed the transition of the NY-ESO SPEAR T-cell

therapy programme to GSK from Adaptimmune. Early trial data

suggests that this asset could be transformational in synovial sarcoma.

It is the ﬁrst cell therapy to show clinical response in solid tumours and

is another recipient of European PRIME and FDA breakthrough status.

Another of our oncology therapies is an agonistic antibody for

inducible T-cell costimulator (ICOS) – the ﬁrst investigational

anti-ICOS agonist antibody to enter human clinical trials. Phase I

safety, pharmacokinetic and pharmacodynamic data, for the therapy

alone and in combination with pembrolizumab, show early, positive

indications of activity.

Respiratory

We have led the way in developing innovative medicines that advance

the management of asthma and COPD for nearly 50 years. Over the

past ﬁve years, we have launched six respiratory medicines, giving us

the broadest portfolio of once-daily, inhaled respiratory medicines in

our industry.

In 2018, we launched Trelegy Ellipta in 26 countries. We are now

class leaders in key markets including the US, UK and France.

Following the landmark IMPACT trial in which Trelegy Ellipta

demonstrated superiority to two of our dual medicines on multiple

endpoints, expanded indications were approved in the US and

Europe, enabling use across a broader group of COPD patients.

We submitted regulatory ﬁlings for Trelegy Ellipta in Japan and

China – the ﬁrst for a single inhaler triple therapy for COPD in both

countries. Further launches are planned throughout 2019. Results

from our phase III CAPTAIN study, which is exploring the efﬁcacy

and safety of Trelegy Ellipta in asthma, are anticipated in 2019.

Our Ellipta portfolio was further strengthened with an expanded

indication for Relvar Ellipta in asthma, and applications to support

label updates in the US and Europe for Anoro Ellipta and Incruse

Ellipta.

1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,

Germany, expected to close in Q1 2019.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Our ﬁrst-in-class severe eosinophilic asthma biologic, Nucala,

gained approval in Europe as the ﬁrst anti-interleukin (IL-5) with

a paediatric indication, alongside its earlier approval for adults.

We also ﬁled regulatory submissions for a paediatric licence in

the US, and in the EU and US for a new formulation of Nucala

that could be used subcutaneously to allow patients or caregivers

to administer treatment themselves.

We continue to innovate in respiratory biologics, with investigational

programmes for Nucala in nasal polyps and hypereosinophilic

syndrome.

Immuno-inﬂammation

Benlysta is the world’s ﬁrst and only biologic medicine speciﬁcally

approved to treat systemic lupus erythematosus (SLE), a chronic,

incurable, autoimmune disease. Building on data from four previous

phase III clinical trials, we presented results from the phase II PLUTO

study exploring use in paediatric patients with childhood-onset SLE.

In addition, the pivotal phase III BLISS studies showed low rates of

organ damage progression in SLE patients treated with Benlysta.

Results from the phase IV EMBRACE study of black adult patients

with active, autoantibody-positive SLE are expected in 2019. We also

began a new phase III study investigating Benlysta in combination

with rituximab in adult patients with SLE. This is assessing whether

co-administration enhances Benlysta’s treatment effect, to potentially

provide sustained disease control, with the possibility of clinical

remission. Headline results are expected in 2020.

We are continuing research into our anti-GM-CSF antibody for

patients with rheumatoid arthritis and expect to progress to phase III

in 2019.

Additional programmes

In 2018, we received approvals in the US and Australia for Krintafel/

Kozenis (tafenoquine), the ﬁrst new treatment for P. vivax malaria

in over 60 years (see page 25).

In Japan, we announced positive phase III results for daprodustat,

an oral hypoxia-inducible factor prolyl hydroxylase inhibitor, in patients

with anaemia associated with chronic kidney disease, and a strategic

collaboration with the Kyowa Hakko Kirin Company for its future

commercialisation. In addition, we have two ongoing daprodustat

phase III studies which are anticipated to report in 2020.

We also continue to develop gepotidacin, the ﬁrst in a new class

of antibiotics.

Advanced technologies

Signiﬁcant investment in a wide range of advanced technologies

is central to our new R&D approach. We are developing a core

capability in artiﬁcial intelligence and machine learning, to enhance

our ability to interpret and understand genetics and genomic data.

We will also invest in functional genomics, applying techniques for

gene modiﬁcation such as CRISPR technology, to help discover

and validate potential targets. These investments supplement our

existing strengths in other advanced technologies, including our

leading position in cell and gene therapy, which we continue

to develop.

Partnerships are key to our innovation. In 2018, we formed an

exclusive collaboration with 23andMe, the world’s leading consumer

genetics and research company. This will combine our scientiﬁc

and medical knowledge with 23andMe’s large-scale genetic

resources and unique data science skills, improving the probability

of R&D success. This exciting collaboration builds on our existing

partnerships, such as the Altius Institute, which pioneers new

technologies and approaches for decoding gene control; the UK

Biobank, which is generating anonymised genetic sequence data

from 500,000 volunteers, and the Open Targets consortium, which

supports an open access search engine that searches, evaluates

and integrates biologic and genetic disease data.

Improving R&D governance

We have established two new governance boards, the Research

Review Board (RRB) and the Development Review Board (DRB).

The RRB is accountable for our future portfolio, providing technical

review on the quality of our research and early-stage programmes.

The DRB reviews late-stage programmes to make sure our studies

are robust and innovative.

Aligned to these changes, we have created separate organisations

for research and for development to enable rigorous and disciplined

decision-making and oversight across the early and late stage

portfolio. Due to their specialist nature, we have kept distinct R&D

units for oncology and global health.

To support the most promising potential medicines in the portfolio

we terminated or divested around 80 programmes. Terminations

included danirixin, miridesap and dezamizumab. We also transferred

our rare disease gene therapy portfolio to Orchard Therapeutics,

in which we have become an equity shareholder, and sold the rights

to tapinarof to Dermavant Sciences.

GSK Annual Report 2018

Phase Compound Indication

Pivotal/registration*

Benlysta + Rituxan

SLE

cabotegravir

LA + rilpivirine

LA HIV

D3, dolutegravir + lamivudine HIV

1278863 (daprodustat HIF-PHI) anaemia

3684934 (fostemsavir HIV AI) HIV

Nucala COPD/HES/nasal polyps

Trelegy Ellipta

asthma

Dectova

1,4

IV inﬂuenza

2857916

(BCMA ADC)

multiple myeloma

Zejula (PARP inhibitor)

ﬁrst-line maintenance ovarian cancer

dostarlimab (PD-1 antagonist )

endometrial cancer

Phase II

3196165

(GM-CSF inhibitor) RA

3389404

/3228836

(HBV ASO) HBV

3359609

(ICOS receptor agonist) cancer

2982772 (RIP1k inhibitor) pso/RA/UC

3772847

(IL33r antagonist) severe asthma

3377794

(NY-ESO-1 TCR) cancer

2586881

(rhACE2) acute lung injury/PAH

2140944 (gepotidacin, topoisomerase IV inhibitor) antibacterial

2330811 (OSM antagonist) systemic sclerosis

2881078 (SARM) COPD muscle weakness

2862277 (TNFR1 antagonist) acute lung injury

3174998

(OX40 agonist) cancer

525762 (BET inhibitor) cancer

2330672 (IBAT inhibitor) cholestatic pruritus

3326595

(PRMT5 inhibitor) cancer

GR121619

(oxytocin) postpartum haemorrhage

TSR-022 (TIM-3 antagonist)

cancer

M7824

1,3

(TGFβ trap/anti PD-L1 bispeciﬁc) NSCLC

Phase I

2831781

(LAG3) ulcerative colitis

3358699

(BET targeted inhibitor) RA

3858279

(CCL17 antagonist) OA

2636771 (PI3kb inhibitor) cancer

2983559 (RIP2k inhibitor) IBD

3036656

(leucyl t-RNA inhibitor) TB

3640254 (HIV maturation inhibitor) HIV

35112 9 4

(IL5 LA antagonist) asthma

2292767 (PI3kd inhibitor) respiratory diseases

1795091 (TLR4 agonist) cancer

3810109

(broadly neutralizing antibody) HIV

3537142

(NYESO1 ImmTAC) cancer

3439171

(HPGD2 inhibitor) muscle repair

3145095 (RIP1k inhibitor) pancreatic cancer

3368715

(PRMT1 inhibitor) cancer

TSR-033 (LAG3)

cancer

2269557 (nemiralisib PI3Kd inhibitor) APDS

* Includes programmes in pivotal phases of development or where pivotal data has reported and regulatory submissions are under consideration or under review.

1 In-licence or other alliance relationship with third party.

2 Additional indications also under investigation.

3 Pending closure of transaction with Merck, KGaA, Darmstadt, Germany.

4 Subject to regulatory approval.

Note: for oncology where phase I studies are conducted in patients, the shift from phase I to phase II is deﬁned when expansion cohorts are started.

Pharmaceuticals pipeline overview

We have 46 assets in development, with 33 immunomodulators of which 16 are focused on oncology.

We expect a number of pivotal readouts in 2019.

Pharmaceuticals continued

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Performance

2018 performance summary

Pharmaceuticals turnover in 2018 was £17,269 million, ﬂat at

AER, but up 2% CER, driven primarily by the growth in HIV sales.

In the US, sales declined 2% AER but grew 1% at CER, with

growth in the HIV portfolio and Benlysta offsetting declines in

established pharmaceuticals and respiratory following patent

expiries. In Europe, sales grew 2% AER, 1% CER, with growth

in the respiratory portfolio offsetting the continued impact of

generic competition to Epzicom and Avodart. International was

ﬂat at AER but grew 5% CER, with growth driven by HIV and

the new respiratory portfolio.

Respiratory sales declined 1% AER, but grew 1% CER, to £6,928

million, with growth from the Ellipta portfolio and Nucala partly offset

by lower sales of Seretide/Advair as the market prepares for the entry

of a generic. Sales of new respiratory products, comprising Ellipta

products and Nucala, grew 35% AER, 38% CER to £2,612 million.

HIV sales increased 9% AER, 11% CER to £4,722 million,

reﬂecting share growth in the dolutegravir portfolio: Triumeq,

Tivicay and Juluca. This was partly offset by the decline in the

established portfolio, particularly the impact of generic competition

to Epzicom/Kivexa in Europe.

Immuno-inﬂammation sales were up 25% AER, 28% CER in 2018,

primarily driven by Benlysta.

Our Established Pharmaceuticals portfolio includes mainly off-patent

medicines. Sales were £5,147 million, down 7% AER, 4% CER,

reﬂecting efforts to maximise the value from this portfolio but also the

beneﬁt of certain post-divestment contract manufacturing sales and

the ﬁrst instalment of a 12-month Relenza supply contract in Europe.

The Pharmaceuticals operating margin of 33.3% was 1.0 percentage

points lower at AER than in 2017 and 0.9 percentage points lower

on a CER basis. This primarily reﬂected increased investment in new

product support, the continued impact of lower prices, particularly

in respiratory, the broader transition of the respiratory portfolio, and

a reduction in royalty income. This was partly offset by the beneﬁts

of prioritisation within R&D and a favourable comparison with the

impact of the Priority Review Voucher purchased in 2017.

Focusing our resources to accelerate growth

In 2018, we made signiﬁcant changes to the way our Pharmaceuticals

organisation works to accelerate growth and deliver the best results

for all our stakeholders.

We refocused our resources, prioritising the major markets such

as the US and China, while reducing investment in lower priority

markets. We have also prioritised resource behind brands and

therapies with the greatest growth potential and which generate

the highest revenue. To support our ambitions for the oncology

therapies in our pipeline, we strengthened our oncology commercial

infrastructure; recruiting more experts in oncology and haematology

and co-locating our R&D and commercial teams.

We simpliﬁed our commercial, medical and regulatory teams,

with fewer complex structures, systems and processes, and

clearer accountabilities. This enables greater speed and efﬁciency

and frees local operating companies to focus on customer-facing

activities and insights. The savings released by these changes

will be reinvested into our priority products and markets.

In recent years, we have signiﬁcantly strengthened our online

resources and in-house medical capabilities to provide bespoke

product information for healthcare professionals (HCPs). In 2018,

we updated our policy on working with HCPs, following consistent

feedback that they value the opportunity to learn about new products

through peer-to-peer programmes with expert practitioners who have

direct experience of our medicines.

The new policy will ensure prescribers have access to all available

information on our innovative products, so they can make fully

informed decisions that support better outcomes for patients.

When we have new medicines or signiﬁcant new data we will allow

payment to global experts to speak about the scientiﬁc evidence,

the diseases they treat and their own clinical experience. The change

was implemented in the US and Japan in late 2018, and depending

on effective implementation and assessment of risk will be

implemented in other major developed markets in Europe, North

America and Asia from 2019 onwards. To avoid any perceived

conﬂict of interest, we have strengthened our commitment to

transparency with new controls and expanded disclosure of

payments to individual HCPs.

Creating a simpler, competitive supply chain

Reliable supply is fundamental to enabling growth in key therapy

areas. Our Pharmaceuticals supply performance levels continued

to improve in 2018 with an on-time, in-full supply to customers

rating of 95.3%. All new products were launched on time.

We are adopting a simpliﬁed structure and operating model geared

to driving performance with increased focus on priority brands and

markets, clearer accountabilities and more pace. This has included

separating our Pharmaceuticals manufacturing and supply

organisation from our Consumer Healthcare network.

We continued to adapt our manufacturing network to support

growth, improve competitiveness and meet business and patient

needs. We opened a £54 million facility in Montrose, Scotland to

supply active pharmaceutical ingredients for our Ellipta respiratory

medicines, and a £26 million facility in Parma, Italy that will produce

fostemsavir, our investigational HIV treatment.

We revised our supply and demand, warehousing and distribution

operations to align with commercial priorities and announced

manufacturing site closures in Mexico and Bangladesh. Following

an extensive review of our cephalosporins antibiotics assets we

decided to restructure its supply chain and manufacturing site at

Ulverston in the UK. This will help us improve competitiveness and

support growth in emerging markets. We continued to simplify our

supplier base and product portfolio and are ahead of schedule to

reduce our contract manufacturers by 35% by 2021.

The Pharmaceuticals manufacturing and supply organisation again

delivered good performance for safety, quality and compliance.

There were 55 regulatory inspections in 2018, all resulting in

satisfactory outcomes.

GSK Annual Report 2018

Innovation

Our Vaccines business has 16 innovative candidate vaccines.

We balance our focus on this robust pipeline with the active

life-cycle management of our existing vaccines, helping to protect

more people through expanded indications and geographies.

Our investment in breakthrough vaccines technologies creates

a real point of differentiation and will deliver further beneﬁts in the

future. We have more than 2,500 vaccines scientists working in three

global R&D centres, in Belgium, Italy and the US. This international

spread equips us with a diversity of skills and culture, helps to attract

the best talent, and opens doors to external partnerships. In 2018,

the proportion of our sales from innovations introduced in the past

ﬁve years was 23%.

We are expanding our capabilities to become a stronger player in

the world’s largest vaccines markets, the US and China. To achieve

this goal, we are simplifying complexity across the business, reducing

R&D timelines and developing a more dynamic culture. In September,

Roger Connor became the new President, Global Vaccines.

Delivering best-in-class innovation

Shingles

In 2018, our breakthrough shingles vaccine, Shingrix, was

recognised as the most successful biopharma launch in the past

10 years in North America

. In June, Canada’s National Advisory

Committee on Immunization (NACI) made a strong recommendation

for Shingrix to be offered to people over 50, following a similar

opinion in the US in 2017. In March, Shingrix received licensing

approval in the EU and Japan, and in May we launched it in Germany.

In December, the Standing Committee on Vaccination in Germany,

STIKO, recommended Shingrix for all people over 60 and for those

over 50 with an immune-compromising condition or severe

underlying disease. The vaccine was approved in Australia in

July 2018. In line with our phased launch strategy, we have the

detailed capacity plans in place that are necessary to deliver

the meaningful increase in doses needed to meet long-term

global demand.

Shingrix marks a step change in the prevention of shingles, a painful

and potentially serious condition that affects more than one in three

people during their lifetimes. It was designed speciﬁcally to address

the challenge of age-related decline in immunity and is the ﬁrst

approved shingles vaccine to combine a non-live antigen, to trigger

a targeted immune response, with a speciﬁcally designed adjuvant

to generate a strong and sustained immune response. Clinical

trials have proven Shingrix efﬁcacy of more than 90% for all

age groups studied.

Progress against our long-term priorities

– Shingrix launched successfully in the

US and Canada

– 23% of 2018 sales came from recent

innovations, driven by Shingrix and

Bexsero

– We have 16 candidate vaccines across

all R&D phases

– Capabilities in science and new

technologies continues to be

differentiator

Innovation Performance Trust

– Total 2018 turnover £5.9 billion,

up 14% AER, up 16% CER

– Grew ahead of the market,

strengthening our position as the

leading vaccines company by value

– In addition to Shingrix, key

contributions from our inﬂuenza and

hepatitis franchises, and Bexsero

– Over 120 million doses of vaccines

delivered to Gavi, the Vaccine Alliance,

to help prevent pneumococcal disease,

rotavirus and cervical cancer

– 270 million doses of oral polio vaccine

delivered to UNICEF for the Global

Polio Eradication Initiative

– Positive results from candidate TB

vaccine in phase IIb trial

1 Source – independent assessment from IQVIA.

Vaccines

We are the leading vaccines company in the world, delivering over 2 million

vaccine doses every day to people living in 158 countries. Our portfolio and

pipeline help protect individuals throughout their lives. We have recently

introduced breakthrough vaccines Shingrix for shingles and Bexsero, the

ﬁrst vaccine for meningitis B.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Meningitis

We are the market leader in vaccines against meningococcal

meningitis, with our complementary portfolio of Menveo, against

serogroups A, C, W, and Y, and Bexsero, targeting serogroup B.

In 2018, we continued to consolidate our leadership by broadening

the age range that our vaccines cover. In the US, where Bexsero is

licensed for 10-to-25-year-olds, the vaccine received Breakthrough

Therapy Designation from the FDA for children between two- and

10 years old. In June, the European Medicines Agency approved

a new, alternative (2+1) dosing schedule for Bexsero in infants

(in addition to the existing 3+1 schedule), offering healthcare

professionals more options to help protect infants from invasive

meningococcal disease (IMD) caused by serogroup B and the

potential for fewer visits to the doctor for families.

We continued to support external research into meningitis B,

including funding the largest-ever study into the adolescent carriage

of meningococcal bacteria. The study, led by the University of

Adelaide, saw more than 34,000 teenagers being vaccinated with

Bexsero. The early ﬁndings, which are a signiﬁcant step forward

in scientiﬁc understanding, show there was a fall in the number

of meningitis B cases in South Australian adolescents, but no

statistically signiﬁcant reduction in nasopharyngeal carriage of the

bacteria that causes the disease. As such, these preliminary results

underscore the need for direct vaccination of vulnerable individuals,

particularly infants and adolescents, as the best way to protect

against meningococcal B disease.

We advanced our work on new formulations for meningitis vaccines,

with our fully liquid Menveo candidate vaccine entering phase II

clinical trials. The phase III results for the US Menveo booster found

that it can effectively and safely extend protection four to six years

after a primary course of MenACWY vaccine. We also remain

committed to the challenging goal of developing a single vaccine

to cover the ﬁve most common meningitis serogroups of A, B, C,

W and Y.

Other priority assets

We are pursuing a full portfolio of vaccines against respiratory

syncytial virus (RSV), tailored to the different age groups most

at risk of infection from the virus. There is currently no prophylactic

vaccine approved for the prevention of respiratory disease caused

by RSV, in spite of the signiﬁcant medical need. Our maternal

vaccine is designed to increase antibodies in the mother that will

transfer to the baby and help protect them in the ﬁrst months of life,

when the disease is most severe. Our candidate paediatric vaccine,

given directly to babies, is designed to induce protection from the

disease throughout childhood and, potentially, for recipients’ entire

lives. In late 2018, we began a phase I/II trial for children, and

commenced a phase I study on the maternal vaccine. The US

FDA has given fast track designation to our RSV candidate

vaccines for pregnant women and older adults, which have just

entered clinical development.

By 2030, COPD is predicted to become the world’s third-leading

cause of death. Our COPD candidate vaccine marks a move away

from the traditional concept of a vaccine given to healthy people

to prevent a speciﬁc disease towards the development of a

disease-modifying vaccine that could reduce the frequency

of COPD exacerbations and slow down the disease’s progress.

It combines two antigens from bacteria commonly found in acute

COPD exacerbations with our proprietary adjuvant system, ASO1.

The phase I and II studies demonstrated that our candidate vaccine

was safe and capable of inducing an immune response. We began

a phase IIb (proof of concept) study in Europe and North America

in 2017, with efﬁcacy results expected in mid-2020.

In inﬂuenza, we are working on a universal (supra-seasonal) vaccine

with researchers at Mount Sinai in the US. We also expanded the

indications for our existing ﬂu vaccines, with European approval for

a paediatric indication for Fluarix Tetra.

New technologies

Our success in innovation reﬂects our unique combination of

advanced technologies, scientiﬁc experts across three global

R&D centres, and external collaborations. Our broad range of

technologies includes adjuvant systems, self-amplifying messenger

RNA (SAM), bioconjugates, generalised modules for membrane

antigens (GMMA) and the chimpanzee adenovirus (ChAd) platform.

Such capabilities have the potential to signiﬁcantly reduce the cost

and time of vaccine development and help make radical advances

that address unmet medical needs.

External partnerships

Partnerships remain central to our innovation. We have around

150 external scientiﬁc collaborations, with most of our 16 candidate

vaccines being developed in partnership. Our partnerships and

technologies also support our work on tuberculosis and shigella

for instance, which is part of our ongoing commitment to developing

vaccines against the diseases of the developing world. Such

collaborations enable our Vaccines scientists to learn from other

leading experts and stay close to emerging technologies and

new science.

Vaccines pipeline

Phase Indication/vaccine

Phase III

Shingrix (for immunocompromised)

Bexsero (infants in the US)

Rotarix (PCV-free)

MMR (in US)

Phase II COPD

Hepatitis C

Malaria (next gen)

MenABCWY

Menveo (liquid)

Shigella

Tuberculosis

RSV paediatric

HIV

Phase I/II RSV older adults

Flu universal

RSV maternal

GSK Annual Report 2018

Performance

2018 performance summary

Vaccines turnover grew 14% AER, 16% CER to £5,894 million,

primarily driven by growth in sales of Shingrix, hepatitis vaccines,

which also beneﬁted from a competitor supply shortage, and higher

sales of inﬂuenza products.

The operating margin of 33.0% was 1.1 percentage points higher at

AER than in 2017 and 2.5 percentage points higher on a CER basis.

This was primarily driven by enhanced operating leverage from strong

sales growth, an improved product mix, including the impact of the

launch of Shingrix, together with further restructuring and integration

beneﬁts. This was partly offset by the comparison with the beneﬁt

of a settlement for lost third-party supply volume recorded in 2017,

increased supply chain costs and increased SG&A investments

to support new launches and business growth.

Shingrix recorded sales of £784 million, primarily in the US and

Canada, driven by demand and share gains. US sales beneﬁted

from market growth in new patient populations now covered by

immunisation recommendations and Shingrix has now achieved

a 98% market share. In the ﬁrst half of 2018 alone, Shingrix

performed twice as strongly as the competitor vaccine had

during the whole of 2017.

Meningitis sales were down 1% AER but up 2% CER to

£881 million. Bexsero sales grew 5% AER, 9% CER, driven by

demand and share gains in the US, together with continued growth

in private market sales in International, partly offset by the completion

of vaccination of catch-up cohorts in certain markets in Europe.

Menveo sales declined 15% AER, 12% CER, primarily reﬂecting

supply constraints in Europe and International as well as a strong

comparator in 2017 and unfavourable year-on-year CDC stockpile

movements in the US, partly offset by demand and share gains

in the US.

Fluarix/FluLaval sales grew 7% AER, 10% CER to £523 million,

driven by strong sales execution in the US and improved sales

in Europe, partly offset by increased price competition in the US.

Established Vaccines sales were down 1% AER and ﬂat CER

reﬂecting lower sales of DTPa-containing vaccines (Infanrix, Pediarix

and Boostrix) due to increased competitive pressures, particularly

in Europe, and unfavourable year-on-year CDC stockpile movements

in the US, together with lower Synﬂorix sales, reﬂecting lower pricing

and demand in emerging markets. Hepatitis vaccines sales grew

17% AER, 19% CER to £808 million, beneﬁting from stronger

demand in the US and Europe, as well as a competitor supply

shortage in the US.

Focusing on growth markets

In 2018, we strengthened our position as the world’s leading

vaccines company by value. Sales grew ahead of the market,

increasing our market share and proﬁtability.

Having established our leadership in Europe and emerging markets,

we are now focusing on increasing our presence in the world’s

largest vaccines markets – US and China – to protect more people

and improve business performance. The US is our number one

priority market and our performance in the US in 2018 has been

particularly strong. We welcome the Chinese government’s recent

steps to fast-track the approval of ‘clinically urgently needed’ new

medicines and vaccines, reﬂecting its commitment to enabling

faster entry of new prevention and treatment options. We look

forward to responding to that need with our innovative vaccines

in the years ahead.

Creating a simpler, competitive supply chain

We have 13 manufacturing sites, across 10 countries. This

international presence enables us to produce our vaccines with

ﬂexibility, as demonstrated during the year, when we leveraged our

secondary manufacturing network to increase capacity for Shingrix.

We have delivered more than 9 million doses globally since launch

and we are working hard to build capacity and meet long-term

global demand. We continue to target high-teens millions of doses

over the next two or three years. To do this, we are undertaking

multiple initiatives to boost production across our global

manufacturing network in the US and Europe, and at every stage

of the manufacturing process from primary antigen production to

packaging. These initiatives will ensure sustainable, steady supply

growth for the vaccine over the coming years.

During the year, we continued to simplify our supply chain, and

discontinued several vaccines that duplicate existing products.

Our ongoing investment in our manufacturing network enabled

a 10% growth in our ﬁlling volume and we maintained our strong

focus on the safety and high quality of all our vaccines.

Vaccines continued

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Innovation

We delivered 36 ﬁrst market launches across our categories and

250 roll outs of new products. In 2018, the proportion of our sales

from innovations introduced in the past three years was 11%.

Delivering best-in-class innovation

We use deep consumer insights and scientiﬁc and technical expertise

to deliver innovations across each of our categories. For example,

in oral health, we further strengthened our leadership in denture care

with the delivery of two innovations to improve the experience for

denture wearers. We addressed a consumer need for an easy,

discreet denture-cleaning solution with the launch of Polident Clean

& Refresh wipes, which can be used anywhere without the need

for water. The wipes combine a unique and patented combination of

tear-resistant tissue and a double mint solution, offering consumers

a quick and effective clean and improved denture conﬁdence.

In addition, our new denture adhesive, Polident Max Seal, has an

innovative precision nozzle with a ﬁner tip which enables exactly the

right amount of ﬁxative to be applied, creating a precise seal around

the edge of the denture for a more comfortable eating experience.

The successful rollout of Sensodyne Rapid Relief, a premium

extension of our Sensodyne brand, continued. Launched in 2017,

it is designed to provide fast relief from tooth sensitivity in as little

as 60 seconds. During 2018, we introduced it in an additional

40 markets, including the US, Italy, Argentina, New Zealand and

Egypt bringing the total number of successful market launches

to more than 90.

In respiratory, consumer insight inspired the packaging innovation

behind Theraﬂu PowerPods, a new extension of Theraﬂu, our

respiratory power brand. Theraﬂu PowerPods, which were launched in

the US, contain cold and ﬂu relief medicine or active ingredients within

a pod that can be used in single-serve coffee makers. This format is

much more convenient for US consumers, who rarely use kettles.

In pain relief, we continued the rollout of Voltaren No Mess in an

additional 17 markets in 2018, including Russia, UK, Australia, Italy

and Spain. The innovative No Mess cap was designed to address

a key consumer barrier to using topical pain relief and makes the

product easier and less messy to apply.

In digestive health, we launched two extensions of our Tums brand.

Tums Gas Relief which offers consumers multi-symptom relief from

heartburn as well as gas, was introduced in our ‘chewy bites’ format

which is the preferred format for the growing number of younger

consumers entering this category. We also introduced a sugar-free

version of Tums in 2018 for consumers looking to reduce their overall

daily sugar intake.

Building industry-leading capabilities

Each of our main categories is supported by a dedicated global

innovation hub, where our scientists work in close partnership with

commercial teams. This means that R&D in each of our hubs is both

science-based and consumer-led and helps speed new innovations

to market. The network’s footprint in Europe, the US and Asia, also

enables us to stay close – and relevant – to all global trends and

markets.

Our Consumer Sensory Labs enable us to listen to, understand

and meet the needs of consumers. Scientists and commercial teams

in these labs assess consumer reactions to products during the

development process to help improve existing products and develop

new ones. During the year, we brought the capabilities of our sensory

labs closer to our markets via labs in the US, the UK and India so

that we can understand consumer preferences in different parts

of the world. For example, we developed Otrivin Unblock & Heal in

response to consumer need for a medicated spray that both relieves

the congestion and nasal dryness that can accompany a cold and

also helps ﬁght the virus. We launched this triple-action spray in

Europe in late 2018.

Our Consumer Healthcare business combines science and consumer

insights to develop innovative everyday healthcare brands for oral health,

pain relief, respiratory, skin health, nutrition and digestive health categories.

In 2018, we reached agreement with Pﬁzer to combine our consumer

healthcare businesses into a new world-leading joint venture.

Progress against our long-term priorities

– Worldwide rollout of Sensodyne

Rapid Relief, Voltaren No Mess and

parodontax/Corsodyl

– Science-based innovations included

Theraﬂu PowerPods and a Polident

denture care range

– New digital innovation hub established

to accelerate innovations in self-care

Innovation Performance Trust

– Total 2018 turnover £7.7 billion,

down 1% AER, up 2% CER

– Bought out Novartis’ 36.5% stake

in Consumer Healthcare Joint Venture

for £9.2 billion

– Agreement with Pﬁzer to combine our

consumer healthcare businesses into

a new world-leading joint venture

– Announced the sale of Horlicks

and other consumer nutrition brands

to Unilever

– Supply chain service levels continued

to improve, achieving 98% on-time,

in-full delivery performance

– Five-year partnership with Smile Train

launched to help more children access

life-changing cleft lip and palate surgery

– Continued our partnership with Allied

Against Dengue in India and South

East Asia to prevent outbreaks of

dengue fever

– Employee engagement score

increased to 81%

Consumer Healthcare

GSK Annual Report 2018

The increasing use of digital technology is revolutionising the way

that consumers learn about, buy, and use healthcare products.

In 2018, we created a new London-based consumer healthcare

digital innovation hub. The hub is a close partnership of commercial,

technology and R&D, focused on identifying and accelerating

innovations in our categories to develop digitally driven brands,

products and services that consumers can use to monitor, manage

and improve their own health.

Emerging markets opportunities

More than one-third of our sales are in emerging markets, where

increasing prosperity is boosting the proportion of middle-class

consumers and, in turn, the demand for consumer healthcare.

Our innovation hubs in India and China are at the forefront of our

efforts to understand and meet this growing consumer need, and

to remain competitive in these important markets. In India, we entered

the high protein drink category with the launch of Horlicks Protein

Plus which blends quality, fast and slow release proteins with its

high level of amino acids, enabling the product to develop stronger

science-based claims than its competitors.

External partnerships

By combining the insights and expertise of our scientists with

breakthrough ideas developed externally, we can develop and deliver

a strong, competitive pipeline of consumer-led, science-based

innovation. Since 2016, the percentage of innovation sales coming

from externally sourced product innovation has increased ﬁvefold.

In 2018, products from external partnerships accounted for 11% of

innovation sales, including Otrivin Unblock & Heal. During the year,

we entered into over 30 external R&D partnerships and our aim is

that they will make up 30% of our pipeline in the future.

Performance

2018 performance summary

Our marketing and innovation resources are targeted on the

brands which deliver the strongest growth and highest returns –

our seven global power brands, including Sensodyne, Voltaren,

Panadol and Theraﬂu, and our 12 regional core brands, such as

Tums and Excedrin. Together, these brands drive performance

of Consumer Healthcare and reinforce our global leadership

in pain relief, respiratory and therapeutic oral health.

Consumer Healthcare sales were £7,658 million, down 1% AER

and up 2% CER, with broad-based growth in oral health and

wellness partly offset by a decline in Panadol and lower sales

of smaller brands. International markets performed strongly,

particularly India and Brazil, while Europe was impacted by

intensifying competitive pressure in the second half of 2018.

The aggregate impact from generic competition on Transderm

Scop in the US, the divestment of Horlicks and MaxiNutrition

in the UK and other small non-strategic brands and implementation

of the Goods & Service Tax (GST) in India reduced overall sales

growth by approximately one percentage point.

Oral health sales grew 1% AER, 4% CER to £2,496 million, as

increased competitive pressures in Europe were offset by double

digit growth from Sensodyne in a number of International markets,

including India and Turkey, and strong single-digit growth in the US

driven by Sensodyne Rapid Relief. Our premium gum health brand

parodontax/Corsodyl became the world’s fastest growing global

toothpaste, outperforming the market four fold, driven by continued

momentum in the US since its launch in 2017, and a strategic brand

repositioning across 40 countries. Our denture care brands out-

performed the category, supported by innovations including Polident

Max Seal and Polident Clean & Refresh, further strengthening our

global leadership position.

Wellness sales declined 2% AER but grew 1% CER to

£3,940 million. Respiratory sales grew in low single digits, led by

Theraﬂu supported by a strong cold and ﬂu season earlier in the

year. Otrivin grew in mid single digits, beneﬁting from new variants,

and Flonase returned to growth following a weaker allergy season

earlier this year.

In pain relief, sales were ﬂat. Low single-digit growth in Voltaren,

supported by the roll-out of Voltaren No Mess in 20 markets, and

double-digit growth in Fenbid were offset by a decline in Panadol

sales due to a change in the route-to-market model in South East

Asia and the discontinuation of slow-release Panadol products in

the Nordic countries.

Nutrition sales declined 5% AER but grew 1% CER to £643 million.

The nutrition business in India performed strongly across the product

portfolio including new innovations such as Horlicks Protein Plus.

The impact of divestments and India GST implementation on nutrition

category growth was approximately eight percentage points.

Skin health sales were down 4% AER, 1% CER to £579 million.

Consumer Healthcare operating margin of 19.8% was

2.1 percentage points higher than in 2017 and 2.2 percentage

points higher on a CER basis. This primarily reﬂected improved

product mix and manufacturing restructuring and integration

beneﬁts, as well as continued focus on delivering improved return

on investment on our advertising and promotional spend.

Strategic business development

During 2018, we made further progress against our Performance

priority to deliver sales growth, operating margin improvements

and attractive returns, completing a £9.2 billion buyout of Novartis’

36.5% stake in GSK Consumer Healthcare in June.

After conducting a strategic review of our nutrition portfolio, in

December we announced the sale of Horlicks and other consumer

nutrition brands to Unilever. As part of this transaction, we

announced that we will merge our 72.5% stake in GlaxoSmithKline

Consumer Healthcare Limited in India with Hindustan Unilever

Limited. The proposed merger includes a distribution arrangement,

which will allow Hindustan Unilever Limited to leverage its scale and

strong reach to sell and distribute our OTC and oral health brands

in India. This transaction is expected to close by the end of 2019.

Consumer Healthcare continued

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Most recently, we reached an agreement with Pﬁzer in December

2018 to combine our consumer healthcare businesses to create

a new world-leading joint venture with combined sales of

approximately £9.8 billion. This brings together two highly

complementary portfolios of trusted consumer healthcare brands,

including GSK’s Sensodyne, Voltaren and Panadol and Pﬁzer’s,

Advil, Centrum and Caltrate. The new combined business will

have leadership positions in pain relief, respiratory and vitamins,

minerals and supplements in addition to our number one position

in therapeutic oral healthcare, and will be well positioned to deliver

strong sales, cash ﬂow and earnings growth.

Together, these moves provide conﬁdence to improve our margin

target to mid-to-high-20s by 2022, assuming the close of the

transaction with Pﬁzer. This improvement is expected to be achieved

in part by delivering £0.5 billion of total annual costs savings through

the joint venture and additionally through delivery of a business-wide

programme aimed at freeing up cash to improve returns to

shareholders and reinvest in the business to drive growth. This is

focused on four pillars: net revenue management to maximise the

value of our brands with shoppers and customers; cost and cash

discipline enabled by zero-based budgeting; strategic resource

allocation to focus our investments in the right areas to get the

best returns; and increased efﬁciencies in our supply chain.

Joining forces with Pﬁzer Consumer Healthcare will be

transformational to the scale of GSK Consumer Healthcare and

lays the foundations for the new JV to be separated from GSK

via a demerger. This is expected to take place within three years

of closing the transaction with Pﬁzer, which we expect to occur

in the second half of 2019, subject to approvals. Further details on

the risks associated to the transaction are set out on page 36.

Digital transformation

By putting digital technology at the heart of our business, we aim

to deliver more meaningful interactions with consumers, fuel brand

growth and achieve efﬁciency savings. In 2018, we invested

strongly in our digital capabilities, including hiring expert new talent.

Reﬂecting the far higher return on online media, compared with

traditional television advertising, we signiﬁcantly increased the

digital balance of our marketing. To streamline our media buying,

we appointed one global media agency to oversee our digital and

ofﬂine paid media strategy and planning around the world. We also

boosted our attractiveness in e-commerce channels by optimising

the ﬁndability of our products, developing rich content for retailer

portals, and securing high-proﬁle ads on customers’ e-commerce

sites. To enrich our people’s digital skills, we rolled out a new

Marketing IQ development programme to 1,300 of our marketers.

Our digital impact is aided by innovative industry partnerships:

a collaboration with Google helps us deliver relevant content to

consumers, while a partnership with Chinese marketing and media

organisation Alimama enables us to target shoppers with appropriate

and timely information. Our partnership with Google has driven

greater efﬁciency in our media targeting. We drove 4.5 billion more

viewable digital media impressions than the same investment would

have generated in 2017, representing a 74% increase. We also draw

on invaluable external insights from our Digital Advisory Board (DAB),

which is made up of digital marketing, data and e-commerce experts.

Members of the GSK Consumer Healthcare strategic leadership

team attend DAB meetings and beneﬁt from the mentorship of

a DAB member. The role of the DAB is to challenge our thinking

and help shape our digital strategy.

Winning with shoppers, customers and experts

Expert endorsement builds trust in our brands and drives shopper

purchase decisions. Sensodyne, for instance, is the number one

dentist-recommended brand for sensitivity in 80% of the markets in

which we compete. Of our OTC brands 70% are sold in pharmacies.

We continued to prioritise our relationships with dentists and

pharmacists and to invest in information that supports our products.

In 2018, our expert sales representatives called on 400,000 dentists

in over 90 markets to share relevant science-based information

and we published approximately 30 abstracts on our clinical trials

and science.

Business partnering with retailers is key. For example, our top six

customers in the US account for approximately 70% of our sales

there. We continue to develop our strong capabilities in joint

business planning, category management and distribution

management to ensure we win with our retailers.

Our Shopper Science Labs in the UK, US and Singapore use

state-of-the-art technology to track shopper behaviour in real time

to provide us with rich insights on consumers’ shopping habits

around the world. We have satellite facilities located by the

headquarters of our major retail partners. These labs enable

us to adapt the shopping experience to meet each consumer’s

need and make decisions about what new products, promotions

or packaging will really make a difference.

Creating a simpler, competitive supply chain

We have continued to strengthen our supply chain and reduce

complexity to improve efﬁciency. In addition, we have formally

integrated it within our business, where previously some central

resources and processes were shared between the Consumer

Healthcare and Pharmaceuticals supply chains as a central unit.

We also reorganised our supply chain on a regional basis, more

closely reﬂecting our commercial operations, to make it more

responsive and agile.

During 2018, we sold two sites (Aiken, US and Slough, UK) and

announced the closure of three more in Ireland, the US and the

Philippines as part of our commitment to remove complexity across

our network and streamline our operations. Overall, since 2015,

we have removed four sites from our supply chain network and

announced the closure of another ﬁve. We continued to streamline

the number of contract manufacturers (CMOs) we use and have

reduced the number by almost 30% since 2015. We continued

to simplify our portfolio by further reducing the number of different

ways that our products are packaged.

Our manufacturing sites recorded a strong on-time in-full delivery

performance, as service levels continued to improve. Reﬂecting

this good performance, the supply chain successfully supported

our growing power brands and met business innovation targets

in full, including all ﬁrst-market launches.

We continued to drive and deliver robust performance in quality

and safety, with no issues arising from regulatory inspections.

GSK Annual Report 2018

Our purpose is to help people do more, feel better and live longer

Using our science and technology

to address health needs

New medical innovations

Develop differentiated, high-quality

and needed medicines, vaccines

and consumer healthcare products

to improve health

Global health

Improve global health impact through

R&D for infectious diseases that affect

children and young people in developing

countries focusing on HIV, malaria

and TB

Health security

Help the world to better prepare for

future disease outbreaks with pandemic

potential, and tackle antimicrobial

resistance

Being a responsible business

Reliable supply

Commit to quality, safety and

reliable supply of our products

for patients and consumers

Ethics and values

Operate an ethical, values-

driven culture, in which any

issues are responded to swiftly

and transparently

Data and engagement

Use data responsibly and

transparently. Improve patient

and scientiﬁc engagement

Environment

Reduce our environmental

impact by one quarter by 2030

Making our products affordable

and available

Pricing

Improve the health of millions of people

each year by making our products

available at responsible prices that

are sustainable for our business

Product reach

Use access strategies to reach

800 million underserved people in

developing countries with our products

by 2025

Healthcare access

Partner to improve disease prevention,

awareness and access to healthcare

services by 12 million people by 2025

Being a modern

employer

Engaged people

Achieve and maintain a competitive

employee engagement score by 2022

Inclusion and diversity

Accelerate our progress on inclusion

and diversity, aiming for over 37% female

representation in senior roles and

recognition in global LGBT+ indices,

by 2022

Health, wellbeing and development

Be a leading company in how we support

employee health, wellbeing and personal

development

Operating responsibly to deliver on our purpose and ensure the greatest

possible long-term impact in improving health around the world.

Trust is one of our three long-term priorities and is essential to

how we deliver our purpose. Society has high expectations of us,

and the dynamic environment in which we operate presents us

with big challenges and opportunities that we must respond to

in order to remain commercially successful, uphold our reputation

and build trust.

To ensure that we are able to identify and respond to these

expectations effectively, we need to have mechanisms in place to

engage with our key stakeholders. On page 9 we summarise the key

trends for our industry and on page 11 we highlight how we engage

across the different stakeholder groups.

With these external expectations in mind, in 2018 we published

a new set of 13 commitments describing the actions we will take

to help deliver societal value and build trust. Our ambitious

commitments will drive progress in three key areas, underpinned by

our fundamental commitments to running our business responsibly:

– Using our science and technology to address health needs

– Making our products affordable and available

– Being a modern employer

External benchmarking

– ATMI: topped the Access to Medicines Index and led the industry

in the Antimicrobial Resistance Benchmark.

– DJSI: ranked 2nd in the DJSI World and Europe indices, placing

us in the top 2% of our sector.

– FTSE4Good: member of the FTSE4Good Index since 2004.

– CDP: received a score of ‘B’ in CDP Carbon and CDP Water.

Named a CDP Supplier Engagement Leader in CDP's supply

chain programme.

– Corporate Political Engagement Index: ranked number one

in Transparency International UK’s 2018 Corporate Political

Engagement Index.

Our approach to reporting

From 2019, we are reporting progress against our 13 commitments

in our Annual Report to reﬂect the integration of our responsible

business approach into our core business strategy. A performance

data document is also available online to provide both current and

previous years’ data. These replace the annual publication of our

Responsible Business Supplement.

GSK.com: 2018 performance data summary

Trust

Our commitments on Trust

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Science and technology

We are using our science and technology to address health needs.

This is achieved through our medical innovation but we also have

a responsibility to impact global health, particularly in the prevention

and treatment of infectious diseases where we have world-leading

scientiﬁc expertise. We have taken a proactive approach to

addressing some of the biggest global health challenges, from

preventing child deaths from infectious diseases to tackling the

urgent public health threat from growing resistance to antibiotics.

New medical innovations

The biggest impact that we can have as a science-led global

healthcare company is to successfully research and develop

innovative products. Through our innovation, we aim to develop

differentiated, high-quality and needed medicines, vaccines and

consumer healthcare products to improve health. Read more about

innovation within our three businesses on pages 13, 18 and 21.

Global health

Each year malaria, TB and HIV/AIDS kill almost 3 million people,

the vast majority in developing countries. There remains huge need

for innovation to address this. Our new global health strategy aims

to improve global health impact through R&D for infectious diseases

that affect children and young people in developing countries,

focusing on HIV, malaria and TB.

The biggest contribution we can make is through our science, but to

have the greatest impact, we need strong collaboration with others

to ensure there is always a clear path for our innovation – end to end

– from lab to patient. We have learned from our malaria vaccine and

our chlorhexidine gel, Umbipro, that getting our innovation to patients

in developing countries is extremely challenging where the traditional

route to market is absent. We cannot alone carry the signiﬁcant

costs and risks associated with full clinical development, registration,

manufacture and market access for new medicines and vaccines that

don’t have a commercial return. Without action to secure the right

procurement models and partnerships, we risk the potential impact

of these treatments being undermined. Instead we need new

sustainable, collaborative models, where risk and costs are shared

across partners, to translate scientiﬁc discoveries into beneﬁt for

the most vulnerable patients.

As well as addressing the disease burden in developing countries,

our investment in global health also brings business beneﬁts, which

helps us to ensure that it is sustainable over the long term. The

innovative science and platforms discovered through global health

R&D can be applied commercially. For example, the adjuvant used

in our RTS,S malaria vaccine has been pivotal to the success of our

shingles vaccine, Shingrix, and is being used in our TB candidate

vaccine, M72, and a number of other vaccines in development.

Our discovery work in infectious diseases also has the potential

to uncover insights relevant to other disease areas that will beneﬁt

our portfolio in the long term.

Tuberculosis

We are aiming to develop a world-leading portfolio of ﬁrst-in-class

medicines for TB, including a candidate vaccine in a phase IIb trial.

We have been working with non-proﬁt scientiﬁc organisation Aeras

to develop the vaccine with the support of the Bill & Melinda Gates

Foundation, the UK’s Department for International Development and

others. We received positive interim results in 2018 for the phase IIb

study, which showed that our candidate vaccine reduced the risk of

developing pulmonary TB by half in adults with latent TB infection.

We are continuing the trial with the International AIDS Vaccine

Initiative, a long-standing GSK collaborator in HIV vaccine

development, which has recently acquired Aeras’ TB vaccine

clinical programme.

GSK also has a number of promising TB medicines in development,

including two that are in preparation for phase II trials. We are

a member of several major public–private partnerships and

programmes, such as the TB Drug Accelerator, which aim to

speed up the discovery and development of novel compounds

against the disease. We currently have three pre-clinical candidates

and a strong discovery pipeline arising from these partnerships.

Malaria

In 2018, we received approval from the US FDA and the Australian

Therapeutic Goods Administration for tafenoquine (Krintafel/

Kozenis), a single-dose radical cure for P. vivax malaria developed

in partnership with the Medicines for Malaria Venture (MMV).

This is the ﬁrst new treatment for this type of relapsing malaria in over

60 years and marks a major contribution towards efforts to eradicate

the disease. Together with our partners, MMV and PATH, we aim

to provide the treatment at an affordable price in malaria endemic

countries. We have submitted a regulatory ﬁling for tafenoquine

in Brazil, the ﬁrst submission in a malaria endemic country.

Our RTS,S vaccine aims to protect children from P. falciparum

malaria, which is most common in sub-Saharan Africa and

responsible for most malarial deaths worldwide. Ghana, Kenya and

Malawi have approved the use of RTS,S for malaria as part of a pilot

vaccination implementation programme coordinated by the WHO.

Clinical trials are also under way for a next-generation malaria vaccine.

HIV

Developing new formulations of HIV medications speciﬁcally for

children, who are disproportionately affected by the disease in

developing countries, is a global priority. Through ViiV Healthcare,

we are progressing clinical development programmes for paediatric

formulations of our medicines in partnership with the International

Maternal Paediatric Adolescent AIDS Clinical Trials Network and

the Paediatric European Network for Treatment of AIDS.

TB is a leading cause of death for people living with HIV and this

co-infection is hard to treat. A phase IV study of ViiV Healthcare’s

Tivicay (dolutegravir) in combination with other antiretrovirals

demonstrated positive results in people receiving treatment for both

HIV and TB. The latest WHO HIV treatment guidelines recommend

dolutegravir-based regimens as the preferred ﬁrst- and second-line

treatment.

Other developing world diseases

As well as our main focus on HIV, TB and malaria, our early discovery

work allows us to pursue the most promising scientiﬁc leads in other

areas, both within GSK and through our Tres Cantos Open Lab and

Vaccines Institute for Global Health.

In 2018, we pledged an additional £5 million in funding for the

Tres Cantos Open Lab Foundation. The Open Lab furthers R&D for

diseases of the developing world by offering external researchers

the potential to access GSK’s compound library, screening tools

and scientiﬁc expertise. As well as supporting research into TB

and malaria, projects include neglected tropical diseases such

as Chagas disease, leishmaniasis and sleeping sickness. Since it

was established in 2010, the Open Lab has approved 74 projects,

trained 85 scientists in global health drug discovery and delivered

a signiﬁcant pipeline of candidate medicines, including a novel

TB drug candidate with treatment shortening potential.

GSK Annual Report 2018

Trust continued

The Vaccines Institute for Global Health also has around

40 scientists working on diseases such as Shigella, invasive

nontyphoidal salmonella, typhoid and paratyphoid fever, and

Group A streptococcus.

Health security

We are using our vaccines, medicines and scientiﬁc know-how to

help the world to better prepare for future disease outbreaks with

pandemic potential, and tackle antimicrobial resistance (AMR).

To prepare for future public health emergencies, we continue to

advance rapid-response vaccine platform technologies and we are

collaborating on the development of a universal inﬂuenza vaccine

candidate.

AMR is one of the biggest health challenges the world faces and

we are playing a leading role in the industry’s response, ranking

ﬁrst among the large pharmaceutical companies in the Access

to Medicine Foundation’s AMR Benchmark in 2018.

Vaccines play a critical role in avoiding the need for antibiotics by

preventing bacterial, viral and other infections. Our vaccines against

diseases such as diphtheria, meningitis, pneumonia and pertussis

have protected tens of millions of individuals from bacterial infections,

which are major drivers of direct antibiotic prescribing. In addition,

our vaccines for non-bacterial infections such as inﬂuenza, rotavirus

and malaria prevent the development of diseases that can trigger

the use of antibiotics, for example to treat secondary infections.

We are also committed to researching and developing new vaccines

against infections that will reduce the need for antibiotics even

further. For example, we are currently developing vaccines against

RSV (a virus), as well as shigellosis and TB (both caused

by bacteria) which are all drivers of current antibiotic use.

In our Pharmaceuticals pipeline, gepotidacin, is the ﬁrst in a new

class of antibiotics. In 2018, we worked with the UK government

on the proposal to develop and test a new payment model that

should incentivise much-needed R&D into new antibiotics from

the pharmaceutical industry. We are pleased that the UK will be

the ﬁrst country in the world to progress this type of model, and

have submitted gepotidacin to the programme.

We supported the creation of the Innovative Medicines Initiative’s

AMR Accelerator, which launched a call for proposals in 2018.

This public–private partnership will aim to speed up the discovery

and development of new medicines to treat or prevent resistant

bacterial infections through collaboration and capability building.

Through our Survey of Antibiotic Resistance (SOAR) programme,

we study, analyse and publish reports on antibiotic resistance at

a local level and share the ﬁndings with HCPs and public health

bodies to inform the development of local antibiotic prescribing

guidelines. In 2018, we trained over 15,000 HCPs across 20

countries on the appropriate use of antibiotics.

GSK.com: Antimicrobial resistance

Affordability and availability

We are making our products affordable and available to more people

around the world through responsible pricing, and strategic access

programmes and partnerships.

In 2018, GSK topped the Access to Medicines Index for the sixth

consecutive time. The assessment recognised us for having the

largest proportion of our R&D pipeline dedicated to priority diseases,

and for the creation of an integrated Global Health R&D unit to

stimulate collaboration.

Pricing

We aim to improve the health of millions of people each year by

making our products available at responsible prices that are

sustainable for our business.

In developing countries, we use innovative pricing structures as

part of our access strategies to extend product reach (see page 27).

However, we recognise that pricing of pharmaceutical medicines

and vaccines is also an important issue in developed countries,

and we understand patient and payer concerns about affordability.

When setting the price of our medicines in developed markets, we

apply a value-based approach to balance reward for innovation with

access and affordability. We price our medicines according to the

value and outcomes they bring to patients, providers and payers,

while being sensitive to market and societal expectations.

In the US, the pricing of all our product launches – including our

most recent launches of Trelegy Ellipta, Benlysta SC, Shingrix and

Juluca – incorporate speciﬁc market dynamics unique to the drug,

as well as the proﬁle of the new medicine or vaccine in the context

of existing treatment options.

The average net price

for our products in the US has fallen by

around 3% on average per year over the past ﬁve years. We also

offer various types of patient assistance to help ensure appropriate

access to our medicines, and in 2018 we provided prescribed

medicines and vaccines to over 126,000 eligible uninsured patients

through our Patient Assistance Programme.

In Europe, we engage with governments and payers to work

towards sustainable health systems that support ongoing innovation.

For example, the pricing of Trelegy Ellipta reﬂects economic value

by demonstrating cost-effectiveness and innovation within an

acceptable budget and offering a potential cost saving compared

with alternatives.

We do not ﬁle patents for our medicines in least developed countries

and low-income countries, and do not enforce historic patents that

we have in those countries. This allows generic companies to

manufacture and supply generic versions of GSK medicines in

those countries.

GSK.com: IP and access in developing countries

1 Price after discounts, rebates or other allowances.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Product reach

We have set a new target to use access strategies to reach

800 million underserved people in developing countries with our

products by 2025. These strategies include tiered pricing, product

donations and voluntary licensing agreements to extend access

through generic manufacturers. In 2018, our products reached

over 102 million people through these access strategies.

In accordance with our tiered pricing principles, we reserve our

lowest vaccines prices for organisations such as Gavi, the Vaccine

Alliance, which supports countries with a GNI per head of less

than $1,580. Eight Gavi countries are now using our new four-dose

vial presentation of our Synﬂorix pneumococcal vaccine, designed

to address cold chain challenges in hot countries, and our Rotarix

vaccine is available in 36 Gavi countries to protect against rotavirus.

In 2018, we distributed around two million doses of our vaccine

Cervarix in Zimbabwe in support of its multi-age cohort vaccination

programme to protect over 800,000 girls against human

papillomavirus. In 2018, we delivered 270 million doses of oral

polio vaccine to UNICEF in support of the Global Polio Eradication

Initiative, reaching over 54 million children.

Umbipro, our innovative chlorhexidine gel to prevent umbilical cord

infections, has been approved in 13 countries so far and has already

beneﬁted over 30,000 newborns in Kenya. Created in partnership

with Save the Children, this potentially life-saving product is available

at an access price (not for proﬁt, not for loss). In collaboration with

USP and USAID, we will share manufacturing know-how to stimulate

local production and wider access to quality-assured chlorhexidine

in developing countries.

In 2018, ViiV Healthcare extended its voluntary licence agreements

for dolutegravir with the UN-backed Medicines Patent Pool and our

direct licensee Aurobindo to two further countries – Mongolia and

Tunisia – to enable generic manufacturers to supply dolutegravir

to more adults living with HIV. Our joint partnership with the Clinton

Health Access Initiative, Unitaid and two generic manufacturers is

also helping to catalyse the development, manufacture and supply

of paediatric formulations of dolutegravir.

In 2018, we donated over 840 million albendazole tablets (8.5 billion

over the last two decades) to the WHO to tackle neglected tropical

diseases, helping to deworm millions of school children and free

14 countries of lymphatic ﬁlariasis (LF). Tackling LF and intestinal

worms is part of our commitment with the WHO and other partners

to help control or eliminate 10 of the 17 neglected tropical diseases

by 2020.

Through our partnership with Americares, Direct Relief, IHP UK

and MAP International, we also donated 150,000 units of essential

medicines, including antibiotics and inhalers, for humanitarian and

emergency response in countries such as Guatemala, South

Sudan and Syria.

GSK.com: Access to medicines in developing countries

Healthcare access

We have set a new long-term target to partner to improve

disease prevention, awareness and access to healthcare services

for 12 million people by 2025. In 2018, we reached 4.2 million people

through these partnerships.

This year, we have invested a further £10.5 million in improving

health infrastructure in developing countries by training frontline

health workers in partnership with Amref Health Africa, CARE

International and Save the Children. This support is tailored to

meet speciﬁc community needs and align with government health

priorities. In 2018, this investment helped to train over 20,000

frontline health workers, and over two million people were directly

reached with a health worker, healthcare service or health facility.

As well as our efforts to combat malaria through R&D (see page 25),

we have partnered with Comic Relief in Africa and South East Asia

to support 21 local projects that improve awareness and prevention

efforts and get treatment to the people who need it. Together,

we reached more than one million people in 2018, including health

workers and vulnerable populations such as pregnant women and

young children.

Alongside local and global partner organisations, we continue

efforts to remove stigma and support HIV education and prevention

in at-risk communities around the world through ViiV Healthcare’s

Positive Action programmes for girls and women, adolescents,

children, men who have sex with men (MSM) and transgender

people. In 2018, for example, ViiV awarded grants of £2.3 million

to support organisations working to prevent and treat paediatric HIV,

and £1.8 million to support social science research in adolescent

HIV. Our Positive Action for Children programme reached over

530,000 people in 2018 with interventions to alleviate the impact

of HIV and AIDS on women and children’s health.

Our partnership with Save the Children aims to combine the two

organisations’ global expertise, skills and energy to help reduce

child mortality. In 2018, the partnership reached over 220,000

children under ﬁve (over 2.8 million children since 2013) with

interventions including: widening immunisation coverage,

accelerating access treatments and strengthening healthcare

systems. We have extended our partnership over the next ﬁve

years to support our shared ambition that no child under ﬁve

should die from preventable causes.

With GSK Consumer Healthcare’s heritage in specialist oral health,

we know the importance of a healthy mouth. This year, we launched

a ﬁve-year partnership with Smile Train to provide funding and

expertise that will help more children get access to life-changing

surgery for cleft lip and palate. We reached over 4,000 children in

the ﬁrst year through corporate donations and employee fundraising.

As a leader in pain relief and fever management, GSK’s Consumer

Healthcare business has also created the Allied Against Dengue

campaign in India and South East Asia. The campaign was created

to bring together key stakeholders and partners to prevent and treat

outbreaks of dengue fever, a potentially fatal mosquito-borne disease.

In 2018, we trained over 1,000 healthcare workers and reached over

100,000 people through a range of programmes to mobilise

communities and promote behaviour change.

Our contribution to community health programmes amounted to

£224 million in 2018. This includes our support of access partnerships

such as Comic Relief and Save the Children, in-kind product

donations such as albendazole and those made through our Patient

Assistance programme, and the volunteering time of our employees.

GSK.com: Access to healthcare partnerships

ViiVHealthcare.com: Positive Action programmes

1 Total excludes reach through albendazole donations which will be assessed

in 2025.

2 Health worker data is estimated based on 2017 reach through the same partner

programmes and level of funding. Final 2018 data will be available in April 2019.

GSK Annual Report 2018

Trust continued

Modern employer

As a modern employer, we want to make sure that everyone is

empowered to be themselves, feel good and keep growing at GSK.

We believe this will help us to attract, retain and motivate the very

best people to support our business now and in the future.

Engaged people

Employee engagement is an important barometer to gauge how our

people feel about working at GSK. We aim to achieve and maintain

a competitive employee engagement score by 2022.

We now survey our employees twice a year to get more regular

feedback about how we are doing on our long-term priorities and

culture change. For our ﬁrst global employee survey of the year

in April 2018, we had a record high 84% response rate and the

results showed we had strong employee engagement at 79%.

For the second survey in September, we saw a one-point drop

in engagement but it remained high at 78%.

As part of our culture change, we have encouraged our people

to share their views and ideas on key topics through regular

conversations hosted by our leaders, including Let’s Talk sessions

with our executive team. We also introduced a collaborative internal

tech platform to enable employees to communicate and collaborate

more informally, discuss the topics that matter to them, and share

knowledge and perspectives to support faster decisions across

the organisation. More than 68,000 users are active on this new

online tool.

Inclusion and diversity

We take a progressive approach to inclusion and diversity because

we want everyone to be themselves and bring their own perspectives

to our business. Together, these unique perspectives and wide

variety of personal experiences make our business stronger,

enhancing our ability to innovate and respond to the diverse

needs of patients and consumers around the world.

We want to accelerate our progress on inclusion and diversity,

aiming for over 37% female representation in senior roles and

recognition in global LGBT+ indices, by 2022.

In 2018, women made up 33% of our senior roles at SVP/VP

level (up from 31% in 2017) and we maintained strong female

representation at management level (45%). In January 2018,

we signed up to the 30% Club gender campaign focused on

achieving 30% female representation in senior management

within FTSE 100 companies by 2020. GSK has already exceeded

this target and remains committed to maintaining and improving

on this.

The latest independent Hampton-Alexander Review of FTSE 100

companies found that GSK has the sixth highest proportion of

women on the Board with 45.5% representation. Overall, we have

increased our female senior executive population (our executive team

and their direct reports) from 25.7% to 32.5% as our long-running

programmes to create a strong female pipeline deliver results.

GSK is also one of 12 prominent healthcare and life science

companies to join the Healthcare Businesswomen’s Association

Gender Parity Collaborative in the US, launched in 2018 to foster

measurable gender parity progress in the industry.

Women in management (%)

2018 2017 2016 2015

SVP/VP

33 31 30 29

Director

43 43 42 40

Manager

48 47 46 45

Total

45 44 43 42

Employees by gender (number)

Male Female Total

Board

6 5 11

Management*

9,704 8,051 17,7 5 5

Total

53,188 42,302 95,490

* Management: senior managers as deﬁned in the Companies Act 2006 (Strategic

Report and Directors’ Report) Regulations 2013 which includes persons

responsible for planning, directing or controlling the activities of the company,

or a strategically signiﬁcant part of the company, other than the Board, including

directors or undertakings included in the consolidated accounts.

We support development and career progression for high-performing

female managers through our Accelerating Difference programme,

which provided coaching and support for around 130 women in

2018. We also recruit and support women early in their careers,

with women representing more than half of the intake of our graduate

and MBA programmes and 35% of our apprentices in 2018.

We published our second gender pay gap report in 2018.

Our gender pay gap for all permanent UK-based GSK employees

is 2.15% (mean), outperforming the national average of 17.1%.

We do not tolerate harassment, unwelcome, unreasonable or

offensive behaviour, or discrimination of any kind. This includes any

form of sexual harassment and, in 2018, we included a module in our

mandatory Code of Conduct training to reinforce our zero-tolerance

approach. This emphasised the importance of bystander intervention

to empower our employees to intervene if they see harassment

occurring.

In September 2018, nearly 3,700 people at 150 locations took part

in activities to raise awareness of our commitment to inclusion and

diversity during Global Inclusion Week. As part of this, we launched

new learning programmes focused on unconscious bias and

resources to help build leaders’ awareness of inclusion and diversity.

We have a Global Disability Council and a Global LGBT+ Council,

as well as inclusion and diversity implementation groups. In addition,

in 2018 we created new global gender and ethnicity councils, all of

which will drive our diversity agenda with support from our employee

resource groups. We achieved a top 10 listing for our LGBT+

Network Group at the British LGBT Awards and, in early 2019,

the group was named the UK’s ‘Employee Network Group of the

Year’ by the Stonewall LGBT rights organisation.

In 2018, we pledged our support for the UN LGBTI Global Business

Standards. In the US, GSK was named Best Place to Work for

LGBT Equality for the third consecutive year in the Human Rights

Campaign’s Corporate Equality Index and, in early 2019, we were

ranked 24th in Stonewall’s UK Workplace Equality Index. We are

committed to removing barriers, increasing understanding and

ensuring that those with disabilities have the same opportunities.

We signed the Charter for Change at the 2018 UK government’s

Department for International Development Global Disability Summit,

joining other organisations with a common aim to ensure rights,

freedoms, dignity and inclusion for people with disabilities.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Health, wellbeing and development

We need resilient, motivated people with the right skills and

knowledge to help us achieve our objectives. That is why we

aim to be a leading company in how we support employee health,

wellbeing and personal development.

Health and wellbeing

In 2018, we successfully rolled out a comprehensive preventive

healthcare package for our employees – and their eligible

dependants – in every country where we operate. The Partnership

for Prevention programme, now covers over 200,000 people in

every country in which we operate and includes up to 40 preventive

healthcare services at little or no extra cost.

We provide programmes to help our people feel good by taking

control of their health, managing their energy levels and adopting

healthier behaviours – as well as giving them ﬂexibility to manage

their lives through life-friendly policies.

In 2018, more than 15,000 people took part in our energy and

resilience programmes. Our personalised digital health platform

was piloted by over 5,000 employees in Belgium and 38% said

that they changed one or more health behaviours as a result.

We will continue to roll out technology platforms to support

a holistic approach to health and wellbeing in 2019.

GSK was named the World’s Most Active Organisation by Virgin

Pulse Global Challenge for the third year running, with over 15,500

employees collectively taking over 18 billion steps during May 2018.

Participants reported increased productivity and lower stress levels.

Mental wellbeing is just as important as physical wellbeing and we

raised awareness of this important issue on World Mental Health

Day, encouraging people to seek support through our 24-hour

conﬁdential Employee Assistance Programme and other resources.

Preventing injuries and illnesses at work is fundamental to our

people’s health and wellbeing. Our reportable injury and illness rate

has continued to decline from 0.24 per 100,000 hours

worked in

2017 to 0.23 in 2018, and remains comparable with other leading

companies in our sector.

Development

We want our people to keep growing at every stage of their career.

That’s why development is one of four expectations for the company

and we have a strong focus on improving the effectiveness of our

people managers. In 2018, 89% of our employees had development

plans in place and, in support of developing leaders, more than

2,000 managers also participated in leadership development

programmes this year.

In 2018, we introduced One80 reviews for nearly 9,000 managers

to help them improve based on feedback from their teams. Through

a short survey, it measures leadership effectiveness in three key

areas: knowing their people, delivering results and maximising

potential. One80 is part of our performance management system

and is designed to ensure our managers are role models for our

values and expectations, as well as helping them enhance their

leadership skills. We know from One80 scores that employees

feel supported by managers in their development. The question

“my manager provides highly effective coaching and guidance to

support my development” scored an average of 3.8 out of 5 from

51,630 responses. We are encouraged by this and have aspirations

to further improve on these scores.

GSK is now a member of the 5% Club, a group of companies

committed to hiring young people in development programmes into

at least 5% of UK roles. In 2018, 336 people joined our graduate

development programmes globally and 165 began apprenticeships

in the UK, Canada, Ireland, Singapore, Belgium and the US.

This year, employees contributed over 120,000 volunteering hours

through our Orange Days and 63 employees went on PULSE

assignments with 25 non-proﬁt organisations in 31 countries to

share their expertise and learn new skills. Our most recent volunteer

assessment found that, after completing their assignment, 73%

agreed that they brought new ideas and fresh ways of thinking

or working to GSK.

GSK.com: Employee volunteering • Training and development data

Reliable supply

Ensuring a high-quality, safe and reliable supply of our products for

patients and consumers is a priority for all three of our businesses.

Product shortages can happen for a variety of reasons, including

supply disruptions and unexpected demand. Since launching our

Shingrix vaccine, we have delivered more than 9 million doses globally,

but the unprecedented demand has meant that some people have

experienced supply shortages. We are working hard to build capacity

and meet this long-term global demand and we are committed to

communicating transparently on the actions we are taking.

Our robust quality management system supports continuous

improvement, helping us to maintain high standards for product

quality and safety and comply with relevant regulations, including

those on Good Manufacturing Practice, Good Pharmacovigilance

Practice and Good Clinical Practice.

Of the 151 external regulatory inspections at our Pharmaceutical,

Vaccines and Consumer Healthcare manufacturing sites in 2018,

most found no issues or resulted in only minor observations.

We address every issue, however minor, and regulatory authorities

have accepted our proposed plans for corrective actions.

In 2018, we conducted 1,650 audits of our suppliers’ quality

processes and 221 audits of clinical trials run by, or on behalf

of GSK, to assess their quality and safety.

Detecting, monitoring, understanding and preventing side effects

(pharmacovigilance) is important in evaluating the safety of

pharmaceutical products, and we work with the WHO and other

partners to enhance systems for reporting these. Through the

TransCelerate Collaboration, we are working with others to promote

harmonised approaches and procedures for the clinical development

and safety evaluation of drugs, and to implement key regulations.

Counterfeit GSK products present a risk to patient safety.

We support efforts to prevent the manufacture and distribution

of counterfeit GSK products by working closely with government

bodies, international organisations (such as the World Customs

Organization and the WHO), customs authorities and industry

associations. We also conduct our own investigation and

enforcement activities to tackle counterfeit GSK products.

Our commitment to high standards of product quality and safety

across the value chain helps to ensure a reliable supply, which is

important for our performance (see the sections of this report on

performance in our individual businesses).

GSK.com: Pharmacovigilance • Anti-counterfeiting

1 2017 data has been restated from 0.23 to 0.24 due to incidents reported

after the previous veriﬁcation period.

2 Based on benchmarking data from the Pharmaceutical Safety Group.

GSK Annual Report 2018

Trust continued

Ethics and values

We are committed to creating an ethical, values-driven culture,

in which any issues are responded to swiftly and transparently.

We expect everyone at GSK to live our values and expectations,

speak up if they have any concerns, engage appropriately with

stakeholders and respect human rights. We also extend these

ethical expectations to the third parties we work with.

Living our values and expectations

Together, our values (patient focus, integrity, respect and

transparency) and expectations (courage, accountability,

development and teamwork) help us to create the culture we

want. They are included in our Code of Conduct, which we

have updated to make it simpler and easier to use.

Every GSK employee and complementary worker is required to

complete mandatory training on the Code of Conduct annually.

In 2018, 98% of our employees and 91% of our complementary

workers completed the training, which covered topics such as safety,

health and wellbeing, third party oversight, data breach reporting,

sexual harassment, and anti-bribery and corruption (ABAC).

We also introduced additional microlearning modules to be taken

throughout the year to keep our values and expectations top of mind,

and updated our discussion guides for leaders to engage with their

teams about related topics. Further in-depth training for over 35,000

people used real-life examples of dilemmas experienced at GSK to

help them understand how to manage ABAC risks relevant to their

roles and reinforce our zero-tolerance approach to bribery and

corruption.

In 2018, we assessed 18 different parts of the business against

a values maturity matrix – including interviewing approximately

1,500 employees – to understand how well our values and

expectations are embedded. Individual areas of the business

are using insights from the assessments to put plans in place

that further enhance the way our values are integrated into ways

of working at GSK. Local examples include increasing opportunities

for engagement with leadership teams to improve trust and

enhancing employee recognition to encourage a greater sense

of accountability.

GSK.com: GSK Code of Conduct

Reporting and investigating concerns

We encourage people to speak up if they have any concerns

relating to unethical conduct or behaviour that is inconsistent with

our values – or if they simply want to ask a question about how to

apply our Code of Conduct.

Anyone within or outside GSK can raise concerns or speak to an

independent third party through our integrity lines, conﬁdentially

or anonymously if they prefer. We take every reported concern very

seriously and we review each one to understand whether a formal

investigation is warranted. If our investigations show that an employee

has breached our policies, we take appropriate disciplinary action.

In 2018, 2,842 employees were accused of misconduct; we

reviewed all of these cases, and initiated 1,805 formal investigations.

As a result, 940 employees were disciplined for policy violations,

of whom 115 employees were dismissed or voluntarily left the

organisation. A further 656 received other documented warnings.

In other instances, action short of a documented warning was taken.

Employees disciplined in 2018: breakdown of types of

policy violation (%)

Mandatory training completion

29%

Behaviour in the workplace

20%

Good manufacturing and distribution practices

11%

Marketing and promotional activities

Expenses

Protection of physical assets and security

Other

25%

Political engagement

Everyone working for, or on behalf of, GSK must follow our

Code of Conduct in their interactions with political stakeholders.

Additionally our selection process for public policy groups includes

criteria to ensure those groups share our values.

In 2018, GSK topped Transparency International UK’s Corporate

Political Engagement Index of 104 global companies operating in

the UK, based on criteria such as political contributions, responsible

lobbying and transparency in reporting.

We spent $4.57 million on federal lobbying activities in the US in

2018, which are registered on the US Federal Lobbying Register.

The spend includes the cost of operating our ofﬁce in Washington

DC, and the cost of travel and consulting. The cost of representing

our interests to EU institutions, published on the EU Transparency

We also publish a list of our

memberships in trade associations that may lobby indirectly

on our behalf.

GSK does not make corporate political contributions. Our US

employees may support individual candidates or political groups

ﬁnancially through a Political Action Committee, which contributed

$345,190 to state and federal candidates in 2018. A breakdown

of this spend is available online.

GSK.com and online: EU Transparency Register • US Federal Lobbying

Public Policy Groups

1 These are the latest available ﬁgures, and 2018 ﬁgures will be available in April

2019 for submission to the EU’s Transparency Register.

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

Human rights

GSK is committed to upholding the Universal Declaration of Human

Rights and the core labour standards set out by the International

Labour Organization. In 2018, as part of our commitment to

implementing the UN Guiding Principles on Business and Human

Rights, we reassessed our human rights risks to ensure we are

focusing efforts where our business has the greatest potential

to impact people.

Six priority areas were identiﬁed: access to healthcare; research

practices; patient safety; labour rights; environment, health and

safety; and privacy. An initial review found that there were appropriate

measures in place to manage the human rights risks related to most

of these areas, but identiﬁed the need to continue to strengthen

our approach to managing third-party labour rights risks. We are

developing actions to address this, and will continue to build our

understanding and management of human rights risks, taking

account of evolving external expectations and best practice.

GSK.com: Human rights • Modern Slavery Act statement

Working with third parties

Our Third Party Oversight programme strengthens our management

of risk in the supply chain by driving improvements in our network

of third parties – including suppliers, distributors and other

organisations with which there is a transfer of value – to ensure

that they share our values and work to the ethical and business

standards expected by GSK. The programme has now been rolled

out across all areas of the business.

During 2018, over 23,000 risk assessments were completed,

and over 1,400 third parties identiﬁed as high-risk have undergone

detailed independent assessments by EcoVadis. In 2018, we

also conducted 83 in-depth audits on health and safety, ethics

and environment. While we will work with third parties to help

them improve, if signiﬁcant issues are not resolved, we may

suspend or terminate their contract.

GSK.com: Working with third parties

Data and engagement

We are committed to using data responsibly and transparently,

and engaging with patients and healthcare providers to help meet

patient needs. This includes treating data with respect, sharing

the results of our clinical trials, integrating patient insights into

our product development and providing healthcare professionals

with the information they want in the way that they want it.

Using data responsibly and transparently

Data is becoming increasingly central to our business and the

healthcare industry more broadly. Our digital, data and analytics

strategy harnesses the power of data and technology to strengthen

our business and make a real difference to patients around the world.

We believe this will help our scientists develop innovative medicines

more quickly and with higher probability of success than ever before,

it will enhance clinical trials and improve interaction with healthcare

providers, customers and consumers, and it will make our own

processes more efﬁcient.

Data privacy

We recognise that people are increasingly concerned about the

protection, and inappropriate use of personal data, particularly

when this is related to health. New EU regulations have also

increased requirements on how companies use personal data.

Loss or inappropriate use of personal information could have a

serious impact, both on the individuals affected and on our business,

and we take our responsibility for data and privacy very seriously.

We have developed a comprehensive suite of training to drive a

culture where everyone at GSK takes personal responsibility for

the correct handling of personal data. Our privacy principles ensure

that our use of personal information is kept to the minimum necessary

and is fair, transparent, accurate and secure. In 2018, we trained

113,000 of our employees and complementary workers on our

privacy principles to help them understand how to apply them

in their daily work and raise awareness of why privacy matters

for all those who handle personal data.

In addition, people in key roles across the organisation are

undergoing certiﬁcation from an accredited external association

to increase expertise and enable us to make informed decisions

about handling personal data.

The protection of individuals’ data and privacy is a high priority

in our exclusive collaboration with 23andMe, which combines

23andMe’s genetic expertise and advanced data science skills

with GSK’s extensive scientiﬁc capabilities and scale, to enhance

the discovery and development of entirely new medicines and

potential cures. 23andMe customers can choose to participate in

research and contribute their information to the unique and dynamic

database for the purpose of advancing scientiﬁc research.

Participation is voluntary and customers are required to afﬁrmatively

consent to their data being used for research. Should they choose

to participate, their information is aggregated so no individual will

be identiﬁable to GSK.

Clinical trial transparency

As part of our long-standing commitment to data transparency for

our clinical trials, we have published 2,484 clinical study reports

and 6,427 summaries of results – positive and negative – from our

trials on our clinical study register.

We also share anonymised patient-level data from 2,333 of our trials

via www.clinicalstudydatarequest.com, which we launched ﬁve years

ago to facilitate innovative data-driven research. It is now used by

19 other trial sponsors and funders. External researchers are granted

access based on a review of the scientiﬁc merit of their research

proposal by an independent panel. Access to GSK trial data has

been approved for 125 proposals since 2013.

GSK.com and online: GSK Privacy Notice • GSK Clinical Study Register

GSK Annual Report 2018

Trust continued

Improve patient and scientiﬁc engagement

To improve the delivery of ground-breaking new therapies, we are

strengthening our focus on patients’ needs by seeking their insights

across the business. In 2018, we began implementing new global

standards on working with and supporting patients.

We also support several initiatives that are empowering patients to

get more involved in the development of medicines through training,

tools and dialogue – including the European Patients’ Academy,

PARADIGM (Patients Active in Research and Dialogues for an

Improved Generation of Medicines) and Patient Focused Medicines

Development.

We held Patient Advocacy Leaders Summits in Japan, Portugal

and Switzerland and supported one in the US this year, to build

relationships between GSK employees, patient advocates, health

policy experts and industry. Representatives of patient organisations

also provide insights through our European Health Advisory Board

and our Respiratory Health Board.

To improve engagement with patients involved in our clinical trials,

we have begun developing patient engagement plans for key assets

to get their input on the development of trial protocols, improve their

experience during the trial and make sure they are informed about

the results when it is completed.

Through our engagement with HCPs, we aim to provide information

on our products in the way that best suits them. In recent years,

we have signiﬁcantly strengthened our online resources and

in-house medical capabilities to provide bespoke product information

for HCPs.

In 2018, we updated our policy on working with HCPs, following

consistent feedback that they prefer to learn about new products

through peer-to-peer programmes with experts who have direct

experience of our medicines. The update was designed to ensure

that we continue to operate responsibly and improve how we help

prescribers to understand new data and clinical experience with

our innovative products. The Pharmaceuticals section of this report

provides more detail on this policy change.

GSK.com: Patient engagement

Environment

Our new goal, by 2030, is to reduce our environmental impact by

one quarter, cutting greenhouse gas emissions, reducing water

impact and redirecting waste for beneﬁcial use. This is underpinned

by ﬁve new environmental commitments for 2030 (against a 2016

baseline) to:

– reduce operational carbon emissions (Scope 1 and 2) by 20%;

– reduce value chain carbon emissions (Scope 3) by 25%

per £ billion revenue;

– source 60% of electricity from renewable sources;

– reduce total water use at each high-risk site by 30%;

– ensure all waste is repurposed for beneﬁcial uses.

Carbon

We are committed to playing our part to address climate change.

In 2018, we set new targets to cut our carbon footprint across the

value chain, which are intended to be challenging but achievable.

We also conducted a review of the reporting requirements of the

Task Force on Climate-related Financial Disclosures (TCFD)

and will be considering how we can use the guidelines to better

understand and report the risks that climate change presents to

our business. In early 2019, we were accredited by the Science

Based Targets Initiative for a set of Scope 1, 2 and 3 targets in line

with a level of decarbonisation required to keep global temperature

increase below 2°C.

Our overall value chain carbon footprint is made up of Scope 1 and 2

emissions from our own operations (14%) and Scope 3 emissions

from our supplier base (48%), logistics (4%) and the use of our

products (34%).

In 2018, Scope 1 and 2 emissions were reduced by 8% through

ongoing efﬁciency measures, investment in on-site generation of

renewable energy and a reduction in the number of sites. In India,

for example, we have saved over 24,700 tonnes of CO

e emissions

over the past four years through investment in solar installations, a

combined heat and power plant, and more efﬁcient lighting, heating

and manufacturing.

Globally, around 5% of our electricity came from renewable sources

in 2018. We are targeting 60% by 2030, with an interim target

of 30% by 2020 to further reduce our operational emissions.

In 2017 (our latest available data), Scope 3 emissions increased

by less than 1%, but decreased by 8% per £1 billion revenue.

Our supply chain makes up the largest share (48%) of our value

chain carbon footprint. We encourage suppliers to share best

practices through the GSK Supplier Exchange, running ‘kaizen’

events to improve energy efﬁciency and recognising achievements

through our Supplier Environmental Sustainability Awards.

Carbon emissions plus intensity ratios (as per regulations)

‘000 tonnes CO

2018 2017 2016

Scope 1 emissions

823 865 889

Scope 2 emissions

606 694 700

Scope 3 emissions

Full data

available in

next year’s

report

18,152 17,897

Intensity ratios 2018 2017 2016

Scope 1 and 2 emissions/

sales revenue (tonnes

e/£m)

46.4 51.5 56.0

Scope 1 and 2 emissions/

FTE (tonnes CO

e/FTE)

15.0 15.8 16.0

Scope 3 emissions/£bn

revenue (million tonnes

e/£bn revenue)

Full data

available in

next year’s

report

0.6 0.64

1 2018 ﬁgures will be available from April 2019.

2 Carbon emissions are calculated according to the Greenhouse Gas Protocol:

A Corporate Accounting and Reporting Standard (revised edition).

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

In 2018, the emissions from the use of our products have increased

by 4% since 2017, as we make medicines accessible to more

people. Most of these emissions come from propellant gases used

in Ventolin metered dose inhalers (MDIs). Over the last few years

we have conducted detailed analysis to explore the requirements of

developing a new propellant for MDIs with a lower carbon footprint.

Our ﬁndings show that this would be extremely complex, requiring

extensive R&D, signiﬁcant changes to our manufacturing process

and new clinical trials to test for efﬁcacy and safety for patients.

Weighing up these challenges, and given there are no incremental

beneﬁts to patients, along with the need for us to allocate our capital

investments to developing promising new medicines to improve

health, we have therefore decided to instead focus our investment

on our new generation dry powder inhaler technologies which do

not release greenhouse gas emissions. Our entire new portfolio

of inhaled medicines is delivered via the dry powder Ellipta inhaler

which has a lifecycle carbon footprint around 24 times lower than

a propellant-based inhaler,

based on an assessment that won

GSK the Carbon Trust’s Best in Product Carbon Footprinting

Award in 2018. In addition, we support efforts to promote low-

carbon inhalers where possible, such as the commitment made

by the UK government, and to increase inhaler recycling for the

recovery and reuse of HFA gas.

Water

While climate change must be tackled at a global level, water

challenges are much more localised. We used 12.9 million cubic

metres of water across our operations in 2018 (compared with

14.7 in 2017) and we are focusing our reduction programmes

in the areas where we have the biggest overall water impact.

All our Pharmaceutical and Consumer Healthcare manufacturing

sites have completed risk assessments to ensure compliance

with our water stewardship standard by 2020. Through these

assessments, we identiﬁed 13 high-risk sites, based on water

scarcity, local water quality, health and social risks, and regulatory

and reputational risks. These sites are now developing strategies

to reduce their water impact. Our goal is to reduce our total water

use at each high-risk site by 30% by 2030.

Waste

We have cut the amount of waste we produce by 7% since 2016,

generating a total of 126,000 tonnes in 2018 (including 36,000

tonnes of hazardous waste).

Further reductions in the amount of waste created – or complete

elimination of waste – is extremely challenging. Our new goal is

for all our waste to be repurposed for beneﬁcial uses by 2030.

This avoids harmful environmental impacts from landﬁll and keeps

materials, such as solvents, in circulation for use in new products.

In 2018, 71% of our sites achieved zero waste to landﬁll. Globally,

77% of our waste was recycled or incinerated with energy recovery.

For example, more than 1.5 million used inhalers have been recycled

through our Complete the Cycle programme in the UK since it began

in 2012.

Environmental stewardship

We are committed to moving towards deforestation-free sourcing

for all key commodities purchased directly by GSK or indirectly

on our behalf, although we recognise that this is a challenge due to

the complex nature of our supply chains. To date, we have focused

on paper packaging, palm oil and palm oil derivatives and have

developed supplier selection criteria, as well as sourcing standards

in conjunction with the Rainforest Alliance.

The packaging of our products plays an important role in delivering

safe, stable and trusted medicines, vaccines and consumer healthcare

products. However, GSK recognises the impact that plastic

packaging has on the environment. We have a number of initiatives

in place to reduce plastic use, increase use of recycled plastic content

and encourage the recycling of plastic components. For example,

ensuring our packaging is no larger in volume, weight and thickness

than it needs to be to fulﬁl its function of protecting the product.

In 2018, we took steps to understand and quantify the amount

of plastic packaging that we produce globally across our business.

We are now using this information to evaluate how we can further

reduce the impact that our plastic use has on the environment.

GSK.com: Environmental policies

1 For one year’s treatment, use of propellant-based inhalers results in a carbon

footprint of 228kg CO

e compared with a carbon footprint of 9.6kg CO

e from

using Ellipta dry powder inhalers.

GSK Annual Report 2018

Our risk management framework is well embedded and continually

reviewed, with oversight at Board level through our Audit and Risk

Committee, assisted by our Risk Oversight and Compliance Council.

The framework enables the Board to identify, evaluate and manage

our Principal Risks and is designed to support our long-term priorities.

It provides our businesses with a framework for risk management and

upward escalation of signiﬁcant risks. In conjunction with our values

and expectations and Speak Up processes, it ensures that the risks

associated with our business activities are actively and effectively

agreed and mitigated and provides reasonable assurance against

material misstatement or loss. Each of our businesses is governed

by a Risk Management and Compliance Board, which promotes

the ‘tone from the top’, establishes the culture regarding risk and

oversees internal controls. Our annual conﬁrmation exercise ensures

a consistent risk management approach across GSK which

reinforces leader accountability.

Each Corporate Executive Team member performs a review of their

key Principal Risks to ensure controls are in place – and wherever

gaps are identiﬁed, clear plans are assigned to address them.

During the year, the Audit and Risk Committee considered GSK’s

risks and the strategies to address them. These reviews were

undertaken through: annual business unit risk and assurance

update reports; strategy papers for each of our most signiﬁcant

risks; and an annual risk review.

We have emphasised the importance of data privacy from an internal

risk management perspective by separating Privacy as a new,

stand-alone Enterprise Risk from the Information Security Enterprise

Risk. Consequently, we now report on 11 Principal Risks, rather

than 10. The risks are listed below with our assessment of the

external macro environment and the risk exposure post mitigation.

They are not in order of signiﬁcance.

Patient safety

Macro

environment

GSK exposure

post mitigation

– The macro risk level has increased on a global scale due to an expanding, strict and diverse

regulatory environment, which is going to evolve further, as exempliﬁed in China. In general

the macro environment in the established US and European markets remains unchanged with

patient safety and Good Pharmacovigilance Practices (GVP) remaining consistent. Plans are

in place to ensure that GSK’s approach to patient safety is not compromised by Brexit.

– The GSK risk exposure remains unchanged. We are providing strong oversight to mitigate

risk during implementation of organisational improvements to the local and central

pharmacovigilance model.

Risk Assessment and mitigation activities

Product quality

Macro

environment

GSK exposure

post mitigation

Financial controls & reporting

Macro

environment

GSK exposure

post mitigation

Anti-bribery & corruption (ABAC)

Macro

environment

GSK exposure

post mitigation

Commercial practices

Macro

environment

GSK exposure

post mitigation

– The macro risk level remained unchanged, with continuing industry-level regulatory scrutiny

of data integrity, drug shortages caused by manufacturing issues, and the need for timely

communication of issues with authorities.

– The overall GSK exposure level remains unchanged; however, improvements in annual

performance metrics reﬂect GSK’s ongoing investment and improvement initiatives in

facilities, operating systems and training.

– The macro level remains unchanged, as there has been no material increase in ﬁnancial

reporting requirements.

– The GSK exposure level has reduced as a result of the successful completion of the US

and intercompany system migrations onto the new ERP platform.

– The macro risk level remains unchanged with continued strict ABAC laws and scrutiny

from government and regulators, and the high standards expected of corporations.

– The GSK exposure level remains unchanged as we improved targeted training to

those most exposed to bribery and corruption risks in their roles; revised and simpliﬁed

applicable written standards; and continued to develop risk indicators intended to provide

meaningful and useful data about the potential for corruption (e.g. ﬁnancial crimes).

We have reduced our exposure to ABAC risk through a business model change in some

very high-risk markets and will continue to embed these changes into 2019. The SEC and

DOJ investigations regarding third party advisers engaged by GSK in China are ongoing.

– The macro risk level has increased due to greater competitive pressure, increased

regulatory enforcement and an expansion of digital engagement, where laws and

regulations are still evolving.

– The GSK exposure level remains unchanged as we continue to enhance and maintain

control over evolving commercial practices, notably the shift in marketing and sales

practices utilising data analytics and e-commerce channels. In October 2018, GSK

announced changes to the way we will engage expert practitioners to improve sharing

of new data on our innovative medicines and vaccines for a limited time among healthcare

practitioners. New controls and training have been implemented to support these changes

while ensuring appropriate oversight and assurance across the markets.

Risk management

GSK Annual Report 2018

Investor information

Financial statements

Strategic report

Governance and remuneration

ARC Report, see page 79

Viability statement, see page 44

Principal risks and uncertainties, see page 241

Internal Control Framework, see page 87

Third party oversight (TPO)

Macro

environment

GSK exposure

post mitigation

Environment, health & safety

and sustainability (EHS&S)

Macro

environment

GSK exposure

post mitigation

Information security

Macro

environment

GSK exposure

post mitigation

Supply continuity

Macro

environment

GSK exposure

post mitigation

– The macro environment remains unchanged as the industry continues to be vigilant

about third-party risks in global sourcing and supply, and consumer and investor

expectations mature.

– The GSK exposure level remains unchanged. The TPO programme has been fully

deployed. Due diligence for low-risk engagements is based on embedded process

controls, relieving Business Owners of TPO activity without a signiﬁcant change in risk

appetite. High-risk engagements continue to require an engagement risk assessment

and prescribed next steps. The risk-based approach proposed means that some low-risk

issues may occur that will require a reactive response.

– The macro risk level has increased due to greater emphasis on environment controls

from regulators, activists and stakeholders. Particular focus areas include antimicrobial

resistance related to manufacturing releases, the wider issue of pharmaceuticals in the

environment (PiE) and increasing emerging market regulation. External scrutiny of our

external supply chain for active ingredients (both for existing and pipeline assets) has

also increased signiﬁcantly.

– The GSK exposure level remains unchanged. Risks associated with restructuring

of the site network are being proactively managed. Mitigation and improvement plans

have been established and are progressing through implementation.

– The macro risk level continues to increase as the threat against the pharmaceutical

business and industry generally become more sophisticated and targeted, as evidenced

by the Wannacry and NotPetya global incidents.

– Despite this, the GSK exposure level remains unchanged due to further development

of our programme to safeguard against cyber-attacks and protect critical information

and systems, and our ability to balance the demands of regulation with our digital

transformation, which involves increased data collection and analysis.

– The macro risk level remains unchanged with ongoing stringent regulation, a continued

US focus on contract manufacturers outside the UK/EU, and Brexit uncertainties.

– The overall GSK risk exposure level is unchanged. We have improved risk management

of our supplier portfolio; reduced the complexity of our internal and external networks;

and improved our crisis and continuity management framework. However, we have seen

an increase in complexity with the introduction of a major serialisation change programme

for the EU Falsiﬁed Medicines Directive coinciding with Brexit preparations.

Research practices

Macro

environment

GSK exposure

post mitigation

– The macro risk level is increasing, primarily driven by the high rate of change to regulations

and external ethical standards and by increasing data use and technological complexity.

– The GSK exposure level remains unchanged as we continue to establish appropriate

controls and a culture of continuous improvement, overseen by an enterprise risk

governance structure.

Risk Assessment and mitigation activities

Privacy

Macro

environment

GSK exposure

post mitigation

– The macro risk level has increased due to new, more stringent data privacy legislation

in multiple countries and the rise of enforcement by regulators.

– The GSK exposure level remains unchanged following implementation of a new global

privacy framework and operating model in the European Economic Area during 2018.

This has resulted in the development of critical privacy expertise in compliance, legal,

and business roles, along with the embedding of privacy controls within IT and third

party oversight.

GSK Annual Report 2018

Our approach to Brexit

In preparing for the UK’s exit from the EU (Brexit), our overriding

priority has been to maintain continuity of supply of our medicines,

vaccines and consumer healthcare products to people in the UK

and EU.

As a result, we have taken a risk-based approach to planning

and mitigation, allocating costs of up to £70 million to implement

relevant changes over the next one to two years, while the future

relationship between the UK and EU is negotiated. We have made

good progress in implementing our Brexit contingency plan in 2018.

Our activity has included: arranging the retesting and certifying of

our medicines in Europe; submitting marketing authorisation holder

transfers; updating packaging; securing additional warehousing;

and supporting employees in obtaining settled status or equivalent

in both the UK and Europe. UK technical guidance, which outlines

acceptance of testing from EU sites for a time-limited period, has

allowed us to reduce some potential duplication in our supply chain

in the short term.

Our Brexit plans prepare us for elements that are within our control.

We have signiﬁcant experience of maintaining resilient supply chains,

and we have used existing processes to develop a new supply

model based on the UK leaving the EU in March 2019. To minimise

disruption to patients, we have also adjusted stock levels in both

the UK and EU. Uncertainty remains about the new operating

environment, and as a result we support efforts to secure a status

quo operating period post-Brexit, and UK and EU preparations to

minimise potential disruption to the supply of medicines to patients.

We anticipate subsequent and ongoing costs arising from Brexit

could include further customs duties and will include the cost

of duplicate testing and release of our products. We continue to

estimate these potential costs at approximately £50 million per year.

As more details emerge on how our business will need to change

after Brexit, the assumptions underlying these forecasts could

change, with consequent adjustments up or down. We will

continue to revise our plans and their expected ﬁnancial impact

as negotiations and regulations develop. Over the longer term,

we continue to believe that Brexit will not have a material impact

on our business.

Risk management continued

Risks associated with the proposed separation of GSK’s

Consumer Healthcare business

A separation of our Consumer Healthcare business may be

dependent on a number of factors that are outside GSK’s control,

including any required shareholder and regulatory approvals,

favourable conditions in public equity markets and public or

private debt markets and changes in applicable law and regulation.

Therefore, there can be no certainty that a separation will be

completed as proposed (or at all). In addition, if a separation is

completed, there can be no assurance that either GSK or Consumer

Healthcare will realise the expected beneﬁts of separation or that

the separation will not adversely affect GSK or Consumer Healthcare

or the value or liquidity of their respective shares.

GSK Annual Report 2018

In this section

CFO’s statement 38

Reporting framework 40

Approach to tax 43

Viability statement 44

Total results 45

Adjusting items 51

Adjusted results 54

Cash generation and conversion 56

Financial position and resources 58

Treasury policies 62

Critical accounting policies 63

Group

ﬁnancial

review

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

I am pleased to report that the Group’s results for 2018 demonstrate

continued operational execution of our key strategic objectives with

strong performances from all three businesses.

Sales

Group turnover was up 2% AER, 5% CER to £30,821 million.

Pharmaceuticals sales were ﬂat at AER but up 2% CER, driven

primarily by growth in HIV sales and further progress by the new

Respiratory products, Nucala and the Ellipta portfolio. This was

partly offset by lower sales of Seretide/Advair and Established

Pharmaceuticals. Overall Respiratory sales declined 1% AER

but grew 1% CER.

Vaccines sales were up 14% AER, 16% CER, primarily driven by

sales of Shingrix in the US and growth in inﬂuenza and Hepatitis

vaccines, which also beneﬁted from a competitor supply shortage,

partly offset by declines in some Established Vaccines.

Consumer Healthcare sales declined 1% AER but grew 2% CER

with broad-based growth in Oral health and Wellness partly offset

by increased competitive pressures in Europe, the divestments of

some smaller brands, including Horlicks and MaxiNutrition in the UK,

as well as the impact of the implementation of the Goods & Services

Tax (GST) in India.

Cost of sales

Cost of sales as a percentage of turnover was 33.2%, down

1.0 percentage points AER and 1.4 percentage points CER. This

primarily reﬂected a favourable comparison with the write-downs

of assets in 2017 related to the decision to withdraw Tanzeum,

together with a more favourable product mix in Vaccines and

Consumer Healthcare, partly offset by adverse pricing pressure

in Pharmaceuticals, particularly in Respiratory, and in Established

Vaccines.

Selling, general and administration

SG&A costs as a percentage of turnover were 32.2%, up

0.1 percentage points at both AER and CER, reﬂecting growth

of 3% AER, 5% CER. The increase primarily reﬂected higher

restructuring costs and investment in promotional product support,

particularly for new launches in Respiratory, HIV and Vaccines.

Research and development

R&D expenditure was lower in 2018 compared with 2017 at

£3,893 million on a Total basis and £3,735 million on an Adjusted

basis. This reﬂected a favourable comparison with the impact of

the Priority Review Voucher, purchased and used to accelerate

registration of our ﬁrst HIV two-drug regimen (dolutegravir and

lamivudine) in 2017, as well as beneﬁts from recent R&D

prioritisation initiatives.

Savings from these initiatives are being used to build investments

in a number of mid and late-stage clinical development programmes,

particularly in oncology and functional genomics.

Operating proﬁt

Total operating proﬁt was £5,483 million, up 34% AER, 43% CER,

and showed strong progression on 2017. Higher charges for

the re-measurement of the contingent consideration liability related

to ViiV Healthcare were more than offset by a stronger operating

performance, lower restructuring costs, lower asset impairment

charges and a favourable comparison with the charges taken in

2017 related to US tax reform of £0.7 billion.

Adjusted operating proﬁt was £8,745 million, up 2% AER, 6% CER,

driven by margin growth in Vaccines and Consumer Healthcare.

Pharmaceuticals operating proﬁt was down 3% AER, but ﬂat at

CER, reﬂecting continued investment in our new products and

a weaker gross margin in the face of ongoing pricing pressures.

Earnings per share

Our stronger operational performance helped to deliver improved

earnings per share (EPS) for the Group. Total EPS more than

doubled to 73.7 pence. Adjusted EPS was 119.4 pence up 7% AER,

and up 12% CER.

Total EPS also beneﬁted from a favourable comparison with

charges in 2017 arising from the impact of US tax reform and

a lower non-controlling interest allocation of Consumer Healthcare

proﬁts following the acquisition of Novartis’ interest in our Consumer

Healthcare business in June 2018.

These factors were partly offset by higher transaction-related

charges arising from increases in the valuation of the liabilities for

contingent consideration, put options and preferential dividends.

The Adjusted EPS growth of 12% CER was well ahead of the 6%

CER increase in Adjusted operating proﬁt, primarily as a result of the

reduced non-controlling interest allocation of Consumer Healthcare

proﬁts and a lower Adjusted tax rate.

Cash generation

We have continued to drive a strong focus on greater cash discipline

across the Group and I am pleased to report we made signiﬁcant

further progress this year, resulting in a net cash inﬂow from

operations of £8,421 million (2017 – £6,918 million) and free

cash ﬂow of £5,692 million (2017 – £3,485 million). This increase

was particularly driven by progress on working capital, despite the

growth in the business, especially in inventory control and stronger

collections. Reductions in capital expenditure, lower legal costs

and higher proceeds from intangible divestments also contributed.

Cash conversion remains a key focus for 2019.

Net debt was £21.6 billion at 31 December 2018, compared

with £13.2 billion at 31 December 2017, comprising gross debt

of £26.1 billion and cash and liquid investments of £4.5 billion,

including £0.5 billion reported within Assets held for sale.

The increase in net debt from last year was primarily driven

by our decision to buy-in the minority stake held by Novartis

in our Consumer Healthcare business for £9.3 billion and an

adverse currency translation impact of £0.8 billion.

CFO’s statement

“We continued to make progress in delivering against our strategy

and the ﬁnancial goals we have set out in our ﬁnancial architecture”

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Capital allocation

We have pursued a disciplined approach to capital allocation,

reﬂected in the investment choices we made in 2018 and in the

transactions we initiated to strengthen our business and improve

our ﬁnancial ﬂexibility to support GSK’s key strategic priorities.

This culminated in the agreement announced in December last year

to establish a new world-leading Consumer Healthcare Joint Venture

that we intend to separate from the Group within three years of

the transaction closing. This will give us a unique value creating

opportunity to establish two leading global companies, each with

appropriate balance sheets better able to support their respective

future investment requirements, while continuing to offer

shareholders attractive distributions.

Given the improvements in cash conversion and free cash ﬂow

generation across the Group over the last few years, we remain

comfortable that we can support our future investment requirements.

However, this new pathway for the Group gives us additional

conﬁdence and visibility in our ability to invest behind our ﬁrst

priority – strengthening the R&D pipeline.

Delivering cash returns to shareholders through dividends is also

a priority. Dividends paid to shareholders in 2018 were £3.9 billion

and we have delivered on the expectations we laid out, with a

dividend of 80p per share for the year. We expect to maintain

the dividend at the same level of 80p for 2019.

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 44.

Outlook

In 2019, we expect Adjusted EPS to decline in the range of -5

to -9% at CER. This guidance reﬂects the expected impact of the

Tesaro acquisition and the signiﬁcant investments we are making

behind its products and pipeline. It also reﬂects the completion of

the other recently announced transactions, as well as the approval

of a substitutable generic competitor to Advair in the US.

2018 was a strong year of operational performance, with good

progress made in commercial delivery of our new products, which

together with continued focus on costs, has led to improved

operating margins. The business is showing good momentum and,

together with the important strategic moves we have made through

the different transactions initiated in 2018, I am conﬁdent in the

outlook and prospects for GSK.

Finally, this is my last report to shareholders as CFO, and I would like

to thank them and our many partners for their support in my time with

the company.

Simon Dingemans

Chief Financial Ofﬁcer

Capital allocation framework

Improved

cash

generation

Invest in the business

– Pharmaceuticals pipeline

– Vaccines capacity

Shareholder returns

Other transactions M&A

– 80p per share dividend expected for 2019

– Focus on rebuilding free cash ﬂow over time

– Target 1.25x to 1.5x cover before returning

dividend to growth

– Strict discipline on returns

Key priorities for capital

Innovation

Performance

Trust

GSK Annual Report 2018

Total and Adjusted results

The Group ﬁnancial review discusses the operating and ﬁnancial

performance of the Group, its cash ﬂows and ﬁnancial position and

our resources. The results for each year are compared primarily with

the results of the preceding year.

Total results

Total reported results represent the Group’s overall performance.

GSK also uses a number of adjusted, non-IFRS, measures to report

the performance of its business. Adjusted results and other non-

IFRS measures may be considered in addition to, but not as a

substitute for or superior to, information presented in accordance

with IFRS. Adjusted results are deﬁned below and other non-IFRS

measures are deﬁned on page 42.

GSK believes that Adjusted results, when considered together with

Total results, provide investors, analysts and other stakeholders with

helpful complementary information to understand better the ﬁnancial

performance and position of the Group from period to period, and

allow the Group’s performance to be more easily compared against

the majority of its peer companies. These measures are also used by

management for planning and reporting purposes. They may not be

directly comparable with similarly described measures used by other

companies.

GSK encourages investors and analysts not to rely on any single

ﬁnancial measure but to review GSK’s Annual Reports, including

the ﬁnancial statements and notes, in their entirety.

GSK is committed to continuously improving its ﬁnancial reporting,

in line with evolving regulatory requirements and best practice and

has made a number of changes in recent years. In line with this

practice, GSK expects in 2019 to continue to review its reporting

framework (including, where relevant, the use of alternative

performance measures).

Adjusted results

Adjusted results exclude the following items from Total results,

together with the tax effects of all of these items:

– amortisation of intangible assets (excluding computer software)

and goodwill

– impairment of intangible assets (excluding computer software)

and goodwill

– major restructuring costs, which include impairments of tangible

assets and computer software, (under speciﬁc Board approved

programmes that are structural, of a signiﬁcant scale and where

the costs of individual or related projects exceed £25 million),

including integration costs following material acquisitions

– transaction-related accounting or other adjustments related to

signiﬁcant acquisitions

– proceeds and costs of disposals of associates, products and

businesses; signiﬁcant legal charges (net of insurance recoveries)

and expenses on the settlement of litigation and government

investigations; other operating income other than royalty income,

and other items

– the impact of the enactment of the US Tax Cuts and Jobs Act

in 2017.

Costs for all other ordinary course smaller scale restructuring and

legal charges and expenses are retained within both Total and

Adjusted results.

As Adjusted results include the beneﬁts of Major restructuring

programmes but exclude signiﬁcant costs (such as signiﬁcant

legal, major restructuring and transaction items), they should not be

regarded as a complete picture of the Group’s ﬁnancial performance,

which is presented in its Total results. The exclusion of other

Adjusting items may result in Adjusted earnings being materially

higher or lower than Total earnings. In particular, when signiﬁcant

impairments, restructuring charges and legal costs are excluded,

Adjusted earnings will be higher than Total earnings.

GSK has undertaken a number of Major restructuring programmes

in recent years in response to signiﬁcant changes in the Group’s

trading environment or overall strategy, or following material

acquisitions, including the Novartis transaction in 2015. Costs,

both cash and non-cash, of these programmes are provided for

as individual elements are approved and meet the accounting

recognition criteria. As a result, charges may be incurred over a

number of years following the initiation of a Major restructuring

programme.

From time to time, the Group divests non-core investments, products

and businesses and records the proﬁt or loss on disposal as an

Adjusting item. The most notable divestment in the past ﬁve years

was the disposal of the Oncology business as one element of the

three-part transaction with Novartis in 2015.

Signiﬁcant legal charges and expenses are those arising from the

settlement of litigation or government investigations that are not in

the normal course and materially larger than more regularly occurring

individual matters. They also include certain major legacy matters.

Reconciliations between Total and Adjusted results, providing further

information on the key Adjusting items for 2017 and 2018 are set out

on page 51 and for the ﬁve years to 2018 are set out on pages 232

to 234.

GSK provides earnings guidance to the investor community on

the basis of Adjusted results. This is in line with peer companies

and expectations of the investor community, supporting easier

comparison of the Group’s performance with its peers. GSK is not

able to give guidance for Total results as it cannot reliably forecast

certain material elements of the Total results, particularly the future

fair value movements on contingent consideration and put options

that can and have given rise to signiﬁcant adjustments driven by

external factors such as currency and other movements in capital

markets.

Reporting framework

Group ﬁnancial review

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Historical record of Adjusting items

The reconcilations between Total and Adjusted operating proﬁt over the last ﬁve years can be summarised as follows:

2018

£m

2017

£m

2016

£m

2015

£m

2014

£m

Total operating proﬁt 5,483 4,087 2,598 10,322 3,597

Intangible asset amortisation 580 591 588 563 575

Intangible asset impairment 116 688 20 206 150

Major restructuring 809 1,056 970 1,891 750

Transaction-related items 1,977 1,599 3,919 2,238 839

Divestments, signiﬁcant legal and other items (220) (119) (424) (9,561) 545

US tax reform – 666 – – –

Adjusted operating proﬁt 8,745 8,568 7,671 5,659 6,456

The analysis of the impact of transaction-related items on operating proﬁt for each of the last ﬁve years is as follows:

2018

£m

2017

£m

2016

£m

2015

£m

2014

£m

Novartis Consumer Healthcare Joint Venture put option 658 986 1,133 83 –

Contingent consideration on former Shionogi-ViiV Healthcare JV (including Shionogi preferential dividends) 1,188 556 2,162 1,874 768

ViiV Healthcare put options and Pﬁzer preferential dividends (58) (126) 577 – –

Contingent consideration on former Novartis Vaccines business 58 101 69 108 –

Other adjustments 131 82 (22) 173 71

Transaction-related items 1,977 1,599 3,919 2,238 839

Full reconciliations between Total and Adjusted results for 2014–2018 are set out on pages 232 to 234.

Further explanations on the Adjusting items for 2018 are reported on page 51.

Reporting framework continued

Non-controlling interests in ViiV Healthcare

Trading proﬁt allocations

Because ViiV Healthcare is a subsidiary of the Group, 100% of

its operating results (turnover, operating proﬁt, proﬁt after tax) are

included within the Group income statement and then a portion

of the earnings is allocated to the non-controlling interests owned

by the other shareholders, in line with their respective equity

shareholdings (Pﬁzer 11.7% and Shionogi 10%). Each of the

shareholders, including GSK, is also entitled to preferential dividends

determined by the performance of certain products that each

shareholder contributed. As the relative performance of these

products changes over time, the proportion of the overall earnings

of ViiV Healthcare allocated to each shareholder will change. In

particular, the increasing sales of dolutegravir-containing products

have a favourable impact on the proportion of the preferential

dividends that is allocated to GSK. Adjusting items are allocated to

shareholders based on their equity interests. GSK was entitled to

approximately 85% of the Total earnings and 82% of the Adjusted

earnings of ViiV Healthcare for 2018. Re-measurements of the

liabilities for the preferential dividends allocated to Pﬁzer and

Shionogi are included within other operating income.

Acquisition-related arrangements

As consideration for the acquisition of Shionogi’s interest in the

former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi

received the 10% equity stake in ViiV Healthcare and ViiV Healthcare

also agreed to pay additional future cash consideration to Shionogi,

contingent on the future sales performance of the products being

developed by that joint venture, principally dolutegravir. Under

IFRS 3 ‘Business combinations’, GSK was required to provide for

the estimated fair value of this contingent consideration at the time

of acquisition and is required to update the liability to the latest

estimate of fair value at each subsequent period end. The liability for

the contingent consideration recognised in the balance sheet at the

date of acquisition was £659 million. Subsequent re-measurements

are reﬂected within other operating income/expense and within

Adjusting items in the income statement in each period, and at

31 December 2018, the liability, which is discounted at 8.5%,

stood at £5,937 million, on a post-tax basis.

Cash payments to settle the contingent consideration are made

to Shionogi by ViiV Healthcare each quarter, based on the actual

sales performance of the relevant products in the previous quarter.

These payments reduce the balance sheet liability and hence are

not recorded in the income statement. The cash payments made

to Shionogi by ViiV Healthcare in 2018 were £793 million.

Because the liability is required to be recorded at the fair value of

estimated future payments, there is a signiﬁcant timing difference

between the charges that are recorded in the Total income statement

to reﬂect movements in the fair value of the liability and the actual

cash payments made to settle the liability.

Group ﬁnancial review continued

GSK Annual Report 2018

The cash payments are reﬂected in the cash ﬂow statement partly

in operating cash ﬂows and partly within investing activities. The tax

relief on these payments is reﬂected in the Group’s Adjusting items

as part of the tax charge. The part of each payment relating to the

original estimate of the fair value of the contingent consideration on

the acquisition of the Shionogi-ViiV Healthcare joint venture in 2012

of £659 million is reported within investing activities in the cash ﬂow

statement and the part of each payment relating to the increase in the

liability since the acquisition is reported within operating cash ﬂows.

Movements in contingent consideration payable to Shionogi were

as follows:

2018

£m

2017

£m

Contingent consideration at beginning of the year 5,542 5,304

Re-measurement through income statement 1,188 909

Cash payments: operating cash ﬂows (703) (587)

Cash payments: investing activities (90) (84)

Contingent consideration at end of the year 5,937 5,542

Of the contingent consideration payable (on a post-tax basis) to

Shionogi at 31 December 2018, £815 million (31 December

2017 – £724 million) is expected to be paid within one year.

Exit rights

Pﬁzer may request an IPO of ViiV Healthcare at any time and if

either GSK does not consent to such IPO or an offering is not

completed within nine months, Pﬁzer could require GSK to acquire

its shareholding. Under the original agreements, GSK had the

unconditional right, so long as it made no subsequent distribution to

its shareholders, to withhold its consent to the exercise of the Pﬁzer

put option and, as a result, in accordance with IFRS, GSK did not

recognise a liability for the put option on its balance sheet. However,

during Q1 2016, GSK notiﬁed Pﬁzer that it had irrevocably given up

this right and accordingly recognised the liability for the put option

on the Group’s balance sheet during Q1 2016 at an initial value of

£1,070 million. Consistent with this revised treatment, at the end of

Q1 2016 GSK also recognised liabilities for the future preferential

dividends anticipated to become payable to Pﬁzer and Shionogi on

the Group’s balance sheet.

The closing balances of the liabilities related to Pﬁzer’s shareholding

are as follows:

2018

£m

2017

£m

Pﬁzer put option 1,240 1,304

Pﬁzer preferential dividend 15 17

Under the original agreements, Shionogi could also have requested

GSK to acquire its shareholding in ViiV Healthcare in six month

windows commencing in 2017, 2020 and 2022. GSK had the

unconditional right, so long as it made no subsequent distribution

to its shareholders, to withhold its consent to the exercise of the

Shionogi put option and, as a result, GSK did not recognise a

liability for the put option on its balance sheet.

However, during Q1 2016, GSK notiﬁed Shionogi that it had

irrevocably given up this right and accordingly recognised the liability

for the put option on the Group’s balance sheet during Q1 2016 at

an initial value of £926 million. In Q4 2016, Shionogi irrevocably

agreed to waive its put option and as a result GSK de-recognised

the liability for this put option on the Group’s balance sheet directly

to equity. The value of the liability was £1,244 million when it was

de-recognised.

GSK also has a call option over Shionogi’s shareholding in ViiV

Healthcare, which under the original agreements was exercisable in

six month windows commencing in 2027, 2030 and 2032. GSK has

now irrevocably agreed to waive the ﬁrst two exercise windows, but

the last six month window in 2032 remains. As this call option is at

fair value, it has no value for accounting purposes.

Free cash ﬂow

With the introduction of the new R&D strategy in 2018, GSK has

revised its deﬁnition of free cash ﬂow, a non-IFRS measure, to

include proceeds from the sale of intangible assets. This balances

with the expenditure on purchases of intangible assets, which is

deducted in calculating free cash ﬂow, and makes the treatment

of intangible assets consistent with property, plant and equipment.

Free cash ﬂow is now deﬁned as the net cash inﬂow from operating

activities less capital expenditure on property, plant and equipment

and intangible assets, contingent consideration payments, net

interest, and dividends paid to non-controlling interests plus

proceeds from the sale of property, plant and equipment and

intangible assets, and dividends received from joint ventures and

associates. It is used by management for planning and reporting

purposes and in discussions with and presentations to investment

analysts and rating agencies. Free cash ﬂow growth is calculated on

a reported basis. A reconciliation of net cash inﬂow from operations

to free cash ﬂow is set out on page 56.

Free cash ﬂow conversion

Free cash ﬂow conversion is free cash ﬂow as a percentage of

earnings.

Working capital conversion cycle

The working capital conversion cycle is calculated as the number of

days sales outstanding plus days inventory outstanding, less days

purchases outstanding.

CER and AER growth

In order to illustrate underlying performance, it is the Group’s practice

to discuss its results in terms of constant exchange rate (CER)

growth. This represents growth calculated as if the exchange rates

used to determine the results of overseas companies in Sterling had

remained unchanged from those used in the comparative period.

CER% represents growth at constant exchange rates. £% or AER%

represents growth at actual exchange rates.

Reporting framework continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Our approach to tax

We understand our responsibility to pay an appropriate amount

of tax, and fully support efforts to ensure that companies are

appropriately transparent about how their tax affairs are managed.

Tax is an important element of the economic contribution we bring to

the countries in which we operate. We do not engage in artiﬁcial tax

arrangements – those without business or commercial substance.

We do not seek to avoid tax by the use of ‘tax havens’ or transactions

we would not fully disclose to a tax authority. We have a zero

tolerance approach to tax evasion and the facilitation of tax evasion.

We have a substantial business and employment presence in

many countries around the globe and we pay a signiﬁcant amount

of tax, including corporation and other business taxes, as well as

tax associated with our employees. At the same time, we have a

responsibility to our shareholders to be ﬁnancially efﬁcient and

deliver a sustainable tax rate. As part of this approach we look to

align our investment strategies to those countries where we already

have substantial economic activity, and where government policies

promote regimes which are attractive to business investment and

R&D activity, and are transparent in their intent and available to all

relevant tax payers. Examples include the UK Patent Box and

Research and Development Expenditure Credit.

Tax risk is managed through robust internal policies and processes to

ensure that we have alignment across our business and compliance

with tax legislation. Our Audit & Risk Committee and the Board are

responsible for approving our tax policies and risk management

approach.

We seek to maintain open, positive relationships with governments

and tax authorities worldwide and we welcome constructive debate

on taxation policy.

In 2018, the Group corporate tax charge was £754 million

(2017 – £1,356 million) on proﬁts before tax of £4,800 million

(2017 – £3,525 million) representing an effective tax rate of 15.7%

(2017 – 38.5%). We made cash tax payments of £1,326 million in

the year (2017 – £1,340 million). In addition to the taxes we pay on

our proﬁts, we pay duties, levies, transactional and employment

taxes.

Our Adjusted tax rate for 2018 was 19.0% (2017 – 21.0%). Subject

to any material changes in our product mix, or other material changes

in tax regulations or laws in the countries in which we operate, and

reﬂecting the ongoing impact of US tax reform, the Group’s effective

Adjusted tax rate for 2019 and the next several years is expected to

be around 19%.

The Group’s Total tax rate of 15.7% (2017 – 38.5%) for 2018 was

lower than the Adjusted tax rate as the Total tax charge includes the

effect of a reduced estimate of the 2017 impact of US tax reform,

following additional guidance being released by the IRS, and a

re-assessment of estimates of uncertain tax positions following the

settlement of a number of open issues with tax authorities.

In 2018, there has been an ongoing public focus on the tax affairs of

multinational companies as well as the continued focus on tax reform.

This has been driven by the OECD’s Base Erosion and Proﬁt Shifting

(BEPS) project and European Commission initiatives such as ﬁscal

state aid investigations. The outputs from the OECD BEPS projects

clariﬁed the important principle that tax should be paid on proﬁts

throughout the supply chain, where the proﬁt-making activity takes

place. GSK is subject to taxation throughout its supply chain.

GSK supports the BEPS proposals, in particular the implementation

of the OECD’s recommendations on ‘Country by Country Reporting’,

including the exchange of this data between tax authorities. This

data, validated against existing information held on taxpayers, will

support their ability to ensure that multinational groups pay an

appropriate amount of tax.

The detailed tax implications of Brexit are dependent on the outcome

of negotiations between the UK and EU, and are therefore currently

unknown. However, we continue to work closely with the ABPI and

BIA to analyse the potential implications for the industry in order to

highlight key focus areas for the Government as part of its Brexit

negotiations. The direct tax implications, in particular, are expected

to be limited for GSK while the indirect tax implications may be more

signiﬁcant, including potential customs duty costs and additional

transaction or administrative costs associated with managing import

and export obligations on the movement of goods between the UK

and the EU. Our approach to Brexit is set out on page 36.

Our Tax Strategy is set out in detail within the Public Policy positions

section of our website. Further details about our corporate tax

charges for the year are set out on page 161.

Group ﬁnancial review continued

GSK Annual Report 2018

In accordance with provision C.2.2 of the 2014 revision of the Code,

GSK has assessed the prospects of the Company over a longer

period than the 12 months required by the ‘Going Concern’

provision. The Directors conﬁrm that they have a reasonable

expectation that GSK will continue to operate and meets its liabilities,

as they fall due, over the next three years. The Directors’ assessment

has been made with reference to GSK’s current position and

prospects, our strategy, the Board’s risk appetite and GSK’s

principal risks and how these are managed, as detailed on pages

34 and 35 in the Strategic report. This assessment has been made

assuming no separation of the new Consumer Healthcare Joint

Venture during the three-year period under consideration.

The Board reviews our internal controls and risk management

policies and approves our governance structure and code of

conduct. It also appraises and approves major ﬁnancing, investment

and licensing decisions, and evaluates and monitors the performance

and prospects of GSK as a whole. The focus is largely on improving

our long-term ﬁnancial performance through delivery of our company

and three business strategies and aligned Innovation, Performance

and Trust priorities.

The Board reviews GSK’s strategy and makes signiﬁcant capital

investment decisions over a long-term time horizon, based on a

multi-year assessment of return on capital, the performance of the

company and three business units, and the market opportunity in

the pharmaceutical, vaccines and consumer sectors. This approach

is aligned to GSK’s model of achieving balanced growth by investing

in high quality, innovative products for patients, consumers and

healthcare providers. However, since many internal and external

parameters become increasingly unpredictable over longer time

horizons, GSK focuses its detailed, bottom-up Plan on a three-year

cycle. The Plan is reviewed at least annually by the Directors, who

approve business forecasts showing expected ﬁnancial impact. The

Directors believe that a three-year assessment period for the Viability

statement is most appropriate as it aligns with the Company’s well

established business planning processes that balance the long-term

nature of investments in the pharmaceutical, vaccines and consumer

sectors with an assessment of the period over which analysis of

near-term business performance is realistically visible.

The Plan has been stress tested in a series of robust operational

and principal risk downside scenarios as part of the Board’s review

on risk. These include the potential effects of Brexit, which are not

expected to be material, although there may be some short-term

disruption. The downside scenarios consider GSK’s cash ﬂows,

sustainability of dividends, funding strategy, insurance provision

and recovery as well as other key ﬁnancial ratios over the period.

These metrics have been subject to sensitivity analysis, which

involves ﬂexing a number of the main assumptions underlying the

forecasts both individually and in combination, along with mitigating

actions that could realistically be taken to avoid or reduce the impact

or occurrence of the underlying risk.

The following hypothetical downside scenarios have been

evaluated:

– Scenario 1: Business performance risks. These include key

performance risks, including lower sales from new products;

greater adverse impact from generic competition and other

competitive launches to other GSK products; as well as

possible supply and manufacturing challenges.

– Scenario 2: External and macroeconomic risks. This scenario

reﬂects incremental risks to the business driven by outside

factors, such as more intense competition, increased pricing

pressure in both the US and Europe as well as the potential

impact of material negative changes in the macro-economic

and healthcare environment.

– Scenario 3: Principal risks. This scenario includes a severe

assessment of the potential loss impact from the principal risks

related to patient safety, product quality, supply chain continuity

as well as anti-bribery and corruption and any consequent

regulatory actions or ﬁnes, all of which could fundamentally

threaten our operations. These risks are managed through

mitigating activities described on pages 241 to 250.

– Scenario 4: Put option exercise. This scenario evaluates the

additional funding requirements assuming the earliest potential

exercise of the outstanding put option held by our partner in the

HIV business.

The three-year review also makes certain assumptions about the

normal level of capital recycling likely to occur and considers whether

additional ﬁnancing facilities will be required and the respective level

of funding ﬂexibility and headroom.

The results of this stress testing show that certain combinations of

these hypothetical scenarios could increase funding demands on

GSK and require mitigating changes to the Group’s funding strategy.

However, in light of the liquidity available to the Group and based on

this analysis, the Directors have a reasonable expectation that, even

under these most severe stress tests, the Company will be able to

continue in operation and meet its liabilities as they fall due over the

three-year period of assessment.

Viability statement

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Group turnover

2018

£m

2017

£m

Growth

£%

Growth

CER%

Pharmaceuticals 17,269 17,276 – 2

Vaccines 5,894 5,160 14 16

Consumer Healthcare 7,658

7,7 5 0

(1) 2

Group turnover 30,821 30,186 2 5

Group turnover was up 2% AER, 5% CER to £30,821 million.

Pharmaceuticals sales were ﬂat at AER but up 2% CER, driven

primarily by the growth in HIV sales and the new Respiratory

products, Nucala and the Ellipta portfolio. This was partly offset by

lower sales of Seretide/Advair and Established Pharmaceuticals.

Overall Respiratory sales declined 1% AER but grew 1% CER.

Vaccines sales were up 14% AER, 16% CER, primarily driven by

sales of Shingrix in the US and growth in inﬂuenza and Hepatitis

vaccines, which also beneﬁted from a competitor supply shortage,

partly offset by declines in some Established Vaccines.

Consumer Healthcare sales declined 1% AER but grew 2% CER

with broad-based growth in Oral health and Wellness partly offset by

increased competitive pressures in Europe, the divestments of some

smaller brands, including Horlicks and MaxiNutrition in the UK, as

well as the impact of the implementation of the GST in India.

Group turnover by geographic region

2018

£m

2017

£m

Growth

£%

Growth

CER%

US 11,982 11,263 6 9

Europe 7,973 7,943 – (1)

International 10,866 10,980 (1) 4

30,821 30,186 2 5

US sales grew 6% AER, 9% CER, driven by the growth of Shingrix

and Hepatitis vaccines as well as strong performances from HIV and

Benlysta, offset by declines in Established Pharmaceuticals and

Respiratory.

Europe sales were ﬂat at AER, but declined 1% CER, as declines

in Established Pharmaceuticals, older HIV products, Meningitis

vaccines and Consumer Healthcare more than offset growth from

Tivicay and Triumeq and the new Respiratory products.

In International, sales declined 1% AER, but grew 4% CER,

reﬂecting strong growth in Tivicay, Triumeq and the Respiratory

portfolio. Sales in Emerging Markets declined 2% AER, but grew

4% CER.

The total results of the Group are set out below.

2018 2017 Growth

% of % of

£m turnover £m turnover £% CER%

Turnover 30,821 100 30,186 100 2 5

Cost of sales (10,241) (33.2) (10,342) (34.3) (1) –

Selling, general and

administration (9,915) (32.2) (9,672) (32.0) 3 5

Research and

development (3,893) (12.6) (4,476) (14.8) (13) (12)

Royalty income 299 1.0 356 1.1 (16) (17)

Other operating

income/(expense) (1,588) (5.2) (1,965) (6.5)

Operating proﬁt 5,483 17. 8 4,087 13.5 34 43

Net ﬁnance costs (717) (669)

Proﬁt on disposal of

interest in associates 3 94

Share of after tax

proﬁts of associates

and joint ventures

31 13

Proﬁt before taxation 4,800 3,525 36 46

Taxation (754) (1,356)

Proﬁt after taxation

for the year

4,046 2,169 87 100

Proﬁt attributable to

shareholders 3,623 1,532

Earnings per share (p) 73.7 31.4 >100 >100

Earnings per ADS

(US$) 1.96 0.82

Total results

Turnover (£bn)

£30.8bn

Total operating proﬁt (£bn)

£5.5bn

AER growth

CER growth

AER growth

34%

CER growth

43%

0 5 10 15 20 25 30

2018

2017

2016

30.8

30.2

27.9

0 2 4 6 8 10 12

2018

2017

2016

5.5

4.1

2.6

Group ﬁnancial review continued

GSK Annual Report 2018

Relvar/Breo Ellipta sales grew 8% AER, 10% CER, to £1,089

million, primarily driven by growth in Europe, which was up 25%

AER, 24% CER to £253 million, and in International, which was up

26% AER, 31% CER to £255 million. In the US, Breo Ellipta sales

declined 3% AER, 1% CER, with volume growth of 27%, reﬂecting

continued market share growth, offset by the combined impact of

prior period payer rebate adjustments and increased competitive

pricing pressure. Anoro Ellipta sales grew 39% AER, 42% CER to

£476 million, driven primarily by share gains in the US. All of our

Ellipta products, Breo, Anoro, Incruse, Arnuity and Trelegy, continued

to grow market share in the US during the year.

Sales of New Respiratory products, comprising Ellipta products and

Nucala, grew 35% AER, 38% CER to £2,612 million.

Seretide/Advair sales declined 23% AER, 21% CER to £2,422

million. Sales of Advair in the US declined 32% AER, 30% CER (9%

volume decline and 21% negative impact of price) primarily reﬂecting

increased competitive pricing pressures. In Europe, Seretide sales

were down 19% AER, 20% CER to £599 million (13% volume

decline and a 7% price decline). This reﬂected continued competition

from generic products and the transition of the Respiratory portfolio

to newer products. In International, sales of Seretide were down 7%

AER, 4% CER, to £726 million (5% volume decline and 1% positive

impact of price), with declines in markets with generic competition

partly offset by growth from other developing markets.

HIV

HIV sales increased 9% AER, 11% CER to £4,722 million in the

year, with the US up 8% AER, 10% CER, Europe up 7% AER,

6% CER and International up 14% AER, 20% CER.

The growth was driven by the increase in market share over the

year in our dolutegravir products which grew 14% AER, 16% CER.

This was partly offset by the decline in our established portfolio,

particularly the impact of generic competition to Epzicom/Kivexa in

Europe. Triumeq, Tivicay and Juluca (which was approved in the US

in November 2017), recorded sales of £2,648 million, £1,639 million

and £133 million, respectively, in the year. Epzicom/Kivexa sales

declined 50% AER, 48% CER to £117 million.

Immuno-inﬂammation

Sales in the year were up 25% AER, 28% CER, primarily driven by

Benlysta, which grew 26% AER, 29% CER to £473 million. In the

US, Benlysta grew 24% AER, 27% CER to £420 million, beneﬁting

from the launch of the sub-cutaneous formulation in the third quarter.

Established Pharmaceuticals

Sales of Established Pharmaceuticals were £5,147 million, down

7% AER, 4% CER, reﬂecting our efforts to maximise the value from

this portfolio but also the beneﬁt of certain post-divestment contract

manufacturing sales and the ﬁrst instalment of a 12-month Relenza

supply contract in Europe.

The Avodart franchise was down 7% AER, 5% CER to £572 million,

primarily due to the loss of exclusivity in Europe, with the US impact

now broadly annualised. Coreg franchise sales declined 63% AER,

63% CER following a generic Coreg CR entrant to the US market in

Q4 2017. Lamictal sales declined 5% AER, 3% CER to £617 million.

Pharmaceuticals turnover

2018

£m

2017

£m

Growth

£%

Growth

CER%

Respiratory 6,928 6,991 (1) 1

HIV 4,722 4,350 9 11

Immuno-inﬂammation 472 377 25 28

Established Pharmaceuticals 5,147 5,558 (7) (4)

17,269 17,276 – 2

Pharmaceuticals turnover in the year was £17,269 million, ﬂat at AER,

but up 2% CER, driven primarily by the growth in HIV sales, which

were up 9% AER, 11% CER, to £4,722 million, reﬂecting share

growth over the year in the dolutegravir portfolio: Triumeq, Tivicay

and Juluca. Respiratory sales declined 1% AER, but grew 1% CER,

to £6,928 million, with growth from our Ellipta portfolio and Nucala

partly offset by lower sales of Seretide/Advair. Sales of Established

Pharmaceuticals were down 7% AER, 4% CER.

In the US, sales declined 2% AER but grew 1% at CER, with growth

in the HIV portfolio and Benlysta offsetting declines in Established

Pharmaceuticals and Respiratory. In Europe, sales grew 2% AER,

1% CER, with growth in the Respiratory portfolio offsetting the

continued impact of generic competition to Epzicom and Avodart.

International was ﬂat at AER but grew 5% CER, with growth driven

by HIV and the new Respiratory portfolio.

Respiratory

Total Respiratory sales declined 1% AER, but grew 1% CER, with

the US down 5% AER, 3% CER. In Europe, sales grew 5% AER,

4% CER and International grew 3% AER, 7% CER. Growth from

our Ellipta portfolio and Nucala was partly offset by lower sales of

Seretide/Advair.

Sales of Nucala were £563 million in the year, up 64% AER, 66%

CER, continuing to beneﬁt from the global rollout of the product. US

sales of Nucala grew 44% AER, 48% CER to £341 million, despite

increased competition, beneﬁting from continued market expansion.

Sales of Ellipta products were up 29% AER, 32% CER, driven by

continued growth in all regions. In the US, sales grew 24% AER,

27% CER, reﬂecting further market share gains, partly offset by the

impact of continued competitive pricing pressures, particularly for

ICS/LABAs. In Europe, sales grew 42% AER, 41% CER. Sales of

Trelegy Ellipta, our new once-daily closed triple product, contributed

£156 million to total Ellipta sales, beneﬁting from an expanded label

in the US.

Turnover (£bn)

£17. 3 bn

56% of Group turnover

AER growth

CER growth

0 5 10 15 20

2018

2017

2016

17.3

16.1

Pharmaceuticals

Total results continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Inﬂuenza

Fluarix/FluLaval sales grew 7% AER, 10% CER to £523 million,

driven by strong sales execution in the US and improved sales in

Europe, partly offset by increased price competition in the US.

Shingles

Shingrix recorded sales of £784 million, primarily in the US and

Canada, driven by demand and share gains. US sales beneﬁted

from market growth in new patient populations now covered by

immunisation recommendations, and Shingrix has now achieved

a 98% market share.

Established Vaccines

Sales of our DTPa-containing vaccines (Infanrix, Pediarix and

Boostrix) were down 8% AER, 7% CER. Infanrix, Pediarix sales

were down 8% AER, 7% CER to £680 million, reﬂecting increased

competitive pressures in Europe as well as unfavourable year-on-year

CDC stockpile movements in the US, partly offset by stronger

demand in International. Boostrix sales declined 8% AER, 7% CER

to £517 million, primarily driven by the return to the market of a

competitor in Europe and lower demand in International.

Hepatitis vaccines grew 17% AER, 19% CER to £808 million,

beneﬁting from stronger demand in the US and Europe as well as

a competitor supply shortage in the US.

Rotarix sales were down 1% AER but up 1% CER to £521 million,

reﬂecting higher demand in Europe, partly offset by lower demand

in International.

Synﬂorix sales declined 17% AER, 17% CER to £424 million,

primarily impacted by lower pricing and demand in Emerging

Markets.

Turnover (£bn)

£5.9bn

19% of Group turnover

AER growth

14%

CER growth

16%

0 1 2 3 4 5

2018

2017

2016

5.9

5.2

4.6

Vaccines

Vaccines turnover

2018

£m

2017

£m

Growth

£%

Growth

CER%

Meningitis

881 890 (1) 2

Inﬂuenza 523 488 7 10

Shingles 784 22 >100 >100

Established Vaccines

3,706 3,760 (1) –

5,894 5,160 14 16

Vaccines turnover grew 14% AER, 16% CER to £5,894 million,

primarily driven by growth in sales of Shingrix, Hepatitis vaccines,

which also beneﬁted from a competitor supply shortage and higher

sales of inﬂuenza products. This was partly offset by lower sales of

DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) due to

increased competitive pressures, particularly in Europe, and

unfavourable year-on-year CDC stockpile movements in the US,

together with lower Synﬂorix sales, reﬂecting lower pricing and

demand in Emerging Markets.

Meningitis

Meningitis sales were down 1% AER but up 2% CER to £881

million. Bexsero sales grew 5% AER, 9% CER driven by demand

and share gains in the US, together with continued growth in

private market sales in International, partly offset by the completion

of vaccination of catch-up cohorts in certain markets in Europe.

Menveo sales declined 15% AER, 12% CER, primarily reﬂecting

supply constraints in Europe and International as well as a strong

comparator in 2017 and unfavourable year-on-year CDC stockpile

movements in the US, partly offset by demand and share gains in

the US.

Total results continued

Group ﬁnancial review continued

GSK Annual Report 2018

Wellness

Wellness sales declined 2% AER but grew 1% CER to £3,940

million. Respiratory sales grew in low single digits, led by Theraﬂu

supported by a strong cold and ﬂu season earlier in the year as well

as the Theraﬂu PowerPods launch in the US in the second half of the

year. Otrivin grew in mid single digits, beneﬁting from new variants,

and Flonase returned to growth following a weaker allergy season

earlier this year.

Pain relief sales were ﬂat as low single-digit growth in Voltaren and

double-digit growth in Fenbid were offset by a decline in Panadol

sales due to a change in the route-to-market model in South East

Asia and the discontinuation of slow-release Panadol products in

the Nordic countries.

Oral health

Oral health sales grew 1% AER, 4% CER to £2,496 million, as

increased competitive pressures in Europe were offset by double-

digit growth from Sensodyne in a number of International markets,

including India and Turkey, and strong single-digit growth in the US

driven by Sensodyne Rapid. Denture care grew in high single digits

through the launch of Corega Max in Russia and Brazil, and Gum

health delivered double-digit growth with continued strong

parodontax performance in the US. Growth was also partly

impacted by de-stocking in International.

Nutrition

Nutrition sales declined 5% AER but grew 1% CER to £643 million.

Our Nutrition business in India performed strongly across the

product portfolio including new innovations such as Horlicks

Protein+ which was launched earlier in the year. The impact of

divestments and India GST implementation on growth was

approximately eight percentage points.

Skin health

Skin health sales were down 4% AER, 1% CER to £579 million,

largely driven by a decline in Physiogel and the divestment of several

small non-strategic brands in the US, which had a negative impact

on growth of one percentage point.

Consumer Healthcare turnover

2018

£m

2017

£m

Growth

£%

Growth

CER%

Wellness 3,940 4,001 (2) 1

Oral health 2,496 2,466 1 4

Nutrition 643 680 (5) 1

Skin health 579 603 (4) (1)

7,658 7,7 5 0 (1) 2

2018

£m

2017

£m

Growth

£%

Growth

CER%

US 1,828 1,826 – 2

Europe 2,340 2,360 (1) (2)

International 3,490 3,564 (2) 4

7,658 7,7 5 0 (1) 2

Consumer Healthcare sales in the year declined 1% AER but grew

2% CER to £7,658 million, with broad-based growth in Oral health

and Wellness partly offset by a decline in Panadol and lower sales of

smaller brands. International markets performed strongly, particularly

India and Brazil, whilst Europe was impacted by intensifying

competitive pressure in the second half of 2018.

The aggregate impact from generic competition on Transderm Scop

in the US, the divestment of Horlicks and MaxiNutrition in the UK and

other small non-strategic brands and implementation of the GST in

India was to reduce overall sales growth by approximately one

percentage point.

Turnover (£bn)

£7.7 bn

25% of Group turnover

AER growth

( 1)%

CER growth

0 2 4 6 8 10

2018

2017

2016

7.7

7.8

7.2

Consumer Healthcare

Total results continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Cost of sales

Cost of sales as a percentage of turnover was 33.2%, down 1.0

percentage points at AER and 1.4 percentage points in CER terms

compared with 2017. This primarily reﬂected a favourable

comparison with £363 million of non-cash restructuring costs from

the write-downs of assets in 2017 related to the decision to withdraw

Tanzeum. The year also beneﬁted from a more favourable product

mix in Vaccines and Consumer Healthcare, particularly the launch

of Shingrix, together with a further contribution from integration and

restructuring savings. This was partly offset by continued adverse

pricing pressure in Pharmaceuticals, particularly in Respiratory, and

in Established Vaccines, together with increased input costs and an

adverse comparison with the beneﬁt of a settlement for lost third-

party supply volume in 2017 in Vaccines.

Selling, general and administration

SG&A costs as a percentage of turnover were 32.2%, 0.1

percentage points higher than in 2017 at both AER and CER,

reﬂecting growth of 3% AER, 5% CER. The increase in SG&A

costs primarily reﬂected higher restructuring costs, and investment

in promotional product support, particularly for new launches in

Respiratory, HIV and Vaccines, partly offset by tight control of

ongoing costs, particularly in non-promotional and back ofﬁce

spending, across all three businesses.

Research and development

R&D expenditure was £3,893 million (12.6% of turnover), 13% AER,

12% CER lower than in 2017. This reﬂected reduced restructuring

costs primarily due to the comparison with the provision for

obligations as a result of the decision to withdraw Tanzeum in 2017

and lower intangible impairments, a favourable comparison with the

impact of the Priority Review Voucher purchased and utilised in

H1 2017 and the beneﬁt of our R&D prioritisation initiatives started

in the second half of last year. This was partly offset by increased

investment in the progression of a number of mid and late-stage

programmes, particularly in Oncology, as well as provisions for the

costs payable to a third party relating to the use of a Priority Review

Voucher awarded in 2018.

2018

2017

(revised) Growth

£m £m £% CER%

Discovery 892 1,007 (11) (10)

Development 1,332 1,423 (6) (5)

Facilities and central support functions 600 576 4 6

Total Pharmaceuticals 2,824 3,006 (6) (5)

Vaccines R&D 673 621 8 8

Consumer Healthcare R&D 238 235 1 3

3,735 3,862 (3) (2)

Items reconciling Adjusted

R&D to Total R&D 158 614

Research and development 3,893 4,476 (13) (12)

The decline in Discovery reﬂected the transfer of certain Oncology

assets to the Development phase. The decline in Development

primarily reﬂects the comparison with the impact of the utilisation

of the Priority Review Voucher in 2017 and the beneﬁt of the

prioritisation initiatives started in the second half of 2017. This was

partly offset by increased investment in the progression of a number

of mid and late-stage programmes, particularly in Oncology, and the

provision for costs payable to a third party relating to the use of a

Priority Review Voucher awarded in 2018. The growth in Technology,

facilities and functional support costs primarily reﬂected increased

investments in data analytics.

Royalty income

Royalty income was £299 million (2017 – £356 million), down 16%

AER and 17% CER, the reduction primarily reﬂecting the patent

expiry of Cialis, partly offset by an increase in the Gardasil royalty.

Other operating income/(expense)

Other operating expense of £1,588 million (2017 – £1,965 million)

primarily reﬂected £1,846 million (2017 – £1,517 million) of

accounting charges arising from the re-measurement of our

contingent consideration liabilities related to the acquisitions of

the former Shionogi-ViiV Healthcare joint venture and the former

Novartis Vaccines business, the value attributable to the Consumer

Healthcare Joint Venture put option previously held by Novartis and

the liabilities for the Pﬁzer put option and Pﬁzer and Shionogi

preferential dividends in ViiV Healthcare. The 2017 charges included

the impact of US tax reform, which increased the fair value of these

liabilities by £666 million. This was partly offset by the proﬁt on a

number of asset disposals, including tapinarof, as well as a gain

arising from the increase in value of the shares in Hindustan Unilever

Limited to be received on the disposal of Horlicks and other

Consumer Healthcare brands, net of disposal costs.

The accounting charges were driven primarily by a £758 million

re-measurement of the contingent consideration liability due to

Shionogi, largely related to the regular updates of exchange rate

assumptions to period end rates and sales forecasts following a

number of studies including the GEMINI study completed in

Q2 2018, together with a £430 million unwind of the discount. In

addition, a net charge of £658 million reﬂected the re-measurement

of the valuation of the Consumer Healthcare put option to reﬂect the

price agreed with Novartis to acquire its shareholding, together with

movements in exchange rates, largely offset by gains on hedging

contracts.

Total results continued

Group ﬁnancial review continued

GSK Annual Report 2018

Operating proﬁt

Total operating proﬁt was £5,483 million in 2018 compared with

£4,087 million in 2017. The increase in operating proﬁt primarily

reﬂected a favourable comparison with charges of £666 million

in 2017 arising from the impact of US tax reform on the valuation

of the Consumer Healthcare and HIV businesses and reduced

restructuring costs and asset impairments. In addition, there was

a contribution from sales growth, a more favourable mix, primarily in

Vaccines and Consumer Healthcare, beneﬁts from the prioritisation

of R&D expenditure and comparison with the impact of the Priority

Review Voucher utilised and expensed in 2017, alongside continued

tight control of ongoing costs. This was partly offset by the increased

impact of accounting charges related to the re-measurement of the

liabilities for contingent consideration, put options and preferential

dividends, continuing pricing pressure, particularly in Respiratory,

increased input costs, the comparison with the beneﬁt in Q2 2017

of a settlement for lost third-party supply volume in Vaccines,

investments in new product support, particularly for launches in

Respiratory, HIV and Vaccines and a reduction in royalty income.

Contingent consideration cash payments which are made to Shionogi

and other companies reduce our balance sheet liability and hence are

not recorded in the income statement. Total contingent consideration

cash payments in 2018 amounted to £1,137 million (2017 – £685

million). This included a cash milestone paid to Novartis of $450

million (£317 million) as well as cash payments made to Shionogi

of £793 million (2017 – £671 million).

Net ﬁnance costs

Finance income

2018

£m

2017

£m

Interest and other income 81 63

Fair value movements – 2

81 65

Finance expense

Interest expense (717) (720)

Unwinding of discounts on liabilities (15) (16)

Remeasurements and fair value movements 3 (4)

Other ﬁnance expense (69) 6

(798) (734)

Net ﬁnance costs were £717 million compared with £669 million in

2017. This reﬂected higher debt levels following our acquisition from

Novartis of its stake in the Consumer Healthcare Joint Venture in

June 2018 as well as additional interest on tax arising from a historic

tax settlement, recorded in Q3 2018, and an adverse comparison

with a provision release of £24 million in Q4 2017 (both reﬂected

in other ﬁnance expense). This was partly offset by the beneﬁt of a

one-off accounting adjustment to the amortisation of long-term bond

interest charges of £20 million in Q1 2018 (reported through interest

expense), the beneﬁt from older bonds being reﬁnanced at lower

interest rates and the translation impact of exchange rate movements

on the reported Sterling costs of foreign currency denominated

interest-bearing instruments.

Proﬁt on disposal of associates

The proﬁt on disposal of associates was £3 million

(2017 – £94 million).

Share of after tax proﬁts of associates and joint ventures

The share of proﬁts of associates and joint ventures was £31 million

(2017 – £13 million), primarily arising from our investment in Innoviva.

Proﬁt before taxation

Taking account of net ﬁnance costs the proﬁt on disposal of

associates and the share of proﬁts of associates, proﬁt before

taxation was £4,800 million compared with £3,525 million in 2017.

Taxation

2018

£m

2017

£m

UK current year charge 234 199

Rest of world current year charge 1,426 1,928

Charge in respect of prior periods (492) (508)

Total current taxation 1,168 1,619

Total deferred taxation (414) (263)

Taxation on total proﬁts 754 1,356

The charge of £754 million represented an effective tax rate on

Total results of 15.7% (2017 – 38.5%) and reﬂected the different

tax effects of the various Adjusting items. This includes the effect

of a reduced estimate of the 2017 impact of US tax reform of £125

million, following additional guidance being released by the IRS

and a re-assessment of estimates of uncertain tax positions following

the settlement of a number of open issues with tax authorities. The

reduction from the prior year effective tax rate on Total proﬁts was

driven primarily by a favourable comparison with the impact of US

tax reform, which resulted in a number of charges in Q4 2017.

Non-controlling interests

The allocation of earnings to non-controlling interests amounted to

£423 million (2017 – £637 million). The reduction was primarily due

to the lower allocation of Consumer Healthcare proﬁts of £117 million

(2017 – £415 million) following the buyout of Novartis’ interest. This

was partly offset by an increased allocation of ViiV Healthcare proﬁts

and higher net proﬁts in some of our other entities with non-

controlling interests.

Earnings per share

Total earnings per share was 73.7p, compared with 31.4p in 2017.

The increase in earnings per share primarily reﬂected a favourable

comparison with charges in 2017 arising from the impact of US

tax reform, reduced restructuring costs and asset impairments,

increased operating proﬁts, a lower tax rate and a reduced non-

controlling interest allocation of Consumer Healthcare proﬁts, partly

offset by higher transaction-related charges arising from increases in

the valuation of the liabilities for contingent consideration, put options

and preferential dividends.

Dividends

The Board declared four interim dividends resulting in a total dividend

for the year of 80 pence, in line with the dividend declared for 2017.

See Note 16 to the ﬁnancial statements, ‘Dividends’.

Total results continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Adjusted results reconciliation

31 December 2018

Total

results

£m

Intangible

asset

amortisation

£m

Intangible

asset

impairment

£m

Major

restructuring

£m

Transaction

-related

£m

Divestments,

signiﬁcant

legal and

other items

£m

Adjusted

results

£m

Turnover 30,821 30,821

Cost of sales (10,241) 536 69 443 15 – (9,178)

Gross proﬁt 20,580 536 69 443 15 – 21,643

Selling, general and administration (9,915) 2 315 98 38 (9,462)

Research and development (3,893) 44 45 49 20 (3,735)

Royalty income 299 299

Other operating income/(expense) (1,588) 2 1,864 (278) –

Operating proﬁt 5,483 580 116 809 1,977 (220) 8,745

Net ﬁnance costs (717) 4 (3) 18 (698)

Proﬁt on disposal of associates 3 (3) –

Share of after tax proﬁts of associates and joint ventures 31 31

Proﬁt before taxation 4,800 580 116 813 1,974 (205) 8,078

Taxation (754) (109) (19) (170) (239) (244) (1,535)

Tax rate 15.7% 19.0%

Proﬁt after taxation 4,046 471 97 643 1,735 (449) 6,543

Proﬁt attributable to non-controlling interests 423 251 674

Proﬁt attributable to shareholders 3,623 471 97 643 1,484 (449) 5,869

Earnings per share 73.7p 9.6p 2.0p 13.1p 30.2p (9.2)p 119.4p

Weighted average number of shares (millions) 4,914 4,914

Adjusted results reconciliation

31 December 2017

Total

results

£m

Intangible

asset

amortisation

£m

Intangible

asset

impairment

£m

Major

restructuring

£m

Transaction

-related

£m

Divestments,

signiﬁcant

legal and

other items

£m

US tax

reform

£m

Adjusted

results

£m

Turnover 30,186 30,186

Cost of sales (10,342) 546 400 545 80 – (8,771)

Gross proﬁt 19,844 546 400 545 80 – 21,415

Selling, general and administration (9,672) 248 83 (9,341)

Research and development (4,476) 45 288 263 18 (3,862)

Royalty income 356 356

Other operating income/(expense) (1,965) 1,519 (220) 666 –

Operating proﬁt 4,087 591 688 1,056 1,599 (119) 666 8,568

Net ﬁnance costs (669) 4 8 (657)

Proﬁt on disposal of associates 94 (94) –

Share of after tax proﬁts of associates and joint ventures 13 13

Proﬁt before taxation 3,525 591 688 1,060 1,599 (205) 666 7,924

Taxation (1,356) (134) (176) (209) (619) (251) 1,078 (1,667)

Tax rate 38.5% 21.0%

Proﬁt after taxation 2,169 457 512 851 980 (456) 1,744 6,257

Proﬁt attributable to non-controlling interests 637 42 114 793

Proﬁt attributable to shareholders 1,532 457 512 851 938 (456) 1,630 5,464

Earnings per share 31.4p 9.4p 10.5p 17.4p 19.2p (9.4)p 33.3p 111.8p

Weighted average number of shares (millions) 4,886 4,886

Adjusting items

Group ﬁnancial review continued

GSK Annual Report 2018

Intangible asset amortisation and impairment

Intangible asset amortisation was £580 million compared with

£591 million in 2017. Intangible asset impairments related to

commercial and Pharmaceuticals R&D development assets were

£116 million (2017 – £688 million). The 2017 charge included

impairments related to the withdrawal of Tanzeum and a number

of other commercial and Pharmaceuticals R&D development

assets. These charges were non-cash items.

Major restructuring and integration

Within the Pharmaceuticals sector, the highly regulated manufacturing

operations and supply chains and long lifecycle of the business mean

that restructuring programmes, particularly those that involve the

rationalisation or closure of manufacturing or R&D sites, are likely

to take several years to complete.

Major restructuring costs are those related to speciﬁc Board-

approved Major restructuring programmes. Major restructuring

programmes, including integration costs following material

acquisitions, are those that are structural and are of a signiﬁcant

scale where the costs of individual or related projects exceed

£25 million. Other ordinary course smaller scale restructuring

costs are retained within Total and Adjusted results.

The Board approved a new Major restructuring programme in July

2018, which is designed to signiﬁcantly improve the competitiveness

and efﬁciency of our cost base with savings delivered primarily

through supply chain optimisation and reductions in administrative

costs.

Total Major restructuring charges incurred in 2018 were £809 million

(2017 – £1,056 million), analysed as follows:

2018 2017

Cash

£m

Non-

cash

£m

Total

£m

Cash

£m

Non-

cash

£m

Total

£m

Combined

restructuring

and integration

programme 330 110 440 531 525 1,056

2018 major

restructuring

programme 279 90 369 – – –

609 200 809 531 525 1,056

Non-cash charges arising under the existing Combined restructuring

and integration programme primarily related to the write-down of

assets as part of the announced plans to reduce the manufacturing

network. Cash charges arose from restructuring in the Europe and

International Pharmaceuticals commercial operations and some

manufacturing sites. Non-cash charges under the 2018 major

restructuring programme primarily related to announced plans to

restructure the manufacturing network and cash charges to date

under the 2018 major restructuring programme primarily related to

restructuring in the US Pharmaceuticals commercial operation, as

well as some manufacturing sites and central functions.

Total cash payments for the two programmes made in the year were

£537 million (2017 – £555 million).

The analysis of major restructuring charges by business was as

follows:

2018

£m

2017

£m

Pharmaceuticals 563 682

Vaccines 104 177

Consumer Healthcare 72 137

739 996

Corporate & central functions 70 60

Total Major restructuring charges 809 1,056

The analysis of Major restructuring charges by Income statement line

was as follows:

2018

£m

2017

£m

Cost of sales 443 545

Selling, general and administration 315 248

Research and development 49 263

Other operating income/(expense) 2 -

Total Major restructuring charges 809 1,056

The Combined restructuring and integration programme delivered

incremental annual cost savings in the year of £0.3 billion. Given its

relatively recent launch, the beneﬁt delivery this year from the 2018

major restructuring programme was not material.

The analysis of incremental annual cost savings in the year by Income

statement line was as follows:

2018

£bn

2017

£bn

Cost of sales 0.2 0.2

Selling, general and administration 0.1 0.4

Research and development - 0.1

0.3 0.7

Total cash charges for the Combined restructuring and integration

programme are now expected to be approximately £4.1 billion with

non-cash charges up to £1.6 billion. The programme has now

delivered approximately £3.9 billion of annual savings, including an

estimated currency beneﬁt of £0.3 billion. The programme is now

expected to deliver by 2020 total annual savings of £4.4 billion

on a constant currency basis, including an estimated beneﬁt of £0.4

billion from currency on the basis of 2018 average exchange rates.

The 2018 major restructuring programme is expected to cost

£1.7 billion over the period to 2021, with cash costs of £0.8 billion

and non-cash costs of £0.9 billion, and is expected to deliver

annual savings of around £400 million by 2021 (at 2018 rates).

These savings will be fully re-invested to help fund targeted

increases in R&D and commercial support of new products.

Adjusting items continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Transaction-related adjustments

Transaction-related adjustments resulted in a net charge of £1,977

million (2017 – £1,599 million). This primarily reﬂected £1,846 million

of accounting charges for the re-measurement of the contingent

consideration liabilities related to our acquisitions of the former

Shionogi-ViiV Healthcare joint venture and the former Novartis

Vaccines business, the value attributable to the Consumer

Healthcare Joint Venture put option held by Novartis and the

liabilities for the Pﬁzer put option and Pﬁzer and Shionogi

preferential dividends in ViiV Healthcare.

Charge/(credit)

2018

£m

2017

£m

Consumer Healthcare Joint Venture put option 658 986

Contingent consideration on former Shionogi-ViiV

Healthcare Joint Venture (including Shionogi

preferential dividends) 1,188 556

ViiV Healthcare put options and Pﬁzer preferential

dividends (58) (126)

Contingent consideration on former Novartis

Vaccines business 58 101

Other adjustments 131 82

Total transaction-related charges 1,977 1,599

A net charge of £658 million relating to the Consumer Healthcare

Joint Venture represented the re-measurement of the valuation of

the Consumer Healthcare put option to the agreed valuation of

$13 billion (£9.2 billion on signing), together with an increase due

to movements in exchange rates, which was largely offset by gains

on hedging contracts.

The £1,188 million charge relating to the contingent consideration

for the former Shionogi-ViiV Healthcare Joint Venture represented a

£758 million increase in the valuation of the contingent consideration

due to Shionogi, primarily as a result of updated exchange rate

assumptions and sales forecasts following the GEMINI study

completed in Q2 2018, together with a £430 million unwind of

the discount.

Other adjustments included a £51 million charge reﬂecting the

release of an indemnity asset relating to the tax treatment of

inventory acquired as part of the Novartis Vaccines acquisition,

with a corresponding offset in tax, as well as acquisition costs

relating to our acquisition of Tesaro completed in January 2019

and the announced agreement with Pﬁzer to combine our

consumer healthcare businesses.

Contingent consideration cash payments which are made to

Shionogi and other companies reduce the balance sheet liability and

hence are not recorded in the income statement. Total contingent

consideration cash payments in the year amounted to £1,137 million

(2017 – £685 million). This included a cash milestone paid to

Novartis of $450 million (£317 million) as well as cash payments

made by ViiV Healthcare to Shionogi in relation to its contingent

consideration liability (including preferential dividends) which

amounted to £793 million (2017 – £671 million).

An explanation of the accounting for the non-controlling interests

in ViiV Healthcare is set out on page 41.

Divestments, signiﬁcant legal charges and other items

Divestments and other items included the proﬁt on a number of

asset disposals, including tapinarof, a gain arising from the increase

in value of the shares in Hindustan Unilever Limited to be received

on the disposal of Horlicks and other Consumer Healthcare brands,

which is expected to complete by the end of 2019, net of disposal

costs, as well as equity investment impairments and certain other

adjusting items. A charge of £33 million (2017 – £68 million) for

signiﬁcant legal matters included the beneﬁt of the settlement

of existing matters as well as provisions for ongoing litigation.

Signiﬁcant legal cash payments were £39 million

(2017 – £192 million).

Adjusting items continued

Group ﬁnancial review continued

GSK Annual Report 2018

GSK uses a number of adjusted, non-IFRS, measures to report the

performance of its business. Adjusted results and other non-IFRS

measures may be considered in addition to, but not as a substitute

for or superior to, information presented in accordance with IFRS.

Adjusted results and other non-IFRS measures are deﬁned on

pages 40 to 42.

Cost of sales

2018 2017 Growth

£m

% of

turnover £m

% of

turnover £% CER%

Cost of sales (9,178) (29.8) (8,771) (29.1) 5 6

Cost of sales as a percentage of turnover was 29.8%, up 0.7

percentage points at AER, and 0.4 percentage points in CER terms

compared with 2017. This primarily reﬂected continued adverse

pricing pressure in Pharmaceuticals, particularly in Respiratory, and

Established Vaccines, as well as increased input costs and an

adverse comparison with the beneﬁt of a settlement for lost third-

party supply volume in 2017 in Vaccines. This was partly offset by a

more favourable product mix in Vaccines and Consumer Healthcare,

particularly with the launch of Shingrix, as well as a further

contribution from integration and restructuring savings in all three

businesses.

Selling, general and administration

2018 2017 Growth

£m

% of

turnover £m

% of

turnover £% CER%

Selling, general and

administration (9,462) (30.7) (9,341) (30.9) 1 4

SG&A costs as a percentage of turnover were 30.7%, 0.2

percentage points lower at AER than in 2017 and 0.3 percentage

points lower on a CER basis. This reﬂected an increase of 1% AER,

4% CER, primarily resulting from increased investment in

promotional product support, particularly for new launches in

Respiratory, HIV and Vaccines, partly offset by tight control of

ongoing costs, particularly in non-promotional and back ofﬁce

spending, across all three businesses.

Research and development

2018 2017 Growth

£m

% of

turnover £m

% of

turnover £% CER%

Research and

development (3,735) (12.1) (3,862) (12.8) (3) (2)

R&D expenditure was £3,735 million (12.1% of turnover), 3% AER,

2% CER lower than 2017, primarily reﬂecting the favourable

comparison with the impact of the Priority Review Voucher

purchased and utilised in 2017 and the beneﬁt of the prioritisation

initiatives started in the second half of 2017. This was partly offset

by increased investment in the progression of a number of mid and

late-stage programmes, particularly in Oncology, as well as the

provision for the costs payable to a third party relating to the use

of a Priority Review Voucher awarded and utilised in 2018.

2018

2017

(revised) Growth

£m £m £% CER%

Discovery 892 1,007 (11) (10)

Development 1,332 1,423 (6) (5)

Facilities and central support functions 600 576 4 6

Total Pharmaceuticals 2,824 3,006 (6) (5)

Vaccines R&D 673 621 8 8

Consumer Healthcare R&D 238 235 1 3

Research and development 3,735 3,862 (3) (2)

Adjusted R&D expenditure declined 3% AER, 2% CER with

Pharmaceuticals down 6% AER, 5% CER. The decline in Discovery

reﬂected the transfer of certain Oncology assets to the Development

phase. The decline in Development primarily reﬂects the comparison

with the impact of the utilisation of the Priority Review Voucher in

2017 and the beneﬁt of the prioritisation initiatives started in the

second half of 2017. This was partly offset by increased investment

in the progression of a number of mid and late-stage programmes,

particularly in Oncology, and the provision for costs payable to a third

party relating to the use of a Priority Review Voucher awarded in

2018. The growth in Technology, facilities and functional support

costs primarily reﬂected increased investments in data analytics.

Royalty income

Royalty income was £299 million (2017 – £356 million), the

reduction primarily reﬂecting the patent expiry of Cialis, partly offset

by an increase in the Gardasil royalty.

Adjusted operating proﬁt

Adjusted operating proﬁt was £8,745 million, 2% higher at AER

compared with 2017 and 6% higher at CER on a turnover increase

of 5%. The Adjusted operating margin of 28.4% was ﬂat at AER

compared with 2017 but 0.5 percentage points higher on a CER

basis. This reﬂected the beneﬁt from sales growth at CER in all

three businesses, a more favourable mix, primarily in Vaccines

and Consumer Healthcare, the beneﬁts of prioritisation of R&D

expenditure and the comparison with the impact of the Priority

Review Voucher utilised and expensed in 2017 as well as continued

tight control of ongoing costs across all three businesses. This

was partly offset by continuing pricing pressure, particularly in

Respiratory, increased input costs, the comparison with the beneﬁt

in Q2 2017 of a settlement for lost third-party supply volume in

Vaccines, investments in promotional product support, particularly

for new launches in Respiratory, HIV and Vaccines and a reduction

in royalty income.

Adjusted operating proﬁt (£bn)

£8.7bn

AER growth

CER growth

4 6 8 10

2018

2017

2016

8.7

8.6

7.7

Adjusted results

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Adjusted operating proﬁt by business

2018 2017 Growth

£m

Margin

% £m

Margin

% £% CER%

Pharmaceuticals 8,420 48.8 8,667 50.2 (3) –

Pharmaceuticals R&D (2,676) (2,740) (2) (1)

Pharmaceuticals 5,744 33.3 5,927 34.3 (3) –

Vaccines 1,943 33.0 1,644 31.9 18 25

Consumer

Healthcare 1,517 19.8 1,373 17.7 10 15

9,204 29.9 8,944 29.6 3 7

Corporate & other

unallocated costs (459) (376) 22 15

Adjusted operating

proﬁt 8,745 28.4 8,568 28.4 2 6

Pharmaceuticals operating proﬁt

Pharmaceuticals operating proﬁt was £5,744 million, down 3% AER

but ﬂat at CER on a turnover increase of 2% CER. The operating

margin of 33.3% was 1.0 percentage points lower at AER than in

2017 and 0.9 percentage points lower on a CER basis. This primarily

reﬂected the continued impact of lower prices, particularly in

Respiratory, and the broader transition of our Respiratory portfolio,

increased investment in new product support and a reduction in

royalty income. This was partly offset by the beneﬁts of prioritisation

within R&D and a favourable comparison with the impact of the

Priority Review Voucher purchased in 2017.

Vaccines operating proﬁt

Vaccines operating proﬁt was £1,943 million, 18% AER, 25% CER

higher than in 2017 on a turnover increase of 16% CER. The

operating margin of 33.0% was 1.1 percentage points higher at AER

than in 2017 and 2.5 percentage points higher on a CER basis. This

was primarily driven by enhanced operating leverage from strong

sales growth, an improved product mix, including the impact of the

launch of Shingrix, together with further restructuring and integration

beneﬁts. This was partly offset by the comparison with the beneﬁt of

a settlement for lost third-party supply volume recorded in 2017,

increased supply chain costs and increased SG&A investments to

support new launches and business growth.

Consumer Healthcare operating proﬁt

Consumer Healthcare operating proﬁt was £1,517 million, up 10%

AER, 15% CER on a turnover increase of 2% CER. The operating

margin of 19.8% was 2.1 percentage points higher than in 2017 and

2.2 percentage points higher on a CER basis. This primarily reﬂected

improved product mix and manufacturing restructuring and

integration beneﬁts, as well as continued tight control of promotional

and other operating expenses.

Net ﬁnance costs

Finance income

2018

£m

2017

£m

Interest and other income 81 63

Fair value movements – 2

81 65

Finance expense

Interest expense (717) (720)

Unwinding of discounts on liabilities (5) (4)

Remeasurements and fair value movements 3 (4)

Other ﬁnance expense (60) 6

(779) (722)

Net ﬁnance costs were £698 million compared with £657 million

in 2017. The increase reﬂected higher debt levels following the

acquisition from Novartis of its stake in the Consumer Healthcare

Joint Venture in June 2018 as well as a £23 million increase in

interest on tax arising from settlement of a historic tax matter and an

adverse comparison with a provision release of £23 million in 2017

(both reﬂected in other ﬁnance expense). This was partly offset by

the beneﬁt of a one-off accounting adjustment to the amortisation

of long-term bond interest charges of £20 million (reported through

interest expense), the beneﬁt from older bonds and the facilities

utilised to fund the acquisition of Novartis’ stake in the Consumer

Healthcare Joint Venture being reﬁnanced at lower interest rates

and fair value gains on hedging instruments.

Share of after tax proﬁts of associates and

joint ventures

The share of proﬁts of associates and joint ventures was £31 million

(2017 – £13 million), primarily arising from our investment in Innoviva.

Taxation

Tax on Adjusted proﬁt amounted to £1,535 million and represented

an effective Adjusted tax rate of 19.0% (2017 – 21.0%). The

reduction in the effective Adjusted tax rate in 2018 was primarily

driven by the reduction in the US federal tax rate.

Non-controlling interests

The allocation of Adjusted earnings to non-controlling interests

amounted to £674 million (2017 – £793 million). The reduction was

primarily due to the lower allocation of Consumer Healthcare proﬁts

of £118 million (2017– £344 million) following the buyout of Novartis’

interest. This was partly offset by an increased allocation of ViiV

Healthcare proﬁts of £501 million (2017 – £414 million), and the

changes in the proportions of preferential dividends due to each

shareholder based on the relative performance of different products,

as well as increases in the allocation due to higher net proﬁts in some

of the Group’s other entities with non-controlling interests.

Adjusted earnings per share

Adjusted EPS of 119.4p was up 7% AER, 12% CER, compared with

a 6% CER increase in Adjusted operating proﬁt, primarily as a result

of a reduced non-controlling interest allocation of Consumer

Healthcare proﬁts and a lower Adjusted tax rate.

Adjusted results continued

Group ﬁnancial review continued

GSK Annual Report 2018

A summary of the consolidated cash ﬂow statement is set out below.

2018

£m

2017

£m

Net cash inﬂow from operating activities 8,421 6,918

Net cash outﬂow from investing activities (1,553) (1,443)

Net cash outﬂow from ﬁnancing activities (6,389) (6,380)

Increase/(decrease) in cash and bank overdrafts 479 (905)

Cash and bank overdrafts at beginning of year 3,600 4,605

Increase/(decrease) in cash and bank overdrafts 479 (905)

Exchange adjustments 8 (100)

Cash and bank overdrafts at end of year 4,087 3,600

Cash and bank overdrafts at end of year

comprise:

Cash and cash equivalents 3,874 3,833

Cash and cash equivalents reported in assets

held for sale 485 –

Overdrafts (272) (233)

4,087 3,600

The net cash inﬂow from operating activities for the year was £8,421

million (2017 – £6,918 million). The increase primarily reﬂected

improved operating proﬁts, a smaller increase in working capital as

a result of a reduction of inventory balances and a strong focus on

collections, the favourable timing of payments for returns and rebates,

and reduced legal settlement and restructuring payments, partly

offset by a negative currency impact on operating proﬁt.

Total cash payments to Shionogi in relation to the ViiV Healthcare

contingent consideration liability in the year were £793 million

(2017 – £671 million), of which £703 million was recognised in cash

ﬂows from operating activities and £90 million was recognised in

contingent consideration paid within investing cash ﬂows. These

payments are deductible for tax purposes.

Capital expenditure and ﬁnancial investment

Cash payments for tangible and intangible ﬁxed assets amounted

to £1,796 million (2017– £2,202 million) and disposals realised

£453 million (2017 – £807 million). Cash payments to acquire

equity investments amounted to £309 million (2017 – £80 million),

primarily relating to 23andMe, and sales of equity investments

realised £151 million (2017 – £64 million).

Free cash ﬂow

Free cash ﬂow is the amount of cash generated by the Group after

meeting our obligations for contingent consideration, interest, tax

and dividends paid to non-controlling interests, and after capital

expenditure on property, plant and equipment and intangible assets.

2018

£m

2017

(revised)

£m

Free cash inﬂow 5,692 3,485

Free cash ﬂow was £5,692 million for the year (2017 – £3,485

million). The increase primarily reﬂected improved operating proﬁts, a

smaller increase in working capital following a reduction of inventory

balances and a strong focus on collections, the favourable timing of

payments for returns and rebates, reduced legal settlement costs

and restructuring payments, lower capital expenditure, including a

favourable comparison with the impact of the Priority Review Voucher

in 2017, increased disposals of intangible assets of £256 million

(2017 – £48 million), primarily relating to the disposal of tapinarof,

and reduced dividend payments to non-controlling interests. This

was partly offset by a negative currency impact on operating proﬁt

and increased contingent consideration payments including the

$450 million (£317 million) milestone paid to Novartis in the year.

Reconciliation of net cash inﬂow from operating

activities to free cash ﬂow

A reconciliation of net cash inﬂow from operating activities, which is

the closest equivalent IFRS measure to free cash ﬂow, is shown

below.

2018

£m

2017

(revised)

£m

Net cash inﬂow from operating activities 8,421 6,918

Purchase of property, plant and equipment (1,344) (1,545)

Purchase of intangible assets (452) (657)

Proceeds from sale of property, plant and equipment 168 281

Proceeds from disposal of intangible assets 256 48

Interest paid (766) (781)

Interest received 72 64

Dividends from associates and joint ventures 39 6

Contingent consideration paid (reported in

investing activities) (153) (91)

Contribution from non-controlling interests 21 21

Distributions to non-controlling interests (570) (779)

Free cash ﬂow 5,692 3,485

Cash generation and conversion

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Cash generation and conversion continued

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 241 to 250. We may from time to

time have additional demands for ﬁnance, such as for acquisitions,

including potentially acquiring increased ownership interests in the

ViiV Healthcare business where minority shareholders hold put

options. We have access to multiple sources of liquidity from short

and long-term capital markets and ﬁnancial institutions for such

needs, in addition to the cash ﬂow from operations.

Investment appraisal and capital allocation

We have a strong framework for capital allocation, including a board

to govern the allocation of capital between our businesses. We utilise

a consistent cash return on invested capital (CROIC) methodology to

prioritise investment across the Group as a whole, so that we can

more effectively compare the returns from each of the businesses as

we allocate capital between them. We also consider the impact on

EPS and our credit proﬁle where relevant.

The discount rate used to perform ﬁnancial analyses is decided

internally, to allow determination of the extent to which investments

cover our cost of capital. For individual investments the discount rate

may be adjusted to take into account speciﬁc country, business or

project risk.

Working capital

2018 2017

Working capital percentage of turnover (%) 23 22

Working capital conversion cycle (days) 201 191

The increase of 10 days in 2018 compared with 2017 was

predominantly due to an adverse impact from exchange of

approximately ﬁve days as well as a reduced denominator due to

lower restructuring and impairment costs in 2018. Excluding these

factors, signiﬁcant improvements were made in working capital

relative to the growth in the business, with reduced inventory as a

result of tight control of inventory levels and stronger collections of

receivables.

Group ﬁnancial review continued

GSK Annual Report 2018

2018

£m

2017

£m

Assets

Non-current assets

Property, plant and equipment 11,058 10,860

Goodwill 5,789 5,734

Other intangible assets 17,202 17,562

Investments in associates and joint ventures 236 183

Other investments 1,322 918

Deferred tax assets 3,887 3,796

Derivative ﬁnancial instruments 69 8

Other non-current assets 1,576 1,413

Total non-current assets 41,139 40,474

Current assets

Inventories 5,476 5,557

Current tax recoverable 229 258

Trade and other receivables 6,423 6,000

Derivative ﬁnancial instruments 188 68

Liquid investments 84 78

Cash and cash equivalents 3,874 3,833

Assets held for sale 653 113

Total current assets 16,927 15,907

Total assets 58,066 56,381

Liabilities

Current liabilities

Short-term borrowings (5,793) (2,825)

Contingent consideration liabilities (837) (1,076)

Trade and other payables (14,037) (20,970)

Derivative ﬁnancial instruments (127) (74)

Current tax payable (965) (995)

Short-term provisions (732) (629)

Total current liabilities (22,491) (26,569)

Non-current liabilities

Long-term borrowings (20,271) (14,264)

Corporation tax payable (272) (411)

Deferred tax liabilities (1,156) (1,396)

Pensions and other post-employment beneﬁts (3,125) (3,539)

Other provisions (691) (636)

Derivative ﬁnancial instruments (1) –

Contingent consideration liabilities (5,449) (5,096)

Other non-current liabilities (938) (981)

Total non-current liabilities (31,903) (26,323)

Total liabilities (54,394) (52,892)

Net assets 3,672 3,489

Equity

Share capital 1,345 1,343

Share premium account 3,091 3,019

Retained earnings (2,137) (6,477)

Other reserves 2,061 2,047

Shareholders’ equity 4,360 (68)

Non-controlling interests (688) 3,557

Total equity 3,672 3,489

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

2018 was £22,488 million, with a net book value of £11,058 million.

Of this, land and buildings represented £4,404 million, plant and

equipment £4,582 million and assets in construction £2,072 million.

In 2018, we invested £1,358 million in new property, plant and

equipment. This was mainly related to a large number of projects

for the renewal, improvement and expansion of facilities at various

worldwide sites to support new product development and launches

as well as to improve the efﬁciency of existing supply chains.

Property is mainly held freehold. New investment is ﬁnanced from

our liquid resources. At 31 December 2018, we had contractual

commitments for future capital expenditure of £665 million and

operating lease commitments of £1,138 million. We believe that

our property and plant facilities are adequate for our current needs.

We observe stringent procedures and use specialist skills to

manage environmental risks from our activities. Environmental issues,

sometimes dating from operations now modiﬁed or discontinued,

are reported under ‘Environment’ on page 32 and in Note 45 to the

ﬁnancial statements, ‘Legal proceedings’.

Goodwill

Goodwill increased to £5,789 million at 31 December 2018, from

£5,734 million. The increase primarily reﬂected the impact of

exchange movements, partly offset by the transfer of goodwill to

assets held for sale.

Other intangible assets

Other intangible assets include the cost of intangibles acquired

from third parties and computer software. The net book value of

other intangible assets as at 31 December 2018 was £17,202 million

(2017 – £17,562 million). The decrease in 2018 reﬂected the impact

of amortisation and impairment of existing intangibles of £902 million

and £134 million respectively, partly offset by the development

costs capitalised during the year of £203 million, other additions

of £327 million and the impact of exchange movements.

Investments in associates and joint ventures

We held investments in associates and joint ventures with a carrying

value at 31 December 2018 of £236 million (2017 – £183 million).

The market value at 31 December 2018 was £487 million

(2017 – £372 million). The largest of these investments was in

Innoviva Inc. which had a book value at 31 December 2018 of

£189 million (2017 – £147 million). The market value at 31 December

2018 was £440 million. See Note 20 to the ﬁnancial statements,

‘Investments in associates and joint ventures’.

Financial position and resources

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Other investments

We held other investments with a carrying value at 31 December

2018 of £1,322 million (2017 – £918 million). The highest value

investments held at 31 December 2018 were in 23andMe, which

was acquired during the year and had a book value at 31 December

2018 of £229 million, and Theravance Biopharma, Inc. which had a

book value at 31 December 2018 of £194 million (2017 – £199

million). The other investments included equity stakes in companies

with which we have research collaborations, which provide access

to biotechnology developments of potential interest and interests in

companies that arise from business divestments.

Derivative ﬁnancial instruments: assets

We had current derivative ﬁnancial assets held at fair value of £188

million (2017 – £68 million) and non-current derivative ﬁnancial assets

held at fair value of £69 million (2017 – £8 million). £100 million of

current derivative ﬁnancial assets related to a derivative embedded

in the agreement to divest Horlicks and other nutritional brands to

Unilever plc. See Note 38 for further information. The majority of the

remainder of these ﬁnancial instruments related to foreign exchange

contracts both designated and not designated as accounting hedges.

Inventories

Inventory of £5,476 million decreased from £5,557 million in 2017.

The decrease primarily reﬂected tight control of inventory levels.

Trade and other receivables

Trade and other receivables of £6,423 million increased from

£6,000 million in 2017, primarily reﬂecting the impact of higher sales,

particularly in Vaccines, partly offset by better collections, together

with exchange movements.

Deferred tax assets

Deferred tax assets amounted to £3,887 million (2017 –

£3,796 million) at 31 December 2018.

Derivative ﬁnancial instruments: liabilities

We held current and non-current derivative ﬁnancial liabilities at fair

value of £128 million (2017 – £74 million). This primarily related to

foreign exchange contracts both designated and not designated as

accounting hedges.

Trade and other payables

At 31 December 2018, trade and other payables were £14,037

million compared with £20,970 million at 31 December 2017.

The decrease primarily reﬂected the elimination of the Consumer

Healthcare Joint Venture put option following the buyout of Novartis’

interest in the Consumer Healthcare Joint Venture on 1 June 2018.

The buyout was primarily funded by utilising the proceeds of bonds

issued with maturity dates of between two and twelve years, in both

the US and Europe, which raised $6 billion and €2.5 billion

respectively. Committed bank facilities ﬁnanced the remaining

amount of the $13 billion transaction.

Provisions

We carried deferred tax provisions and other short-term and

non-current provisions of £2,579 million at 31 December 2018

(2017 – £2,661 million). Other provisions at the year-end included

£219 million (2017 – £186 million) related to legal and other disputes

and £641 million (2017 – £504 million) related to Major restructuring

programmes. Provision has been made for legal and other disputes,

indemniﬁed disposal liabilities, employee related liabilities and the

costs of the restructuring programme to the extent that at the balance

sheet date a legal or constructive obligation existed and could be

reliably estimated.

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 £995 million (2017 – £1,505

million) on pension arrangements and £1,379 million (2017 – £1,496

million) on unfunded post-employment liabilities. The decrease in net

deﬁcit was predominantly driven by higher discount rates that we

used to discount the value of the liabilities, partly offset by a reduction

in UK asset values.

Other non-current liabilities

Other non-current liabilities amounted to £938 million at

31 December 2018 (2017 – £981 million).

Contingent consideration liabilities

Contingent consideration amounted to £6,286 million at 31 December

2018 (2017 – £6,172 million), of which £5,937 million (2017 – £5,542

million) represented the estimated present value of amounts payable to

Shionogi relating to ViiV Healthcare and £296 million (2017 – £584

million) represented the estimated present value of contingent

consideration payable to Novartis related to the Vaccines acquisition

following a milestone payment of $450 million made to Novartis in

January 2018.

The liability due to Shionogi included £252 million in respect of

preferential dividends. The liability for preferential dividends due to

Pﬁzer at 31 December 2018 was £15 million (2017 – £17 million).

An explanation of the accounting for the non-controlling interests

in ViiV Healthcare is set out on page 41.

Of the contingent consideration payable (on a post-tax basis)

at 31 December 2018, £837 million (2017 – £1,076 million)

is expected to be paid within one year. The consideration payable

for the acquisition of the Shionogi-ViiV Healthcare joint venture and

the Novartis Vaccines business is expected to be paid over a number

of years. As a result, the total estimated liabilities are discounted to

their present values, on a post-tax basis using post-tax discount

rates. The Shionogi-ViiV Healthcare contingent consideration liability

is discounted at 8.5% and the Novartis Vaccines contingent

consideration liability is discounted partly at 8% and partly at 9%.

Financial position and resources continued

Group ﬁnancial review continued

GSK Annual Report 2018

Financial position and resources continued

Net debt

2018

£m

2017

£m

Cash, cash equivalents and liquid investments 3,958 3,911

Cash, cash equivalents reported in assets

held for sale 485 –

Borrowings – repayable within one year (5,793) (2,825)

Borrowings – repayable after one year (20,271) (14,264)

Net debt (21,621) (13,178)

At 31 December 2018, net debt was £21.6 billion, compared with

£13.2 billion at 31 December 2017, comprising gross debt of £26.1

billion and cash and liquid investments of £4.5 billion, including £0.5

billion reported within Assets held for sale, reﬂecting the agreement to

divest Horlicks and the other Consumer Healthcare nutritional brands

to Unilever plc. Net debt increased due to the £9.3 billion acquisition

from Novartis of the remaining stake in the Consumer Healthcare Joint

Venture in June 2018, the £0.2 billion investment in 23andMe, £0.8

billion of unfavourable exchange impacts from the translation of

non-Sterling denominated debt, and dividends paid to shareholders

of £3.9 billion, partly offset by increased free cash ﬂow of £5.7 billion

after the milestone payment to Novartis.

At 31 December 2018, GSK’s cash and liquid investments were held

as follows:

2018

£m

2017

£m

Bank balances and deposits 1,853 1,715

Bank balances and deposits reported in

assets held for sale 485 –

US Treasury and Treasury repo only money

market funds 449 1,715

Liquidity funds 1,572 403

Cash and cash equivalents 4,359 3,833

Liquid investments – Government securities 84 78

4,443 3,911

Cash and liquid investments of £2.9 billion (2017 – £2.5 billion) were

held centrally at 31 December 2018.

The analysis of cash and gross debt after the effects of hedging

is as follows.

2018

£m

2017

£m

Cash and liquid investments 4,443 3,911

Gross debt – ﬁxed

(21,603) (16,229)

– ﬂoating (4,432) (805)

– non-interest bearing (29) (55)

Net debt (21,621) (13,178)

1 Includes £1.3 billion equivalent of notes swapped from ﬂoating to ﬁxed rates via interest

rate swaps.

Movements in net debt

2018

£m

2017

£m

Net debt at beginning of year (13,178) (13,804)

Increase/(decrease) in cash and bank overdrafts 479 (905)

Increase in liquid investments – (4)

Increase in long-term loans (10,138) (2,233)

Net repayment of short-term loans 1,986 3,200

Exchange movements (776) 585

Other movements 6 (17)

Net debt at end of year (21,621) (13,178)

2,500

2,000

1,500

1,000

500

3,000

Maturity proﬁle of long-term debt

£m equivalent

GBP bonds EUR bonds USD bonds

Other long-term debt

2020 2022 2025 2027 2033 2034 2038 2039 2042

2023 2043

2045

20242021 2026 2029

2028 2030

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Total equity

At 31 December 2018, total equity had increased from £3,489 million

at 31 December 2017 to £3,672 million. This primarily reﬂected the

impact of Total proﬁt and the re-measurement gains on deﬁned

beneﬁt plans offset by dividends paid and an unfavourable exchange

translation impact in the year.

A summary of the movements in equity is set out below.

2018

£m

2017

£m

Total equity at beginning of year 3,489 4,963

Implementation of IFRS 15 (4) –

Implementation of IFRS 9 (11) –

Total equity at beginning of year, as adjusted 3,474 4,963

Total comprehensive income for the year 4,300 2,882

Dividends to shareholders (3,927) (3,906)

Ordinary shares issued 74 56

Changes in non-controlling interests – (2)

De-recognition of liabilities with non-controlling

interests (62) –

Shares acquired by ESOP Trusts – (65)

Share-based incentive plans 360 333

Tax on share-based incentive plans 2 (4)

Contributions from non-controlling interests 21 21

Distributions to non-controlling interests (570) (789)

Total equity at end of year 3,672 3,489

Share purchases

No shares were acquired by the Employee Share Ownership Plan

(ESOP) Trusts in 2018 (2017 – £65 million). Shares are held by the

Trusts to satisfy future exercises of options and awards under the

Group share option and award schemes. A proportion of the shares

held by the Trusts are in respect of awards where the rules of the

scheme require us to satisfy exercises through market purchases

rather than the issue of new shares. The shares held by the Trusts

are matched to options and awards granted.

At 31 December 2018, the ESOP Trusts held 41.5 million

(2017 – 66.7 million) GSK shares against the future exercise of

share options and share awards. The carrying value of £161 million

(2017 – £400 million) has been deducted from other reserves. The

market value of these shares was £619 million (2017 – £882 million).

During 2018, no shares were repurchased by the company. At

31 December 2018, GSK held 414.6 million shares as Treasury

shares (2017 – 414.6 million shares), at a cost of £5,800 million

(2017 – £5,800 million), which has been deducted from retained

earnings.

No ordinary shares were purchased in the period 1 January 2019

to 1 March 2019 and the company does not expect to make any

ordinary share repurchases in the remainder of 2019.

Commitments and contingent liabilities

Financial commitments are summarised in Note 41 to the ﬁnancial

statements, ‘Commitments’. Other contingent liabilities are set out

in Note 32 to the ﬁnancial statements, ‘Contingent liabilities’.

Contractual obligations and commitments

The following table sets out our contractual obligations and

commitments at 31 December 2018 as they fall due for payment.

Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+

£m £m £m £m £m

Loans 26,154 5,771 3,367 3,562 13,454

Interest on loans 9,418 714 1,383 1,187 6,134

Finance lease obligations 68 24 29 9 6

Finance lease charges 16 5 3 3 5

Operating lease

commitments 1,138 223 316 228 371

Intangible assets 4,762 172 420 743 3,427

Property, plant & equipment 665 560 105 – –

Investments 82 38 32 12 –

Purchase commitments 561 436 124 1 –

Pensions 238 75 119 44 –

Total 43,102 8,018 5,898 5,789 23,397

Commitments in respect of loans and future interest payable on loans

are disclosed before taking into account the effect of derivatives.

We have entered into a number of research collaborations to develop

new compounds with other pharmaceutical companies. The terms

of these arrangements can include upfront fees, equity investments,

loans and commitments to fund speciﬁed levels of research. In

addition, we will often agree to make further payments if future

‘milestones’ are achieved.

As some of these agreements relate to compounds in the early

stages of development, the potential obligation to make milestone

payments will continue for a number of years if the compounds move

successfully through the development process. Generally, the closer

the product is to marketing approval, the greater the probability

of success. The amounts shown above within intangible assets

represent the maximum that would be paid if all milestones were

achieved, and include £4.2 billion which relates to externalised

projects in the discovery portfolio. There was a reduction in the

commitments in 2018 due to amendments made to existing

agreements and obligations which have ceased.

In 2018, we reached a revised agreement with the trustees of the

UK pension schemes to make additional contributions, to assist in

eliminating the pension deﬁcit identiﬁed as part of the 31 December

2017 actuarial funding valuation. The table above includes this

commitment but excludes the normal ongoing annual funding

requirement in the UK of approximately £140 million. This funding

commitment supersedes the previous agreement made in 2016.

For further information on pension obligations, see Note 28 to the

ﬁnancial statements, ‘Pensions and other post-employment beneﬁts’.

Financial position and resources continued

Group ﬁnancial review continued

GSK Annual Report 2018

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+

£m £m £m £m £m

Guarantees 33 13 13 4 3

Other contingent liabilities 60 17 13 11 19

Total 93 30 26 15 22

In the normal course of business, we have provided various

indemniﬁcation guarantees in respect of business disposals in

which legal and other disputes have subsequently arisen. A

provision is made where an outﬂow of resources is considered

probable and a reliable estimate can be made of the likely outcome

of the dispute and this is included in Note 29 to the ﬁnancial

statements, ‘Other provisions’.

We provide for the outcome of tax, legal and other disputes when an

outﬂow of resources is considered probable and a reliable estimate

of the outﬂow may be made. At 31 December 2018, other than for

those disputes where provision has been made, it was not possible

to make a reliable estimate of the potential outﬂow of funds that might

be required to settle disputes where the possibility of there being an

outﬂow was more than remote.

The ultimate liability for such matters may vary signiﬁcantly from the

amounts provided and is dependent upon negotiations with the

relevant tax authorities and the outcome of litigation proceedings,

where relevant. This is discussed further in ‘Principal risks and

uncertainties’ on pages 241 to 250 and Note 45 to the ﬁnancial

statements, ‘Legal proceedings’.

ViiV Healthcare contingent consideration liability

The contingent consideration payable to Shionogi amounted to

£5,937 million at 31 December 2018 (2017 – £5,542 million),

discounted at 8.5%. The undiscounted value was £8,885 million

at 31 December 2018.

Financial position and resources continued

Treasury policies

We report in Sterling and pay dividends out of Sterling cash ﬂows.

The role of Treasury is to monitor and manage the Group’s external

and internal funding requirements and ﬁnancial risks in support of

our strategic objectives. GSK operates on a global basis, primarily

through subsidiary companies, and we manage our capital to ensure

that our subsidiaries are able to operate as going concerns and to

optimise returns to shareholders through an appropriate balance

of debt and equity. Treasury activities are governed by policies

approved annually by the Board of Directors, and most recently

on 18 October 2018. A Treasury Management Group (TMG)

meeting, chaired by our Chief Financial Ofﬁcer, takes place on a

regular basis to review Treasury activities. Its members receive

management information relating to these activities.

Treasury operations

The objective of GSK’s Treasury activities is to minimise the post-tax

net cost of ﬁnancial operations and reduce its volatility in order to

beneﬁt earnings and cash ﬂows. GSK uses a variety of ﬁnancial

instruments to ﬁnance its operations and derivative ﬁnancial

instruments to manage market risks from these operations.

Derivatives principally comprise foreign exchange forward contracts

and swaps which are used to swap borrowings and liquid assets

into currencies required for Group purposes as well as interest rate

swaps which are used to manage exposure to ﬁnancial risks from

changes in interest rates.

Derivatives are used exclusively for hedging purposes in relation to

underlying business activities and not as trading or speculative

instruments.

Capital management

Our ﬁnancial strategy, implemented through the Group’s Financial

architecture, supports GSK’s strategic priorities and it is regularly

reviewed by the Board. We manage the capital structure of the

Group through an appropriate mix of debt and equity. We continue

to manage our ﬁnancial policies to a credit proﬁle that particularly

targets short-term credit ratings of A-1 and P-1 while maintaining

single A long-term ratings consistent with those targets.

Our long-term credit rating with Standard and Poor’s is A+

(negative outlook) and with Moody’s Investor Services (‘Moody’s’)

is A2 (negative outlook). Our short-term credit ratings are A-1 and

P-1 with Standard and Poor’s and Moody’s respectively.

Liquidity risk management

Our policy is to borrow centrally in order to meet anticipated funding

requirements. Our cash ﬂow forecasts and funding requirements are

monitored by the TMG on a regular basis. Our strategy is to diversify

liquidity sources using a range of facilities and to maintain broad

access to ﬁnancial markets.

Each day, we sweep cash from a number of global subsidiaries

to central Treasury accounts for liquidity management purposes.

Interest rate risk management

Our objective is to minimise the effective net interest cost and

to balance the mix of debt at ﬁxed and ﬂoating interest rates over

time. The policy on interest rate risk management limits the net

amount of ﬂoating rate debt to a speciﬁc cap, reviewed and agreed

no less than annually by the Board.

Foreign exchange risk management

Foreign currency transaction exposures arising on external trade

ﬂows are not normally hedged. Foreign currency transaction

exposures arising on internal trade ﬂows are selectively hedged.

Our objective is to minimise the exposure of overseas operating

subsidiaries to transaction risk by matching local currency income

with local currency costs where possible. GSK’s internal trading

transactions are matched centrally and we manage inter-company

payment terms to reduce foreign currency risk. Foreign currency

cash ﬂows can be hedged selectively under the management of

Treasury and the TMG. These include hedges of the foreign

exchange risk arising from acquisitions and disposals of assets.

Where possible, we manage the cash surpluses or borrowing

requirements of subsidiary companies centrally using forward

contracts to hedge future repayments back into the originating

currency.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

In order to reduce foreign currency translation exposure, we seek

to denominate borrowings in the currencies of our principal assets

and cash ﬂows. These are primarily denominated in US Dollars,

Euros and Sterling. Borrowings can be swapped into other

currencies as required.

Borrowings denominated in, or swapped into, foreign currencies

that match investments in overseas Group assets may be treated

as a hedge against the relevant assets. Forward contracts in major

currencies are also used to reduce exposure to the Group’s

investment in overseas Group assets. The TMG reviews the

ratio of borrowings to assets for major currencies regularly.

Counterparty risk management

We set global counterparty limits for each of our banking and

investment counterparties based on long-term credit ratings from

Moody’s and Standard and Poor’s. Treasury’s usage of these limits

is monitored daily by a Corporate Compliance Ofﬁcer (CCO) who

operates independently of Treasury. Any breach of these limits would

be reported to the CFO immediately.

The CCO also monitors the credit rating of these counterparties and,

when changes in ratings occur, notiﬁes Treasury so that changes

can be made to investment levels or to authority limits as appropriate.

In addition, relationship banks and their credit ratings are reviewed

regularly and a report is presented annually to the TMG for approval.

The consolidated ﬁnancial statements are prepared in accordance

with IFRS, as adopted for use in the European Union, and also

with IFRS as issued by the IASB, following the accounting policies

approved by the Board and described in Note 2 to the ﬁnancial

statements, ‘Accounting principles and policies’.

We are required to make estimates and assumptions that affect

the amounts of assets, liabilities, revenue and expenses reported

in the ﬁnancial statements. Actual amounts and results could differ

from those estimates.

The critical accounting policies relate to the following areas:

– Turnover

– Taxation (Note 14)

– Legal and other disputes (Notes 29 and 45)

– Intangible asset impairments (Note 19)

– Business combinations (Note 38)

– Pensions and other post-employment beneﬁts (Note 28).

Information on the judgements and estimates made in these areas

is given in Note 3 to the ﬁnancial statements, ‘Key accounting

judgements and estimates’.

Turnover

In respect of the Turnover accounting policy, our largest business

is US Pharmaceuticals, and the US market has the most complex

arrangements for rebates, discounts and allowances. The following

brieﬂy describes the nature of the arrangements in existence in our

US Pharmaceuticals business:

– We have arrangements with certain indirect customers whereby

the customer is able to buy products from wholesalers at reduced

prices. A chargeback represents the difference between the

invoice price to the wholesaler and the indirect customer’s

contractual discounted price. Accruals for estimating chargebacks

are calculated based on the terms of each agreement, historical

experience and product growth rates

– Customer rebates are offered to key managed care and Group

Purchasing Organisations 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 is as follows:

2018 2017 2016

£m

Margin

(revised)

£m

Margin

(revised)

£m

Margin

Gross turnover 18,227 100 16,365 100 13,363 100

Market driven

segments (5,147) (28) (4,040) (25) (2,731) (21)

Government

mandated and

state programs (4,594) (25) (3,933) (24) (3,063) (23)

Cash discounts (361) (2) (330) (2) (261) (2)

Customer returns (98) (1) (97) (1) (98) (1)

Prior year adjustments 98 1 86 1 10 9 1

Other prior year items (59) – (23) – (25) –

Other items (613) (4) (460) (3) (457) (3)

Total deductions (10,774) (59) (8,797) (54) (6,526) (49)

Net turnover 7,453 41 7,568 46 6,837 51

Market-driven segments consist primarily of Managed Care and

Medicare plans with which we negotiate contract pricing that

is honoured via rebates and chargebacks. Mandated segments

consist primarily of Medicaid and Federal Government programmes

which receive government-mandated pricing via rebates and

chargebacks.

Critical accounting policies

Treasury policies continued

Group ﬁnancial review continued

GSK Annual Report 2018

Strategic report

The Strategic report was approved by the Board of Directors on

11 March 2019

Simon Dingemans

Chief Financial Ofﬁcer

11 March 2019

The increased deductions in the market driven segments of the

gross turnover to net turnover reconciliation primarily reﬂected

higher rebates and chargebacks on Respiratory products, and

on Advair in particular. During 2018, Advair accounted for 15%

of US Pharmaceuticals turnover and approximately 34% of the

total deduction for rebates and returns, and the Respiratory

portfolio as a whole accounted for approximately 78% of the

total deduction in the year. Advair continued to suffer pricing

pressures in 2018 as we sought to transition our Respiratory

portfolio to newer products.

The balance sheet accruals for rebates, discounts, allowances

and returns for the US Pharmaceuticals and Vaccines businesses

are managed on a combined basis. At 31 December 2018, the

total accrual amounted to £4,356 million (2017 – £2,837 million).

A monthly process is operated to monitor inventory levels at

wholesalers for any abnormal movements. This process uses

gross sales volumes, prescription volumes based on third party

data sources and information received from key wholesalers.

The aim of this is to maintain inventories at a consistent level

from year to year based on the pattern of consumption.

On this basis, US Pharmaceuticals and Vaccines inventory levels at

wholesalers and in other distribution channels at 31 December 2018

were estimated to amount to approximately four weeks of turnover.

This calculation uses third party information, the accuracy of which

cannot be totally veriﬁed, but is believed to be sufﬁciently reliable

for this purpose.

Legal and other disputes

In respect of the accounting policy for Legal and other disputes,

the following brieﬂy describes the process by which we determine

the level of provision that is necessary.

In accordance with the requirements of IAS 37, ‘Provisions,

contingent liabilities and contingent assets’, we provide for

anticipated settlement costs where an outﬂow of resources is

considered probable and a reliable estimate may be made of

the likely outcome of the dispute and legal and other expenses

arising from claims against the Group.

We may become involved in signiﬁcant legal proceedings, in respect

of which it is not possible to make a reliable estimate of the expected

ﬁnancial effect, if any, that could result from ultimate resolution of the

proceedings. In these cases, appropriate disclosure about such

cases would be included in the Annual Report, but no provision

would be made.

This position could change over time and, therefore, there can be

no assurance that any losses that result from the outcome of any

legal proceedings will not exceed by a material amount the amount

of the provisions reported in the Group’s ﬁnancial statements.

Like many pharmaceutical companies, we are faced with various

complex product liability, anti-trust and patent litigation, as well as

investigations of its operations conducted by various governmental

regulatory agencies. Throughout the year, the General Counsel of

the Group, as head of the Group’s legal function, and the Senior

Vice President and Head of Global Litigation for the Group, who is

responsible for all litigation and government investigations, routinely

brief the Chief Executive Ofﬁcer, the Chief Financial Ofﬁcer and the

Board of Directors on the signiﬁcant litigation pending against the

Group and governmental investigations of the Group.

These meetings, as appropriate, detail the status of signiﬁcant

litigation and government investigations and review matters such

as the number of claims notiﬁed to us, information on potential

claims not yet notiﬁed, assessment of the validity of claims,

progress made in settling claims, recent settlement levels and

potential reimbursement by insurers.

The meetings also include an assessment of whether or not there

is sufﬁcient information available for us to be able to make a reliable

estimate of the potential outcomes of the disputes. Often, external

counsel assisting us with various litigation matters and investigations

will also assist in the brieﬁng of the Board and senior management.

Following these discussions, for those matters where it is possible

to make a reliable estimate of the amount of a provision, if any, that

may be required, the level of provision for legal and other disputes is

reviewed and adjusted as appropriate. These matters are discussed

further in Note 45 to the ﬁnancial statements, ‘Legal proceedings’.

Critical accounting policies continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Corporate

Governance

In this section

Chairman’s Governance statement 66

Our Board 68

Our Corporate Executive Team 71

Leadership and effectiveness 72

Nominations Committee report 77

Accountability 79

Audit & Risk Committee report 79

Relations with stakeholders 89

Engagement activities 89

Science Committee report 91

Corporate Responsibility Committee report 92

Directors’ report 94

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Chairman’s Governance statement

Dear Shareholder

I am pleased to present our Corporate Governance report for 2018.

Our governance structure operates from the Board across the Group

and we believe it underpins our ability to deliver our strategy and

create long-term value and beneﬁt for our shareholders and

stakeholders.

I can conﬁrm that throughout 2018 the company complied with

the requirements of the Financial Reporting Council’s (FRC) UK

Corporate Governance Code (current Code) except that Dr Vivienne

Cox was unable to attend the company’s 2018 AGM. She was

required to attend a board meeting of another public company as

their Senior Independent Director and Nomination & Governance

Chair. This resulted in partial non-compliance with current Code

provision E.2.3.

A copy of the current Code is available on www.frc.org.uk.

The following pages set out details on the composition of our Board,

its corporate governance arrangements, processes and activities

during the year, together with reports from each of the Board’s

Committees. In addition, related statutory disclosures are set out in

the Shareholder Information section on pages 251 to 270.

Corporate governance reform

During the year, The Companies (Miscellaneous Reporting)

Regulations 2018 were published in conjunction with the FRC’s new

Code (the Reforms). The Reforms seek to raise the bar on existing

corporate governance practices and encourage companies to

demonstrate their broader responsibility within society, in fulﬁlment of

the Government’s aim to build trust in business. At their core, they:

– require boards to report on how they have had regard to matters

set out in section 172 of the Companies Act 2006, including

stakeholder impacts, when fulﬁlling their directors’ duties;

– introduce new requirements around employee consultation, pay

practices, board culture, composition and diversity; and

– encourage companies to report on how the new Code’s principles

have been applied each year.

The Reforms came into effect on 1 January 2019 and seek to drive a

number of changes to companies’ underlying corporate governance

processes. As a result, the Board has reviewed our existing practices

to identify where they are in line with the Reforms and implemented

enhancements where appropriate. We will report against the

Reforms in next year’s Annual Report to allow time to embed these

new practices in our corporate governance framework and to monitor

their operation and effectiveness.

However, I wish to highlight in this Report some of the more

signiﬁcant implementation steps which may be of interest to our

investors and wider stakeholders. These include the early publication

of our CEO pay ratio on page 106 and the designation of Dr Vivienne

Cox as our Workforce Engagement Director, which is discussed on

page 90. We have also further strengthened reporting on our

stakeholder relationships agenda by:

– summarising our approach and the mechanisms we have in place

to promote stakeholder engagement on page 11;

– highlighting the speciﬁc role our Corporate Responsibility

Committee plays in monitoring, identifying and addressing the

evolving views and expectations of our broad range of

stakeholders on pages 92 and 93; and

– describing how we respond to the expectations of our

stakeholders to remain commercially successful, protect our

reputation and build trust by:

– using our science and technology to reduce health needs

– making our products more affordable and available

– being a modern employer.

“Our purpose and values have always been a source of great

pride for the Board and our employees. It is a powerful force in

attracting and retaining talented people who, as individuals, want

to be part of a company that contributes meaningfully to society.”

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Our purpose, strategy and culture

Our purpose is to help people do more, feel better and live longer

and this is underpinned by our values of patient focus, integrity,

respect and transparency. Our purpose and values have always been

a source of great pride for the Board and our employees. It is a

powerful force in attracting and retaining talented people who,

as individuals, want to be part of a company that contributes

meaningfully to society. Emma Walmsley was keen to preserve

this commitment to our purpose and values as she and her team

developed the company’s priorities around IPT, supported by

evolving a culture to foster more pace and performance edge. The

Board receives regular papers from the CEO, Head of Human

Resources and our global businesses, that update it on progress on

the alignment between our strategy and our performance and

values-based culture that was introduced at the start of 2018.

Culture change in a complex, global organisation such as GSK takes

time and sustained effort. However, we are seeing some encouraging

signs that our new expectations are taking effect and supporting our

strategy. This ultimately should enable swifter progress in getting

new medicines, vaccines and consumer healthcare products to our

patients and consumers around the world.

Risk management

The Board continues to consider GSK’s Enterprise risks and the

strategies to address them. Reviews of the risks were undertaken

throughout the course of the year, including whether the key

Enterprise risks affecting the respective businesses are being

managed and mitigated in a proportionate way, and management’s

commitment to maintain a strong controls culture.

Also of note is the recent decision by the Serious Fraud Ofﬁce,

in the UK, to close its investigation having concluded that no further

action is required. The investigation had focused on commercial

practices by the company, its subsidiaries and associated persons.

The company’s own ﬁndings have led to further improvements in

the control environment. Investigations by the US Securities and

Exchange Commission and Department of Justice remain ongoing.

Succession process

In closing, I informed the Board at the start of the year of my intention

to retire from the Board once a successor has been appointed. Our

Senior Independent Director, Vindi Banga, is leading the process to

identify and recruit my successor to lead the Board into the next

phase of its development. His update on the process and the desired

attributes sought in a new Chairman are set out on page 78.

It has been a privilege to serve as Chairman of GSK for the last four

years and to observe the positive impact on the company that Emma

has made in such a relatively short time as CEO. This Annual Report

demonstrates the clarity of the current strategy that has resulted in an

improvement in the performance of the business. However, I feel that

it is the right time to hand over the reins to a new Chair to have a clear

run at overseeing the eventual separation of GSK into two world-

class businesses. In doing so, I am conﬁdent that my successor will

continue the crucial role of the Chair in promoting and supporting our

strategy for the long-term beneﬁt of our shareholders, patients,

employees and other stakeholders.

I commend this report to all of our stakeholders.

Philip Hampton

Chairman

11 March 2019

GSK Annual Report 2018

Philip Hampton 65

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, Philip chaired major FTSE 100 companies, including

The Royal Bank of Scotland Group plc and J Sainsbury plc. He has also

served as Group Finance Director at Lloyds TSB Group plc, BT Group plc,

BG Group plc, British Gas plc and British Steel plc. Philip was previously

an Executive Director of Lazards and a Non-Executive Director of RMC

Group Plc and Belgacom SA. Until 2009, he was Chairman of UK Financial

Investments Limited, which manages the UK Government’s shareholdings

in banks. Philip was Senior Independent Director of Anglo American Plc

between 2014 and 2018, having served on its Board since 2009.

External appointments

Philip is Chair of the Hampton-Alexander Review of FTSE Women Leaders,

an independent review on improving gender balance in FTSE leadership.

As announced in January 2019, Philip will step down as Non-Executive

Chairman and the Board has started the process of identifying his successor.

Emma Walmsley 49

Chief Executive Ofﬁcer

Nationality

British

Appointed

1 January 2017. Chief Executive Ofﬁcer from 1 April 2017

Skills and experience

Prior to her appointment as GSK’s CEO, Emma was the CEO of GSK

Consumer Healthcare, leading its creation as a Joint Venture between

GSK and Novartis in March 2015 (solely owned by GSK since June 2018).

Emma joined GSK in 2010 from L’Oreal, having worked for 17 years

in a variety of roles in Paris, London, New York and Shanghai.

Emma holds an MA in Classics and Modern Languages from Oxford

University.

External appointments

Emma co-chairs the Consumer, Retail and Life Sciences Council, a business

advisory group for the UK Government, and is an Honorary Fellow of the

Royal Society of Chemistry.

Simon Dingemans 55

Chief Financial Ofﬁcer

Nationality

British

Appointed

4 January 2011. Chief Financial Ofﬁcer from 1 April 2011

Skills and experience

Prior to joining GSK, Simon had over 25 years of experience in investment

banking at SG Warburg and Goldman Sachs. Simon advised GSK for over

a decade before his appointment and was closely involved in a number

of GSK’s key strategic projects. Simon was previously Chairman of the

100 Group of Finance Directors between 2014 and 2016.

External appointments

Simon is a Trustee of The Donmar Warehouse.

Simon will step down from the Board at the conclusion of the AGM

on 8 May 2019.

Our Board

Committee Chair

Nominations

Audit & Risk

Remuneration

Science

Corporate Responsibility

Key

Board composition

Composition

Executive 33.3%

Non-Executive 66.7%

Tenure Non-Executive

Up to 3 years 25%

3-6 years 50%

7-9 years 25%

International experience

Global 83%

US 100%

Europe 92%

EMAP 67%

Gender diversity

Board At date of publication

Male 58.3%

Female 41.7%

Executive

Male 75%

Female 25%

Non-Executive

Male 50%

Female 50%

Board At close of AGM on 8 May 2019

Male 54.5%

Female 45.5%

Executive

Male 66.7%

Female 33.3%

Non-Executive

Male 50%

Female 50%

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Dr Vivienne Cox 59

Independent Non-Executive Director & Workforce

Engagement 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 BP’s gas, power and renewable business and its

alternative energy unit. Vivienne was previously a Non-Executive Director

of BG Group plc and Rio Tinto plc and Lead Independent Director at the

UK Government’s Department for International Development. Vivienne was

appointed Commander of the Order of the British Empire in the 2016 New

Year Honours for services to the UK Economy and Sustainability.

External appointments

Vivienne is Senior Independent Director of Pearson plc, a Non-Executive

Director of Stena AB and Chairman of the Supervisory Board of Vallourec.

She is an Advisory Board Member of the African Leadership Institute,

Chair of Rosalind Franklin Institute, Vice President of the Energy Institute

and a member of the advisory board of Montrose Associates. Vivienne sits

on the Global Leadership Council of Saïd Business School, Oxford and is

Patron of the Hospice of St Francis.

Lynn Elsenhans 62

Independent Non-Executive Director

Nationality

American

Appointed

1 July 2012

Skills and experience

Lynn has a wealth of experience of running a global business and signiﬁcant

knowledge of the global markets in which GSK operates. She served as

Chair, President and Chief Executive Ofﬁcer of Sunoco Inc from 2009 to

2012. Prior to joining Sunoco in 2008 as President and Chief Executive

Ofﬁcer, Lynn worked for Royal Dutch Shell, which she joined in 1980, and

where she held a number of senior roles, including Executive Vice President,

Global Manufacturing from 2005 to 2008. Lynn was previously a Non-

Executive Director of Flowserve Corporation, the First Tee of Greater

Houston, and a Trustee of the United Way of Greater Houston.

External appointments

Lynn is a Non-Executive Director of Baker Hughes, a GE company, and

Chair of its Audit Committee, as well as a Board Director of Saudi Aramco.

In addition, Lynn is a Director of the Texas Medical Center.

Iain Mackay 57

Chief Financial Ofﬁcer Designate

Nationality

British

Appointed

14 January 2019. Chief Financial Ofﬁcer from 1 April 2019

Skills and experience

Prior to joining GSK, Iain was Group Finance Director at the global bank

HSBC Holdings plc, a position he held for eight years. A chartered

accountant, Iain has worked in Asia, the US and Europe and before HSBC

was at General Electric, Schlumberger Dowell and Price Waterhouse.

External appointments

Iain is a Trustee of the British Heart Foundation and a member of the Court

of the University of Aberdeen.

Iain holds an MA in Business Studies and Accounting, and an Honorary

Doctorate from Aberdeen University in Scotland.

Dr Hal Barron 56

Chief Scientiﬁc Ofﬁcer and President, R&D

Nationality

American

Appointed

1 January 2018

Skills and experience

Prior to joining GSK, Hal was President R&D at Calico LLC (California Life

Company), an Alphabet-funded company that uses advanced technologies

to increase understanding of lifespan biology. Prior to joining Calico, Hal was

Executive Vice President, Head of Global Product Development, and Chief

Medical Ofﬁcer of Roche, responsible for all the products in the combined

portfolio of Roche and Genentech. At Genentech, he was Senior Vice

President of Development and Chief Medical Ofﬁcer. Hal was a Non-

Executive Director and Chair of the Science & Technology Committee

at Juno Therapeutics, Inc until March 2018, when it was acquired by

Celgene Corporation.

External appointments

Hal is Associate Adjunct Professor, Epidemiology & Biostatistics, University

of California, San Francisco. He is also a Non-Executive Board Director of

GRAIL, Inc, an early cancer detection healthcare company and a member

of the Advisory Board of Verily Life Sciences LLC, a subsidiary of

Alphabet Inc.

Manvinder Singh (Vindi) Banga 64

Senior Independent Non-Executive Director

Nationality

British

Appointed

1 September 2015 and as Senior Independent Non-Executive Director

from 5 May 2016

Skills and experience

Prior to joining GSK, Vindi spent 33 years at Unilever plc, where his last

role (amongst several senior positions) was President of the Global Foods,

Home and Personal Care businesses, and a member of the Unilever

Executive Board. Vindi sat on the Prime Minister of India’s Council of Trade

& Industry from 2004 to 2014, and was on the Board of Governors of the

Indian Institute of Management (IIM), Ahmedabad. Vindi is also the recipient

of the Padma Bhushan, one of India’s highest civilian honours. Vindi has

been a Non-Executive Director of Thomson Reuters Corp, Chairman of

the Supervisory Board of Mauser Group and Senior Independent Director

of Marks & Spencer Group Plc.

External appointments

Vindi is a Partner at private equity investment ﬁrm Clayton Dubilier & Rice,

Chairman of Kalle GmbH, a Director of High Ridge Brands Co and a member

of the Holdingham International Advisory Board. Vindi is a Non-Executive

Director of the Confederation of British Industry (CBI), sits on the Governing

Board of the Indian School of Business, Hyderabad and the Global Leadership

Council of Saïd Business School, Oxford and is a member of the Indo UK CEO

Forum. Vindi is Chair of the Board of Trustees of Marie Curie.

GSK Annual Report 2018

Judy Lewent 70

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 its Chief Financial Ofﬁcer from 1990 to 2007 when she retired. Judy

served as a Non-Executive Director of Dell Inc, Quaker Oats Company and

Motorola Inc, and held Non-Executive Directorships at Purdue Pharma Inc,

Napp Pharmaceutical Holdings Limited and certain Mundipharma

International Limited companies until 2014.

The Board has determined that Judy has recent and relevant ﬁnancial

experience, and agreed that she has the appropriate qualiﬁcations and

background to be an audit committee ﬁnancial expert.

External appointments

Judy is a Non-Executive Director of Thermo Fisher Scientiﬁc Inc and

Motorola Solutions Inc. She is also a Trustee of the Rockefeller Family Trust,

a life member of the Massachusetts Institute of Technology Corporation,

a member of the American Academy of Arts and Sciences and a member

of the Business Advisory Board of twoXAR.

Urs Rohner 59

Independent Non-Executive Director

Nationality

Swiss

Appointed

1 January 2015

Skills and experience

Urs has a broad range of business and legal experience having served

as Chairman on a number of Boards, most recently for Credit Suisse, a

world-leading ﬁnancial services company. Prior to joining Credit Suisse in

2004, Urs served as Chairman of the Executive Board and CEO of ProSieben

and ProSiebenSat.1 Media AG. This followed a number of years in private

practice at major law ﬁrms in Switzerland and the US, having been admitted

to the bars of the canton of Zurich in Switzerland in 1986 and the state of

New York in the US in 1990.

External appointments

Urs is Chairman of the Board of Credit Suisse Group AG and of its

Chairman’s and Governance Committee. He is also Chairman and member

of the Board of Trustees of Credit Suisse Research Institute and Credit

Suisse Foundation. Urs was appointed Vice-Chairman of the Governing

Board of the Swiss Bankers Association in 2015.

Our Board continued

Dr Laurie Glimcher 67

Independent Non-Executive Director and Scientiﬁc & Medical Expert

Nationality

American

Appointed

1 September 2017

Skills and experience

In addition to a number of senior leadership positions held at both Harvard

Medical School and Harvard School of Public Health, Laurie also served

as Stephen and Suzanne Weiss Dean and Professor of Medicine at Weill

Cornell Medical College and as an Attending Physician at the New York

Presbyterian Hospital/Weill Cornell Medical Center. Laurie stepped down

from the Board of Bristol-Myers Squibb Co (BMS) in 2017 after serving for

20 years on its Board. Laurie brings scientiﬁc and public health expertise

to the Board’s deliberations, and a wealth of global, publicly listed,

pharmaceutical business experience.

External appointments

Laurie is currently Professor of Medicine at Harvard Medical School and is

CEO, President and an Attending Physician at the Dana-Farber Cancer

Institute.

Laurie is a member of the US National Academy of Sciences and the National

Academy of Medicine. She is a member of the Scientiﬁc Steering Committee

of the Parker Institute for Cancer Immunotherapy and a Non-Executive

Director of the Waters Corporation, where she also serves on its Corporate

Governance Committee. In addition, Laurie is co-founder and Chair of the

Scientiﬁc Advisory Board of Quentis Therapeutics Inc. She is a Scientiﬁc

Advisory Board member of Repare Therapeutics Inc, Abpro Therapeutics

and Kaleido Biosciences Inc.

Dr Jesse Goodman 67

Independent Non-Executive Director and Scientiﬁc & Medical Expert

Nationality

American

Appointed

1 January 2016

Skills and experience

Jesse previously served in senior leadership positions at the US Food

and Drug Administration (FDA), including most recently as the FDA’s

Chief Scientist and previously as Deputy Commissioner for Science and

Public Health and as Director of the Center for Biologics Evaluation and

Research (CBER).

Jesse played a leadership role in developing the FDA’s Regulatory Science

and Medical Countermeasures Initiatives and has worked collaboratively

with industry, academia, government and global public health and regulatory

partners to prepare for and respond to major public health threats, including

emerging infectious diseases, disasters and terrorism. He led the FDA’s

response to West Nile Virus and to the 2009 H1N1 inﬂuenza pandemic and

served on the Senior Leadership Team for the 2010 White House Medical

Countermeasure Review. Jesse brings scientiﬁc and public health expertise

to the Board’s deliberations.

External appointments

Jesse, currently Professor of Medicine at Georgetown University, directs

the Georgetown University Center on Medical Product Access, Safety and

Stewardship (COMPASS) and is an active clinician who serves as Attending

Physician in Infectious Diseases. He also serves as President and Member

of the Board of the United States Pharmacopeia (USP), a member

of the Regulatory and Legal Working Group of the Coalition for Epidemic

Preparedness Innovations (CEPI) and of the US National Academy of

Medicine. Jesse is a member of the Board of Intellia Therapeutics,

Cambridge, MA.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Roger Connor

President, Global Vaccines

Roger joined the CET in 2013. He was appointed

President of GSK Global Vaccines in 2018.

In addition to leadership of the Vaccines business,

he is responsible for GSK’s global procurement

organisation. Previously, he was President,

Global Manufacturing & Supply and, before

that, Vice President, Ofﬁce of the CEO and

Corporate Strategy. Roger joined GSK in 1998

from AstraZeneca.

Roger holds a degree in Mechanical and

Manufacturing Engineering from Queen’s

University, Belfast and a Master’s in Manufacturing

Leadership from Cambridge University.

He is a Chartered Accountant.

James Ford

Senior Vice President & General Counsel

James joined the CET in 2018, when he was

appointed Senior Vice President and General

Counsel. He joined GSK in 1995 and has served

as General Counsel Consumer Healthcare,

General Counsel Global Pharmaceuticals,

Vice President of Corporate Legal and Acting

Head of Governance, Ethics and Compliance.

Prior to GSK, James was a solicitor at Clifford

Chance and DLA. He holds a law degree from

University of East Anglia and a Diploma in

Competition Law from Kings College. He is

qualiﬁed as a solicitor in England and Wales,

and is an attorney at the New York State Bar.

Nick Hirons

Senior Vice President, Global Ethics

and Compliance

Nick was appointed to the CET in 2014 as Senior

Vice President, Global Ethics and Compliance,

responsible for compliance, risk management,

corporate security and investigations.

Nick joined GSK in 1994 as an International

Auditor. He was later Head of Audit & Assurance,

where he combined ﬁve audit functions into an

independent team with a common risk-based

methodology. In 2013, Nick relocated to China

to establish a governance model for our China

business that created a consistent approach

to compliance.

Nick is a fellow of the Chartered Institute

of Management Accountants.

Our Corporate Executive Team

* Simon Dingemans will step down from the

CET on 31 March 2019 and Iain Mackay

will take formal responsibility as CFO from

1 April 2019.

Luc Debruyne, Dan Troy and Sir Patrick

Vallance were members of the CET before

leaving the company in December 2018,

January 2019 and March 2018 respectively.

Brian McNamara

CEO, GSK Consumer Healthcare

Brian joined the CET in 2016, when he was

appointed CEO, GSK Consumer Healthcare.

He joined GSK in 2015 as Head of Europe

and Americas for GSK Consumer Healthcare,

following the creation of a Joint Venture between

GSK and Novartis. Previously, he was head

of Novartis’ OTC division. Brian began his

career at Procter and Gamble.

Brian is a Board Member of the World Self-

Medication Industry Association, serving as

Chairman from February 2017 to March 2019,

and is a Board Member of the Consumer Goods

Forum. He earned an undergraduate degree

in Electrical Engineering from Union College

in New York and an MBA in Finance from the

University of Cincinnati.

Luke Miels

President, Global Pharmaceuticals

Luke joined GSK and the CET in September

2017 as President, Global Pharmaceuticals,

responsible for our commercial portfolio of

medicines and vaccines.

Previously, he worked for AstraZeneca as Executive

Vice President of their European business and,

prior to that, was Executive Vice President of

Global Product and Portfolio Strategy, Global

Medical Affairs and Corporate Affairs. Before

then, he held roles of increasing seniority at Roche

and Sanoﬁ-Aventis in the US, Europe and Asia.

He is a member of the Board for ViiV Healthcare.

Luke holds a Bachelor of Science degree in

Biology from Flinders University in Adelaide and

an MBA from the Macquarie University, Sydney.

David Redfern

Chief Strategy Ofﬁcer

David joined the CET as Chief Strategy Ofﬁcer

in 2008 and is responsible for corporate

development and strategic planning. Previously,

he was Senior Vice President, Northern Europe

with responsibility for GSK’s pharmaceutical

businesses in that region and, prior to that,

he was Senior Vice President for Central and

Eastern Europe. He joined GSK in 1994.

David was appointed Chairman of the Board

of ViiV Healthcare Limited in 2011 and a

Non-Executive Director of the Aspen Pharmacare

Holdings Limited Board in 2015. He has a

Bachelor of Science degree from Bristol

University and is a Chartered Accountant.

Regis Simard

President, Pharmaceuticals Supply Chain

Regis joined the CET in 2018, when he became

President, Pharmaceuticals Supply Chain.

He is responsible for the manufacturing and

supply of GSK’s pharmaceutical products.

He also leads Quality and Environment, Health,

Safety and Sustainability at a corporate level.

Regis joined GSK in 2005 as Site Director

at Notre Dame de Bondeville, rising to become

Senior Vice President of Global Pharmaceuticals

Manufacturing before his current role. Previously,

he held senior positions at Sony, Konica Minolta

and Tyco Healthcare. He is a member of the

Board for ViiV Healthcare. He is a mechanical

engineer and holds an MBA.

Karenann Terrell

Chief Digital & Technology Ofﬁcer

Karenann joined GSK and the CET in 2017 as

Chief Digital & Technology Ofﬁcer, responsible for

our technology, digital, data and analytics strategy.

Previously, she worked for Walmart as Chief

Information Ofﬁcer. Prior to this, she was at

Baxter International, where she was Chief

Information Ofﬁcer, and before that Daimler

Chrysler Corporation. Karenann began her

career at General Motors.

Karenann is a member of the board of trustees

for the New York Hall of Science and in 2017 she

became a Non-Executive Director of Pluralsight

LLC. She earned graduate and post-graduate

degrees in Electrical Engineering from Kettering

and Purdue Universities respectively.

Claire Thomas

Senior Vice President, Human Resources

Claire was appointed to the CET as Senior

Vice President, Human Resources in 2008.

She joined the Company in 1996 as Senior

Manager, Human Resources, Sales and

Marketing Group, UK Pharmaceuticals before

becoming Director of Human Resources for

UK Pharmaceuticals in 1997. She was appointed

Senior Vice President, Human Resources,

Pharmaceuticals Europe in 2001, and Senior

Vice President, Human Resources,

Pharmaceuticals International in 2006.

Prior to GSK, Claire worked for the Ford Motor

Company, holding various positions in Human

Resources. She has a Bachelor of Science

degree in Economics, Management and Industrial

Relations from the University of Wales.

Phil Thomson

President, Global Affairs

Phil joined the CET in 2011. He was appointed

President, Global Affairs in 2017, with

responsibility for the Group’s strategic approach

to reputation, policy development and stakeholder

engagement.

Previously, Phil was Senior Vice President,

Communications and Government Affairs.

Phil is Chairman of The Whitehall & Industry

Group and a Board Member of the China–Britain

Business Council. He earned his degree in

English, History and Russian Studies from

Durham University.

Emma Walmsley

Chief Executive Ofﬁcer

Simon Dingemans*

Chief Financial Ofﬁcer

Iain Mackay*

Chief Financial Ofﬁcer Designate

Dr Hal Barron

Chief Scientiﬁc Ofﬁcer

and President, R&D

For biographical details, see pages 68 and 69

GSK Annual Report 2018

Nominations

Committee

Audit & Risk

Committee

Remuneration

Committee

Scheduled Board and Committee attendance during 2018

Board Nominations Audit & Risk Remuneration Science

Corporate

Responsibility

Total number of scheduled meetings 6 6 6 5 3 5

Members Attended Attended Attended Attended Attended Attended

Philip Hampton 6 6

Emma Walmsley 6

Simon Dingemans 6

Dr Hal Barron 6

Vindi Banga 6 6 6 5

Dr Vivienne Cox 6 5 4

Lynn Elsenhans 6 6 6 5

Dr Laurie Glimcher 6 6 3

Dr Jesse Goodman 6 3 5

Judy Lewent 6 6 6 5 3

Urs Rohner 6 5

Sir Patrick Vallance

Stepped down on 31 March 2018 2 (2)

Professor Sir Roy Anderson

Retired on 3 May 2018 3 (3) 2 (2) 2 (2)

Number of ad-hoc meetings 37 3 6 6 3 1

For Directors who served for part of the year, the numbers in brackets denote the number of meetings the Directors were eligible to attend.

See the Committee Reports for other attendees at Committee meetings, such as the Chairman, CEO and other Executive Directors, and the work of the Committees

during the year. These reports are included later in the Corporate Governance Report.

See GSK.com for terms of reference for each Board Committee.

Board

The Board has established a corporate governance framework with clearly deﬁned responsibilities and accountabilities. The framework is

designed to safeguard and enhance long-term shareholder value and to provide a platform to realise the Group’s strategy through GSK’s

long-term priorities of Innovation, Performance and Trust, that is consistent with its culture, values and expectations. Our internal control and

risk management arrangements, described on pages 87 to 88 and 34 to 36, are an integral part of our governance framework.

For the Board to operate effectively and to give full consideration to key matters, Board Committees have been established as set out below.

on page 77

on page 79

on page 96

Corporate

Responsibility

Committee

on page 92

Science

Committee

on page 91

Corporate governance framework

Chief

Executive

Ofﬁcer

Corporate

Executive

Team

Leadership and effectiveness

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Areas of focus Long-term priorities link

Strategy

The Board’s oversight of the execution of our strategy included:

– Receiving and discussing reports from our three principal businesses: Pharmaceuticals, Vaccines and

Consumer Healthcare

– Receiving IPT transformation programme

– Scrutinising and approving new R&D strategy

– Holding joint Board and Corporate Executive Team strategy day to discuss IPT priorities against external landscape

changes, business performance, competitors and governance arrangements

– Scrutinising and approving major Consumer deals with Novartis, Pﬁzer and Unilever

– Scrutinising and approving an oncology deal to purchase Tesaro

– Receiving and discussing reports on our pensions, insurance, tax and treasury strategies

Performance The Board’s focus on performance included:

– Evaluating the CEO’s 2017 performance and setting her 2018 objectives

– Setting, reviewing and agreeing the annual budget and forward looking three year plan

– Receiving reports from the CEO on our three principal businesses

– Scrutinising the Group’s ﬁnancial performance

– Approving a major Group restructuring plan

– Reviewing our digital, data and analytics capabilities and opportunities

Governance

The Board’s approach to discharging its corporate governance duties included:

– Receiving reports from Board Committees

– Approving the 2017 Annual Report

– Reviewing AGM preparation and approving the 2018 Notice of AGM and a General Meeting to approve the

transaction with Novartis

– Considering observations and agreeing actions from the independent external evaluation of the Board’s performance

– Receiving reports on corporate governance and regulatory developments

– Approving appointment of new auditor

– Undertaking training on GSK’s Code of Conduct and Anti-bribery and corruption

– Approving the appointment of a new Chief Financial Ofﬁcer

Cultural

transformation

The Head of HR briefed the Board on:

– Aligning GSK’s culture and values to support our strategy and long-term priorities

Engagement

The Board’s regard for stakeholder impacts included:

– Reviewing and approving a new Trust framework that has been set in the context of external trends and stakeholder

expectations

– Receiving regular external stakeholder development reports

– Approving the evolution of our approach and changes to medical engagement with key external experts

– Designating Dr Vivienne Cox as Workforce Engagement Director to gather the views of the Group’s workforce

Link to long-term priorities Innovation

Performance

Trust

Culture

2018 Board programme

The Board is responsible for the long-term success of the company and has the authority, and is accountable to shareholders, for

ensuring that the Group is appropriately managed and achieves the strategic objectives it sets. In the performance of these duties, it has

regard to the interests of other key stakeholders and is cognisant of the potential impact of the decisions it makes. The Board discharges

those responsibilities through an annual programme of meetings and during the year it focused on a number of speciﬁc areas outlined in

the table, in line with its long-term IPT priorities underpinned by a continuing shift in culture. In addition, during the year the CEO met with

Non-Executive Directors to discuss various matters, including the progress on the company’s strategy, succession planning and continuing

regulatory investigations.

GSK Annual Report 2018

Independent oversight and rigorous challenge

Non-Executive Directors

– Provide a strong independent element to the Board

– Constructively support and challenge management

and scrutinise their performance in meeting agreed

deliverables

– Shape proposals on strategy and management

– Each has a letter of appointment setting out the terms

and conditions of their directorship

– Devote such time as is necessary to the proper

performance of their duties

– Are expected to attend all meetings as required.

Independence statement

The Board considers all of its Non-Executive Directors

who are identiﬁed on pages 68 to 70 to be independent.

They each demonstrate an appropriate degree of

independence in character and judgement and are free

from any business or other relationship which could

materially interfere with the exercise of their judgement.

The independence and commitment of Lynn Elsenhans

and Judy Lewent, who have served on the Board for over

six years, has been subjected to a rigorous review.

Senior Independent Non-Executive Director

Vindi Banga

– Acts as a sounding board for the Chairman and a trusted

intermediary for other Directors

– Together with the Non-Executive Directors, leads the

annual review of the Chairman’s performance, taking

into account views of the Executive Directors

– Discusses the results of the Chairman’s effectiveness

review with the Chairman

– Leads the search and appointment process and

recommendation to the Board of a new Chairman

– Acts as an additional point of contact for shareholders

– In doing so, maintains an understanding of the issues and

concerns of major shareholders through brieﬁngs from the

Investor Relations team and the Company Secretary.

The Senior Independent Non-Executive Director’s role description is

available on GSK.com

Key Board roles and responsibilities

Leadership

Chairman

Philip Hampton

– Leads and manages the business of the Board

– Provides direction and focus

– Ensures clear structure for effective operation of the

Board and its Committees

– Sets Board agenda and ensures sufﬁcient time is

allocated to promote effective debate to support sound

decision making

– Ensures the Board receives precise, timely and clear

information

– Meets with each Non-Executive Director on an annual

basis to discuss individual contributions and performance,

together with training and development needs

– Shares peer feedback that is provided as part of the Board

evaluation process

– Meets with all the Non-Executive Directors independently

of the Executive Directors

– Maintains a dialogue with shareholders on the governance

of the company.

The Chairman’s role description is available on GSK.com

Chief Executive Ofﬁcer

Emma Walmsley

– Is responsible for the management of the Group and its

three businesses

– Develops the Group’s strategic direction for consideration

and approval by the Board

– Implements the agreed strategy

– Is supported by members of the Corporate Executive

Team

– Maintains a continual and active dialogue with

shareholders in respect of the company’s performance.

The Chief Executive Ofﬁcer’s role description is available on GSK.com

Company Secretary

Victoria Whyte

– Secretary to the Board and all Board Committees

– Supports the Board and Committee Chairs in annual agenda planning

– Ensures information is made available to the Board members in a timely fashion

– Supports the Chairman in designing and delivering Board inductions

– Coordinates continuing business awareness and training requirements for the Non-Executive Directors

– Undertakes internal Board and Committee evaluations at the request of the Chairman

– Advises the Directors on Board practice and procedures and corporate governance matters

– Chairs the Group’s Disclosure Committee

– Is a point of contact for shareholders on corporate governance matters.

Leadership and effectiveness continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

The Company Secretary assists the Chairman in designing and

facilitating individual induction programmes for new Directors.

They are designed with the purpose of orientating and familiarising

new Directors with our industry, organisation, governance and our

long-term IPT priorities.

New CET members meet with Board members as part of their

induction, and to ensure the Board maintains its connections

with the CET.

Induction

Each new Director receives a general induction, which includes

their duties and responsibilities as a Director of a listed company,

the company’s Corporate Governance structure and undertaking

training on GSK’s Code of Conduct. A personalised induction is

then devised which is individually tailored to each new Director’s

background, education, experience and role.

The induction programme for Executive Directors normally includes

an explanation of the role of an Executive Director, if appropriate,

building relationships with the Chairman, Board and the CET and

arranging to ﬁll any capability gaps the new Director may have.

The Chief Financial Ofﬁcer Designate’s induction programme was

tailored for Iain Mackay, a highly experienced global CFO, and

commenced when he joined the Board in January 2019. It includes

the following features:

– familiarisation with the industry and GSK;

– introduction to the Finance organisation and GSK’s ﬁnancial

structure; and

– introduction to senior management, other CET members and

advisors to the company.

The induction programme for Non-Executive Directors normally

includes introductory meetings with members of the CET and other

senior executives to explain the company’s business and ﬁnancial

structure, the commercial and regulatory environment in which we

operate, our competitors and an investor’s perspective.

Visits to our business operations are also a feature of Non-Executive

and Executive Directors’ induction programmes.

Board, business and key stakeholder awareness

To ensure that our Non-Executive Directors develop and maintain

a greater insight and understanding of the business and key

stakeholders, they:

– are invited to attend internal management meetings, including

meetings of the CET;

– meet employees informally during visits to the Group’s operations

and at receptions held with staff around Board meetings;

– receive monthly investor relations and stakeholder reports to

maintain awareness of investor and stakeholder views and

competitors’ performance and strategy; and

– measure progress in implementing our long-term IPT priorities and

evolving our culture through an all-employee survey undertaken

every six months and through reports on the regular conversations

the CET has directly with the workforce through the Let’s Talk

programme.

Training

The Chairman meets with each Director annually on a one-to-one

basis to discuss his or her continuing training and development

requirements. The Board is kept up to date on legal, regulatory

and governance matters through regular papers and brieﬁngs

from the Company Secretary and presentations by internal and

external advisers.

During 2018, the Board members undertook and completed training

on GSK’s Code of Conduct and Anti-bribery and corruption.

Board induction and development

GSK Annual Report 2018

Board performance action points for 2019

Further improvements Areas of focus for 2019

– Succession planning for the Board The SID is running the search process for the next Chairman supported by a

global executive search ﬁrm. Attendance at the Nominations Committee for this

process has been expanded to include all Non-Executive Directors. Further details

are set out on page 78.

The Nominations Committee has also been progressing the search for a

successor for Judy Lewent, the Chair of the Audit & Risk Committee.

– Oversight of R&D and pipeline revival and key business development

transactions, and the proposed Consumer Healthcare joint venture

with Pﬁzer

The Board will continue to monitor the performance of R&D and the pipeline

and the integration and operation of the key business development transactions

including: Tesaro, 23andMe, Merck KGaA, Darmstadt, Germany. It will also be

reviewing and overseeing arrangements for the proposed Consumer Healthcare

joint venture with Pﬁzer.

– Building Board relationships and culture in line with the CEO’s culture

work across the Group

Continuing the evolution of the Board’s culture and building relationships as the

membership has changed is an important area of focus especially with the

impending Chairman succession.

– Further enhancing the Board’s decision-making and ways of working Opportunities to further enhance the Board’s decision-making and ways of

working will continue to be considered to ensure that the Board can operate as

effectively as possible.

2018 Board performance

Progress against the conclusions of the 2017 Board evaluation review is set out below.

Areas of focus for 2018 Progress/Achievements

– A review of R&D strategy following the appointment of the new

Chief Scientiﬁc Ofﬁcer and President, R&D

The Board reviewed and approved Dr Hal Barron’s new approach to R&D which

was announced with the company’s Q2 results. The new approach focused on

science relating to the immune system, the use of genetics and investments in

advanced technologies.

– Enhancing the Board’s focus and decision making by agreeing

its clear priorities to focus on each year

The Board agreed clear priorities for focus during 2018 and was pleased

to have achieved them.

– Succession planning at senior executive and Board level The Board reviewed Executive and Non-Executive Director succession planning,

and succession processes are continuing to replace the Audit & Risk Committee

Chair. Following the Chairman’s decision to step down from the Board, the SID

is leading the succession process for the Chairman, in collaboration with the

Non-Executive Directors. Further details on Chairman succession are set out

on page 78.

– Building Board relationships and culture in line with the CEO’s

culture work across the Group

The Board was especially busy in 2018, but continues to build relationships and

evolve its culture as its membership changes.

Leadership and effectiveness continued

2018 Internal evaluation of the Board

The Board carries out an evaluation of its performance and the

performance of its Committees every year which is facilitated

externally every third year. The progress of the Board against

the outcomes of the 2017 external evaluation, which was

facilitated by Ms Fﬁon Hague of Independent Board Evaluation,

is disclosed below.

The 2018 Board and Committees evaluation process was conducted

internally by the Company Secretary who:

– interviewed each Director with a small number of focused

questions;

– drew all the responses together from the information gathered

and discussed the outcomes and recommendations with the

Chairman; and

– following discussion with the Board as a whole, identiﬁed areas

of focus and improvement for the Board which are set out below.

Further improvements and areas of focus for the Board were

identiﬁed and are set out below.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Dear Shareholder

In the last few years, the Committee has been thoughtful in its

approach to refreshing the Board and replacing retiring directors.

More recently, the Committee has supported Emma Walmsley since

her appointment as CEO in 2017 in her refreshment of the senior

leadership team to drive the delivery of her IPT priorities for the

long-term beneﬁt of shareholders, patients and our other key

stakeholders.

Executive management succession

In my Committee report last year, I shared insights on the recruitment

of several key senior executive appointments. This included Dr Hal

Barron, who joined the Board as Chief Scientiﬁc Ofﬁcer and

President, R&D on 1 January 2018 to bring a fresh approach to our

R&D business. This process has continued this year and reﬂects

positively both on a strong pipeline of top talent in the organisation

and, also, the ability to attract high-quality external hires to bring new

perspectives and approaches from outside the business.

Iain Mackay joined the Board from HSBC, to be our next Chief

Financial Ofﬁcer when Simon Dingemans (our current CFO) steps

down from the Board as planned in May 2019. Our CFO succession

process is described in more detail below.

When Simon informed the Board of his intention to leave the

company, the Committee engaged Egon Zehnder, which specialises

in the recruitment of high-calibre executives, to carry out a targeted

internal and external search for his successor. The Committee

compiled a role proﬁle for the next CFO which set out the desired

skills.

In the Committee’s view, a potential successor to Simon would

require a strong technical grasp of reporting, internal controls,

and cost and capital discipline. He/she would be familiar with

international long cycle businesses, M&A execution and, though

not essential, an understanding of manufacturing and R&D. Finally,

a successor should be an effective business partner to the CEO,

a proven communicator with shareholders and possess a strong

set of personal values.

Egon Zehnder initiated a thorough global search against this agreed

proﬁle which yielded a pool of candidates, which was then reduced

to a shortlist of several potential internal and external candidates.

These shortlisted candidates met and were subsequently interviewed

by the company’s Audit & Risk Committee Chair, the CEO, the

Remuneration Committee Chair and me, and our feedback on each

candidate was compiled. The Committee also received the CEO’s

analysis of the candidates and that of the Head of HR. The process

culminated with the Committee meeting to agree a recommendation

to the Board that Mr Iain Mackay be appointed the next CFO. The

recommendation received unanimous Board approval. On 7 August

2018, it was announced that Iain would join the Board as an

Executive Director with effect from 14 January 2019.

The Board was pleased to welcome Iain to GSK. He is a proven

CFO of a complex, regulated global bank, from his eight years as

Group Finance Director at HSBC. He brings tremendous ﬁnance

experience from different sectors from his time at HSBC, General

Electric, Schlumberger Dowell and Price Waterhouse where he

trained. He is a strong leader with a track record of driving cost,

cash and capital allocation discipline to deliver the strategy.

In addition to the new CFO, the Committee has also reviewed the

following internal senior executive appointments to the CET.

Nominations Committee report

Philip Hampton

Nominations Committee Chair

Role

The Committee reviews and recommends to the Board:

– the structure, size and composition of the Board and

the appointment of Directors, members to the Board

Committees and the CET

– succession to the Board and the CET.

Membership

Committee members Committee member since

Philip Hampton – Chair from 27 January 2015 27 January 2015

Vindi Banga 1 January 2016

Lynn Elsenhans 27 January 2015

Judy Lewent 8 May 2014

Urs Rohner 1 January 2017

Professor Sir Roy Anderson 1 October 2012 until

3 May 2018

Details of the Committee members’ skills and experience are given in

their biographies under ‘Our Board’ on pages 68 to 70. See page 72

for Committee member attendance levels.

The Company Secretary is Secretary to the Committee

and attends all meetings. Other attendees at Committee

meetings may include:

Attendees

Regular

attendee

Attends as

required

Chief Executive Ofﬁcer ✓

Head of Human Resources ✓

Appropriate external advisers ✓

Advisory services

During the year, Egon Zehnder provided recruitment

consultancy services to the Committee, in addition to

recruitment and HR services which they provide to the

company. The Committee supports the engagement of

executive search ﬁrms, such as Egon Zehnder, who have

signed up to the Voluntary Code of Conduct on gender

diversity and best practice. Egon Zehnder is also one of the

13 executive search ﬁrms to be accredited in 2018 under the

Enhanced Code of Conduct, by meeting exacting performance

criteria and best practice standards in gender-balanced

selection for FTSE 350 boards.

GSK Annual Report 2018

James Ford was appointed SVP, General Counsel on 1 August

2018, succeeding Dan Troy who had performed the role at GSK

for 10 years. James was previously SVP and General Counsel for

Global Pharma. Through his 23-year career with GSK, he has

gained wide-ranging legal experience including investigations,

complex corporate transactions and litigation in senior roles across

the US, Asia and the UK.

Roger Connor was appointed President, Vaccines on 1 September

2018 succeeding Luc Debruyne, who in the last ﬁve years of his

27 year career at GSK had been President, Vaccines. Roger has

been on the CET since 2012 as President, Global Manufacturing

& Supply and led the strategic transformation of GSK’s supply chain

to support improved quality and supply performance. He has a

proven track record of leading a complex, global organisation,

developing organisational capability and driving cultural

transformation.

Regis Simard was appointed President, Pharmaceutical Supply

Chain on 1 September 2018. Regis was previously SVP, Global

Pharma Manufacturing and joined GSK in 2005 as a site director

in France, having in the past worked in the electronics, medical

devices and pharmaceutical industries.

Diana Conrad has been appointed to succeed Claire Thomas

as SVP, HR from 1 April 2019 to lead the HR function.

Board composition and diversity

The Board has sought to balance its composition and that of its

Committees and to refresh them progressively over time so that

they can beneﬁt from the experience of longer serving Directors,

and the fresh external perspectives and insights from newer recent

appointees.

Non-Executive Directors are drawn from a wide range of industries

and backgrounds, including the pharmaceuticals industry and R&D,

vaccines, consumer products and healthcare, medical research and

academia, and insurance and ﬁnancial services, and have a wealth

of experience of complex organisations with global reach. Many of

our Board members have experience of long-cycle industries, which

is of assistance in understanding the industry in which we operate.

We are committed to the diversity of our Boardroom just as GSK

is committed to equal opportunities for all our employees at all levels

of the organisation. The Board and management seek to encourage

a diverse and inclusive culture throughout GSK.

A key requirement of an effective board is that it comprises a

range and balance of skills, experience, knowledge, gender and

independence, with individuals who are prepared to challenge each

other and work as a team. This needs to be backed by a diversity of

personal attributes, including character, intellect, sound judgement,

honesty and courage.

The Committee is responsible for developing measurable objectives

to support the implementation of the Board’s diversity policy,

including gender, and monitoring progress towards the achievement

of these objectives. Our diversity policy is in line with the measurable

targets set out in the:

– Hampton-Alexander Review to increase the number of women

in senior leadership positions in all FTSE 350 companies; and

– Parker Review Commission’s report ‘Beyond One by ‘21’ to

increase ethnic diversity appointments on the boards of FTSE

100 companies.

Progress towards our female Board representation and combined

Executive Committee and Direct Reports targets of at least 33%

by 2020 was published in the FTSE Women Leaders 2018 report,

which is reproduced below:

2018 Report Female

Representation Metrics

Female Representation as at 30 June 2018

Board

Combined Executive

Committee and Direct

Reports

2020 FTSE 100 target 33.0% 33.0%

GSK 45.5% (2017 – 41.7%) 32.5% (2017 – 25.7%)

FTSE 100 average 30.2% (2017 – 27.7%) 27.0% (2017 – 25.2%)

FTSE 100 highest 50.0% (2017 – 44.4%) 47.0% (2017 – 47.0%)

As at the date of this Report we have 41.7% women on our Board

(2017 – 38%) and 21% women on our Corporate Executive Team

(2017 – 21%).

Our female Board representation will return to 45.5% when Simon

Dingemans steps down from the Board on 8 May 2019.

Closing this gap between the Board and CET gender representation

and further increasing the pipeline of female direct reports to the

CET to achieve our 2020 target, is a particular area of attention.

We are pleased that good progress has been made, such that at this

stage we are now almost in line with our 2020 target on combined

executive committee and direct reports. The representation of

women in management positions at GSK is illustrated on page 28,

as part of the gender diversity of GSK’s global workforce.

We are in line with the Parker Report’s recommendation.

I have decided to step down from the Board. Our SID, Vindi Banga,

is leading the process to identify my successor. More details are

given below.

Chairman succession: A search process for the next Chairman

is underway supported by a global executive search ﬁrm. The next

Chairman will oversee delivery of the next phase of the company’s

strategy, continuing to strengthen the pharmaceutical business

whilst demerging the consumer business formed through the

integration of the Pﬁzer business with that of GSK. A speciﬁcation

has been agreed covering the key skills, experience and personal

characteristics deemed desirable for the role and we are also

engaging with shareholders to gather their views. The selection

committee for this process has been expanded to include all

Non-Executive Directors.

Vindi Banga

Senior Independent Director

Committee evaluation

The Committee’s annual evaluation exercise was internally facilitated

by the Company Secretary, who interviewed Committee members on

behalf of the Committee Chair. It was concluded that the Committee

continued to operate effectively. In terms of enhancements, the

Committee would seek to augment its appointment process

for the appointment of scientiﬁc and ﬁnancial experts by co-opting

subject matter experts to advise the Committee.

Philip Hampton

Nominations Committee Chair

11 March 2019

Nominations Committee report continued

Leadership and effectiveness continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Dear Shareholder

In the following pages of this report we aim to share insights into the

activities undertaken or overseen by the Committee during the year.

The Committee has worked largely to a recurring and structured

programme of activities. I devise this programme with the Company

Secretary and agree its content with management and the external

auditor at the start of each year. It is then adapted as appropriate

as the year progresses.

Financial reporting

The integrity of the ﬁnancial statements, including the Annual Report

and quarterly results announcements, is a key focus for the

Committee. This includes the Committee’s assessment of the

effectiveness of the internal controls over ﬁnancial reporting.

The Committee reviewed, at least quarterly, the company’s signiﬁcant

accounting matters, including contingent consideration liabilities,

revenue recognition and accruals for returns and rebates,

restructuring, tax and accounting for signiﬁcant transactions,

as well as the impact of changes to accounting standards.

The Committee’s position has always been to aim for clear and

transparent ﬁnancial disclosure in GSK’s ﬁnancial reporting and

to support a proactive approach that is in step with or ahead of

guidance and requirements from regulators. In line with prior years,

the Committee continued to review compliance with the latest

guidance and endorsed management proposals to further improve

disclosures particularly around the use of Alternative Performance

Measures in GSK’s 2018 preliminary results and the Annual Report.

External auditor

After a competitive tender exercise Deloitte LLP were appointed

the company’s new auditor at the 2018 AGM, replacing

PricewaterhouseCoopers LLP, after a smooth transition exercise

with minimal disruption to the business. I have maintained a strong

working relationship with the new audit partner throughout the

transition and during the 2018 audit process. Management and

Deloitte have also worked closely together, so that Deloitte could

develop a deep understanding of GSK’s business that it could bring

to bear during the 2018 Group audit. We have welcomed the new

perspectives and the challenge that Deloitte has brought to the audit.

We are also pleased to have observed further improvements in audit

quality and efﬁciencies that have resulted from Deloitte’s deployment

of data analytics.

Accountability

Audit & Risk Committee report

Judy Lewent

Audit & Risk Committee Chair

Role

The Committee reviews and is responsible for:

– ﬁnancial and internal reporting processes

– the integrity of the ﬁnancial statements, including the

Annual Report and quarterly results announcements

– the system of internal controls

– identiﬁcation and management of risks and external and

internal audit processes

– initiating audit tenders, the selection and appointment of

external auditor, setting their remuneration and exercising

oversight of their work.

Membership

Committee members Committee member since

Judy Lewent – Chair from 1 January 2013 1 April 2011

Vindi Banga 1 January 2016

Lynn Elsenhans 1 January 2014

Dr Laurie Glimcher 1 September 2017

Details of the Committee members’ ﬁnancial, accounting or scientiﬁc

experience and expertise are given in their biographies under ‘Our Board’

on pages 69 and 70. See page 72 for Committee member attendance

levels.

The Company Secretary is Secretary to the Committee and

attends all meetings. The entire Board is invited to attend the

Committee meetings and other attendees include:

Attendee

Regular

attendee

Attends as

required

General Counsel ✓

Group Financial Controller ✓

Head of Audit & Assurance ✓

Head of Global Ethics and Compliance ✓

Chief Medical Ofﬁcer ✓

Chief Product Quality Ofﬁcer ✓

External auditor ✓

In accordance with the Financial Reporting Council’s UK

Corporate Governance Code, the Board has determined

that Judy Lewent has recent and relevant ﬁnancial experience.

The Board has also agreed that she has the appropriate

qualiﬁcations and background to be an audit committee

ﬁnancial expert as deﬁned by the Sarbanes-Oxley Act of

2002, and has determined that she is independent within the

meaning of the Securities Exchange Act of 1934, as amended.

The Committee has, as a whole, competence relevant to the

sector in which the company operates.

GSK Annual Report 2018

Internal framework for control and risk

management developments

This is another core area of focus for the Committee. In 2018, the

following developments in Global Ethics and Compliance (GEC), the

business units, and across the enterprise, continued to strengthen

our controls and culture of compliance and risk management.

Technology user access controls: As part of the Committee’s

role in assessing the effectiveness of the internal controls over

ﬁnancial reporting, certain technology systems and the associated

infrastructure were identiﬁed for further focus and consideration

by the Committee especially around user access management.

Throughout the year, the Committee closely monitored the Group’s

plans to address the control ﬁndings identiﬁed. In addition, a further

programme was implemented and completed in 2018 to identify and

validate the additional layers of controls the Group has established

to mitigate this risk area, as well as some further enhancements to

these controls.

Enterprise risk management enhancements: The Committee

has also overseen the launch of a new Enterprise risk management

(ERM) cycle, which provides an end-to-end approach to planning,

mitigation and reporting of key Enterprise risks:

– introducing Enterprise risk plans (ERP) for each business, and

the Global support function, which set out its risk appetite and

tolerance, the expected controls, mitigation actions and

monitoring. The Risk Oversight Compliance Council approves

and the Committee reviews executive summaries of these ERPs;

– a controlled process of adaptions for ERPs has been established

to achieve an appropriate balance between managing Enterprise

risks on a consistent basis, while providing a measure of risk-

based ﬂexibility for various parts of the organisation where justiﬁed;

– making Enterprise risk reports more data-focused to generate

more informed discussion of risk exposure and mitigation; and

– the Committee agreed to separate Information protection into

two separate Enterprise risks – Information security and Privacy.

Privacy: During the year, the Privacy Centre of Excellence delivered

a change programme to improve and sustainably manage GSK’s

data privacy compliance, whilst ensuring compliance with the

General Data Protection Regulation that became law in May 2018.

This included:

– the implementation of a new control framework;

– remediation of certain existing business activities, including

adopting privacy controls, such as privacy contract terms, written

records of processing activities, and data protection impact

assessments; and

– a comprehensive training programme to drive greater expertise,

awareness and accountability for managing personal information

across the entire organisation.

Further details on our approach to data privacy issues is given on

page 31.

Enterprise risk framework and strategies: During the year, the

Committee considered GSK’s Enterprise risks and the strategies

to address them. These reviews were undertaken through:

– annual business unit risk and assurance update reports;

– enterprise risk strategy papers for each of our most signiﬁcant

risks;

– annual risk reviews contained in the Risk Management & Internal

Control Report which is presented by the Head of GEC.

As part of its review, the Committee assesses whether the key

Enterprise risks affecting the unit are being managed and mitigated in

a proportionate way. The Committee examines whether it is satisﬁed

with the control environment, its operation and effectiveness and

whether reﬁnements that management propose (to ensure the

environment remains ﬁt for purpose) are appropriate. It also assesses

the commitment of the business unit’s leadership to maintain a strong

controls culture.

Each business reported on key Internal Control Framework (ICF)

improvements and simpliﬁcation activities to further improve how

we manage risks. These are summarised below.

Pharmaceuticals: An overall Pharmaceuticals Leadership Team

Risk Management and Compliance Board (RMCB) was established,

providing an improved governance structure better aligned to the

organisation and strengthening connections between the regional

and country RMCBs. In addition, the Distributor Control Framework

was designed and implemented by Export Markets, simplifying

management monitoring and enabling our third-party audits to focus

on high risk distributors. The General Manager conﬁrmation process

continued to be a key focus with targeted discussions at RMCBs, a

better understanding of global mitigation actions, and accountability

for local control efforts. In addition, a Site Director conﬁrmation was

run for the ﬁrst time in 2018 with the End 2 End supply chain review.

Vaccines: Comprehensive risk reviews were carried out for key

assets such as Shingrix and Bexsero. The GEC Independent

Business Monitoring team also conducted its ﬁrst review of Vaccines

focusing on high risk areas primarily within commercial, medical

and external R&D, with conﬁrmation that controls are working as

intended. Monitoring of sites through the corporate Environment,

Health, Safety & Sustainability (EHSS) Assurance Group was also

established and an R&D mapping exercise was performed to

evaluate the need for IBM in key business activities. No gaps were

identiﬁed, and the next veriﬁcation exercise is planned for 2019.

Consumer Health: Key risk themes from monitoring and audit

ﬁndings were reviewed to identify high risk areas for enhanced risk

management and low risk areas for clearer guidance and policy

simpliﬁcation. An improved management monitoring toolkit was

developed as well as a new tool assessing country risk, incorporating

culture, commercial and qualitative criteria.

Audit & Risk Committee report continued

Accountability continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Emerging risks: For a number of years the Committee has been

considering emerging risks at each scheduled meeting. This year,

these discussions were enhanced by the results of the Audit &

Assurance (A&A) team’s Political, Economic, Social, Technological,

Legal and Environmental (PESTLE) external analysis of emerging

risks. The Committee is also examining the leveraging of new

technology and risk scanning services to better support identiﬁcation

of emerging risks.

Written standards: During 2018 a review of GSK’s most important,

global written standards has been undertaken to further simplify

and harmonise written standards and controls to make them easier

to access and understand.

Monitoring and compliance activities

Monitoring is a key element of our ICF. It provides a continuous

source of insights that inform improvements in the control environment

and there was signiﬁcant focus by each of our businesses in this

area in 2018. This included consolidated and streamlined business

monitoring and improved coordination between Enterprise risk

owners, businesses and monitoring groups. In addition, a new Travel

and Expenses system was implemented with control enhancements

utilising artiﬁcial intelligence and enhanced data analytics.

During 2018, GEC introduced an Early Case Assessment phase

to its investigation process. This empowers an investigator to quickly

determine the most appropriate action, improve the quality of the

investigation and ensure a more productive use of resources.

The Investigations team have sought to further increase trust in

our Speak Up channel arrangements by updating processes to

promote better quality decision making and improved monitoring

of lead indicators. In addition, the Investigations training and

education programme has been improved with more investigation

work performed in-house. This has resulted in a signiﬁcant reduction

in the cost of external support. In 2018, a further 70 HR, Compliance

and Legal based employees have been trained in investigative

interviewing techniques.

GSK Values & Expectations

These are a high priority for the Committee. During the year, a range

of employee resources were introduced to promote awareness,

help facilitate discussions and bring values and expectations to life

for employees. These resources included Living our Values and

Expectations discussion guides, expectations descriptors and

Let’s Talk channels. In April 2018, GEC updated GSK’s Code

of Conduct to make it shorter, simpler and easier to use.

The A&A team has conducted 18 Values Assurance Reviews (VARs)

during 2018 to test how well our values and expectations are

embedded in the organisation. These have identiﬁed follow up

action areas including: creating an environment where people are

comfortable to speak up; continuing to develop managers’ leadership

capabilities; addressing perceptions of complexity and continuing

to drive simpliﬁcation efforts; and raising awareness of GSK’s

expectations and what they mean in the context of an employee’s

roles.

GEC has continued to focus on people development and building

capabilities, including:

Ethics and Compliance Academy: A Virtual Academy run on a

quarterly basis.

Anti-bribery and corruption (ABAC): The ABAC training strategy

evolved to provide tailored and targeted modules based on

employees’ roles and responsibilities, with a particular emphasis

on further enhancing the skills of those who conduct high risk

business activities on behalf of the company.

Privacy certiﬁcation: The privacy function offered a globally

recognized professional privacy certiﬁcation from the International

Association of Privacy Professionals.

Code of Conduct: The annual mandatory training on our Code

of Conduct was delivered in two parts and focused on living our

values and expectations and ABAC. This was supplemented by

the introduction of microlearning modules that can be taken at

any time.

Committee evaluation

The Committee’s annual evaluation was internally facilitated by

the Company Secretary who interviewed Committee members on

behalf of the Committee Chair. It was concluded that the Committee

continued to operate effectively. In terms of enhancements, it was

agreed to continue:

– the good progress made during 2018 in ensuring Committee

papers are concise and accessible to facilitate productive

discussion; and

– to work with the Nominations Committee on succession planning

for the Committee Chair and for Board and Committee members

with ﬁnancial experience.

Judy Lewent

Audit & Risk Committee Chair

11 March 2019

Audit & Risk Committee report continued

GSK Annual Report 2018

Areas of Committee focus Items discussed Frequency

Financial

reporting

– Reviewed integrity of draft ﬁnancial statements, appropriateness of accounting policies and going concern

assumptions

– Considered approval process for conﬁrming and recommending to the Board that the 2017 Annual Report

is fair, balanced and understandable

– Reviewed and recommended to the Board approval of the 2017 Annual Report and Form 20-F

– Reviewed and approved Directors’ expenses

– Reviewed and recommended approval of quarterly and preliminary results announcements, dividends

and earnings guidance

– Reviewed signiﬁcant issues in relation to the quarterly and preliminary results

– Reviewed and recommended inclusion of the Viability Statement in the 2017 Annual Report

– Reviewed the ﬁnancial reporting framework and disclosure arrangements

– Reviewed major restructuring reports

– Reviewed accounting developments and their impacts as well as key accounting issues

External

auditor

– Canvassed observations of the outgoing Audit Partner on the company, the Committee and the Finance organisations

– Reviewed and approved audit/non-audit expenditure incurred during 2017

– Considered the auditor’s report on the 2017 annual results

– Performed evidence-based assessment of external auditor and the effectiveness of 2017 external audit

– Considered qualiﬁcations, expertise and independence of the external auditor

– Recommended to the Board the appointment of Deloitte and for the Committee to agree auditor’s remuneration

– Approved the 2018 audit plan and fee proposal and set performance expectations for auditor for the year

– Considered non-audit services fees for 2018 and the 2019 audit budget

– Considered initial results of 2018 external audit

– Considered internal control over ﬁnancial reporting

Global internal

control

& compliance

– Reviewed assurance reports from Global Pharmaceuticals (including R&D and ViiV Healthcare), Vaccines

and Consumer Healthcare, as well as the Global Support functions

– Reviewed GSK’s internal control framework and controls over ﬁnancial reporting

– Reviewed Technology access controls and closely monitored plans to address control ﬁndings identiﬁed

and the programme to validate mitigation

– Conﬁrmed compliance with Sarbanes-Oxley Act

– Received independent external evaluation outcomes of Audit & Assurance

– Reviewed Audit & Assurance work during 2017 and approved the planned work for 2018

– Reviewed the US Corporate Integrity Agreement

– Reviewed implementation of the enhancements to the Healthcare professional engagement policy

– Reviewed General Data Protection Regulation readiness and compliance

– Received litigation reports and updates

– Received reports on continuing investigations and on Anti-bribery and corruption (ABAC) issues

Risk – Reviewed risk management framework compliance

– Reviewed the risk elements of group treasury, pensions, risk and insurance and tax policies

– Agreed a new approach to enterprise risk management

– Received status reports on each of the company’s 11 Enterprise Risks (these Risks are disclosed on pages 34 and 35)

– Received fraud, site security and cyber security risk assessment update

– Received updates on the implications and planning for Brexit

– Received Risk Oversight and Compliance Council (ROCC) meeting updates

– Considered emerging risks

Governance and

other matters

– Conﬁrmed compliance with the UK Corporate Governance Code

– Reviewed the Committee’s terms of reference and conﬁrmed that they had been adhered to during 2018

– Received corporate governance updates

– Reviewed the Committee’s performance and effectiveness

– Reviewed and approved the Group’s Modern Slavery Act Statement

– Reviewed the company’s gender pay gap disclosures

– Met privately and separately with the Heads of Global Ethics & Compliance, Audit & Assurance, and the General Counsel

– Met privately with the external auditor at the end of each meeting as appropriate

What the Committee did during 2018

Committee Activity Key

Annually

Quarterly

Periodically

Standing

Accountability continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

In considering the quarterly ﬁnancial results announcements and the ﬁnancial results contained in the 2018 Annual Report, the Committee

reviewed the signiﬁcant issues and judgements made by management in determining those results. The Committee reviewed papers

prepared by management setting out the key areas of risk, the actions undertaken to quantify the effects of the relevant issues and the

judgements made by management on the appropriate accounting required to address those issues in the ﬁnancial statements.

The signiﬁcant issues considered in relation to the ﬁnancial statements for the year ended 31 December 2018 are set out in the following

table, together with a summary of the ﬁnancial outcomes where appropriate. In addition, the Committee and the external auditor have

discussed the signiﬁcant issues addressed by the Committee during the year and the areas of particular audit focus, as described in

the Independent Auditor’s Report on pages 128 to 139.

Signiﬁcant issues considered by the Committee

in relation to the ﬁnancial statements How the issue was addressed by the Committee

Going concern basis for the preparation

of the ﬁnancial statements

The Committee considered the outcome of management’s half-yearly reviews of current and forecast net

debt positions and the various ﬁnancing facilities and options available to the Group. Following a review

of the risk and potential impact of unforeseen events, the Committee conﬁrmed that the application of the

going concern basis for the preparation of the ﬁnancial statements continued to be appropriate.

Revenue recognition, including returns

and rebates (RAR) accruals

The Committee reviewed management’s approach to the timing of recognition of revenue and accruals for

customer returns and rebates. The US Pharmaceuticals and Vaccines accrual for returns and rebates was

£4.4 billion at 31 December 2018 and the Committee reviewed the basis on which the accrual had been

made and concurred with management’s judgements on the amounts involved. A fuller description of the

process operated in the US Pharmaceuticals and Vaccines business in determining the level of accrual

necessary is set out in ‘Critical accounting policies’ on page 63.

Provisions for legal matters, including

investigations into the Group’s

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 Group’s commercial

practices. Management outlined the levels of provision and corresponding disclosure considered necessary

in respect of potential adverse litigation outcomes and also those areas where it was not yet possible to

determine if a provision was necessary, or its amount. At 31 December 2018, the provision for legal matters

was £0.2 billion, as set out in Note 29 to the ﬁnancial statements, ‘Other provisions’.

Provisions for uncertain tax positions The Committee considered current tax disputes and areas of potential risk and concurred with

management’s judgement on the levels of tax contingencies required. At 31 December 2018, a tax payable

liability of £1.2 billion, including provisions for uncertain tax positions, was recognised on the Group’s

balance sheet.

Impairments of intangible assets The Committee reviewed management’s process for reviewing and testing goodwill and other intangible

assets for potential impairment. The Committee accepted management’s judgements on the intangible

assets that required writing down and the resulting impairment charge of £134 million in 2018. See

Note 19 to the ﬁnancial statements, ‘Other intangible assets’ for more details.

Valuation of contingent consideration

in relation to ViiV Healthcare

The Committee considered management’s judgement that following the further improved sales

performance of Tivicay and Triumeq it was necessary to increase the liability to pay contingent

consideration for the acquisition of the former Shionogi-ViiV Healthcare joint venture. At 31 December

2018, the Group’s balance sheet included a contingent consideration liability of £5.9 billion in relation

to ViiV Healthcare. See Note 39 to the ﬁnancial statements, ‘Contingent consideration liabilities’ for

more details.

ViiV Healthcare put option The Committee reviewed and agreed the accounting for the Pﬁzer put option and concurred with

management’s judgement on the valuation of the put option of £1.2 billion at 31 December 2018.

Signiﬁcant issues relating to the ﬁnancial statements

GSK Annual Report 2018

External auditor

Following an audit tender process conducted by the Committee

which concluded in December 2016, Deloitte’s appointment as

the auditor of the company and the Group was approved by

shareholders at the GSK AGM in May 2018. There were no

contractual or similar obligations restricting the Group’s choice of

external auditor.

Deloitte observed PricewaterhouseCoopers, (PwC) work as

GSK’s previous statutory auditor during the 2017 year end auditing

process. A full report on the transition process between PwC

and Deloitte is included on pages 103 and 104 in GSK’s 2017

Annual Report.

The Committee considers that during 2018, the company has

complied with the mandatory audit processes and audit committee

responsibility provisions of the Competition and Markets Authority

Statutory Audit Services Order 2014.

Effectiveness and quality of external audit process

The Committee is committed to ensuring on an ongoing basis that

GSK receives a high quality and effective audit from its external

auditor. In evaluating Deloitte’s performance during 2018, prior to

making a recommendation on their re-appointment in early 2019, the

Committee reviewed the effectiveness of their performance against

the criteria which it agreed, in conjunction with management, at the

beginning of 2018. The criteria are set out on page 85.

In undertaking this review, the Committee considered the overall

quality of the audit, the independence of Deloitte and whether they

have exhibited an appropriate level of challenge and scepticism in

their work. Because Deloitte had recently been appointed GSK’s

auditor, their length of tenure was not taken into account when

assessing their independence and objectivity.

Finally, the Committee considered feedback on the 2018 external

audit through a survey that sought views from the ﬁnancial

management team at corporate and business unit level. It covered:

– effectiveness of challenge by the auditor, their integrity and

the transparency of their reporting to management and the

Committee;

– clarity of communication by the auditor and their ways of working;

– alignment of the 2018 audit to the Group’s investment in SAP;

– quality of the audit team’s leadership; and

– skills and experience of the audit team.

Having reviewed all this feedback, and noted any areas of

improvement to be implemented in respect of the team on the

2019 audit, the Committee:

– was satisﬁed with the effectiveness of the auditor and the external

audit process; and

– was satisﬁed with the auditor’s independence, qualiﬁcations,

objectivity, expertise and resources.

The Committee therefore recommended to the Board the re-

appointment of Deloitte at the forthcoming AGM.

Auditor’s appointment

Accountability continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

The detailed criteria the Committee used for judging the effectiveness of Deloitte as the external auditor and their overriding responsibility

to deliver a smooth-running, thorough and efﬁciently executed audit for 2018 are set out below:

Performance expectations for GSK’s external auditor 2018

Audit approach

and strategy

– Leverage a centrally controlled audit approach, ensuring that GSK’s group, joint ventures and local statutory entities were audited

once and once only

– Reﬁne a consistent technology-led audit with enhanced risk assessment and analytical procedures, providing insights that combine

data trend analysis, process cycle pathways, and the identiﬁcation of audit risks, ensuring a well-informed and efﬁcient audit

– Deliver a focused and consistent audit approach globally that reﬂects local risks and materiality

High quality

independent audit

– Adhere to all independence policies (GSK’s, FRC’s 2016 Revised Ethical Standard and applicable SEC standards)

– Maintain a relentless focus on audit quality and Deloitte’s internal quality control procedures

– Provide timely clarity on assessments of accounting treatments and ensure consistency of advice at all levels

– Maintain a forward-thinking approach by raising potential issues or concerns as soon as identiﬁed

– Provide timely up-to-date knowledge of technical and governance issues, including evolving market practice on the viability statement

requirements, ESMA/SEC guidelines and new IFRSs (i.e. IFRS 16)

– Serve as an industry resource, communicating best practice trends in reporting and integrated reporting

– Provide high quality and succession planning of key staff members of Deloitte and ensure their technical skillsets are continuously enhanced

Effective

partnership

– Deliver a smooth running, thorough and efﬁciently executed audit by:

– Discussing approach and areas of focus in advance and early engagement on understanding the implications of the new operating model

– Ensuring SOX scope and additional procedures are discussed and endorsed by corporate management and communicated on a timely

basis within GSK and Deloitte

– Avoiding surprises through timely reporting of issues at all levels within the Group

– Early engagement on and provision of impact assessments of key judgements

– Ensuring clarity of roles and responsibilities between local Deloitte and Finance Services

– Responding to any issues raised by corporate management on a timely basis

– Meeting agreed deadlines

– Providing sufﬁcient time for management to consider draft auditor reports and respond to requests and queries

– Consistent and timely communication and engagement between local and central audit teams, and across all GSK stakeholder groups

– Liaise with Audit & Assurance to avoid duplication of work and Global Ethics and Compliance to ensure a common understanding of audit

outcomes, adopting a collaborative approach to solving issues

– Ultimately provide a high-quality service to the Board, be scrupulous in their scrutiny of the Group and act with utmost integrity

Auditor

transition

– Ensure a seamless, effective, and efﬁcient auditor transition from PwC to Deloitte by maximising the use of relevant information provided

by PwC in respect of the 2016 and 2017 audits of the company and its subsidiaries in relation to the audit of the Group’s consolidated

accounts

Value for

money

– Work closely with management to agree on scope changes, overruns and efﬁciencies and set clear milestones for continuous monitoring

– Provide transparency of audit time and cost incurred analysis against budget, identifying areas that will enable reduction in audit hours

without compromising audit quality and commensurately reducing audit fees

Auditor’s appointment continued

GSK Annual Report 2018

Where possible, other accounting ﬁrms are engaged to undertake

non-audit services.

Where the external auditor is permitted to provide non-audit services

(such as audit-related, tax and other services), in accordance with

GSK’s policy contained in GSK’s Finance Manual, the Committee

ensures that auditor objectivity and independence are safeguarded

by requiring pre-approval by the Committee.

The following core policy guidelines on engaging the external auditor

to provide non-audit services are observed:

– Process: ensuring all non-audit services over £50,000 are put

out to competitive tender with ﬁnancial service providers other

than the external auditor, in line with the Group’s procurement

process, unless the skills and experience of the external auditor

make them the only suitable supplier of the non-audit service

under consideration;

– Safeguards: ensuring adequate safeguards are in place so that

the objectivity and independence of the Group audit are not

threatened or compromised; and

– Fee cap: ensuring that the total fee levels do not exceed 50% of

the annual audit fee, except in special circumstances where there

would be a clear advantage in the company’s auditor undertaking

such additional work.

The company’s current policy complies with the Financial Reporting

Council’s (FRC) 2016 Revised Ethical Standard and the EU Audit

Regulation and the Sarbanes-Oxley Act of 2002. The policy contains

the following three guidelines:

Fee cap: GSK’s policy cap of 50% of the annual audit fee cap is

more stringent than the FRC’s fees cap set at 70% of the average

fees for the preceding three-year period.

Prohibitions: GSK’s policy includes a ‘black list’ of prohibited

non-audit services.

Pre-approval: The category-wide pre-approval process reﬂects

the restrictions in the FRC’s 2016 Guidance on Audit Committees,

so that all non-audit services:

– over £50,000 are pre-approved by the Committee Chairman

and CFO as delegated by the Committee;

– between £25,000 and £50,000 are pre-approved by the

Group Financial Controller; and

– under £25,000 are approved by a designate of the Group

Financial Controller.

Fees paid to the company’s auditor and its associates are set out

below. Further details are given in Note 8 to the ﬁnancial statements,

‘Operating proﬁt’.

Non-audit services

0 10 20 40

2018

Deloitte

2017

PwC

2016

PwC

Audit and assurance services

Other services, including tax, regulatory, compliance and

treasury-related services

Audit/non-audit services three year comparison graph (£m)

26.2

1.9

26.6

3.5

3.9

27.7

1.9

One of the key compliance requirements of a group’s ﬁnancial

statements is for the Annual Report to be fair, balanced and

understandable. The coordination and review of Group-wide

contributions into the Annual Report follows a well-established

and documented process, which is performed in parallel with

the formal process undertaken by the external auditor.

The Committee received a summary of the approach taken by

management in the preparation of GSK’s 2018 Annual Report

to ensure that it met the requirements of the FRC’s 2016 UK

Corporate Governance Code. This enabled the Committee, and

then the Board, to conﬁrm that GSK’s 2018 Annual Report taken

as a whole is fair, balanced and understandable and provides the

information necessary for shareholders to assess the company’s

position and performance, business model and strategy.

Code of Conduct and reporting lines

We also have a number of well-established policies, (including

a Code of Conduct), which are available on the Governance section

of our website, together with details of our conﬁdential Speak Up

reporting lines for the reporting and investigation of unlawful

conduct. An updated version of the Code of Conduct was last

published in April 2018.

Fair, balanced and understandable assessment

Accountability continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

The Board recognises its obligation to present a fair, balanced

and diligent assessment of GSK’s current position and prospects.

The Board is accountable for evaluating and approving the

effectiveness of the internal controls, including ﬁnancial, operational

and compliance controls, and risk management processes operated

by GSK.

The Internal Control Framework (the Framework) is a comprehensive

enterprise-wide risk management model and the means by which

GSK ensures the reliability of ﬁnancial reporting and compliance

with laws and regulations. The Framework supports the continuous

process of the Board’s identiﬁcation, evaluation and management of

the Group’s Principal Risks, as required by the Financial Reporting

Council’s (FRC’s) UK Corporate Governance Code (the Code), and

is designed to manage the risk of not achieving business objectives.

Internal control framework

A ﬁt for purpose Framework, in conjunction with our corporate

values, expectations and Speak Up processes, ensures that the risks

associated with our business activities are actively and effectively

controlled in line with the agreed risk appetite. We believe the

Framework provides reasonable, but not absolute, assurance against

material misstatement or loss.

The Group’s Risk Oversight and Compliance Council (ROCC), a

team of senior leaders, is mandated by the Board to assist the

Committee in overseeing risk management and internal control

activities. It also provides the business with a framework for risk

management and upward escalation of signiﬁcant risks. Each

business unit has a risk board structure which reports to the ROCC.

The business unit Risk Management and Compliance Boards

(RMCBs) are responsible for promoting the local ‘tone from the top’

and risk culture, as well as ensuring effective oversight of internal

controls and risk management processes.

Each Principal Risk has an assigned risk owner who is a member

of senior management. The risk owner is accountable for the

management of his/her respective Principal Risk, including the

setting of risk mitigation plans, their implementation and for reporting

on the risk management approach and progress to the ROCC and

the Committee every year. The ROCC and the RMCBs are assisted

by Global Ethics and Compliance (GEC), which is responsible for

advancing risk management across the enterprise and for the

development of working practices that are risk-based and ethically

sound. GEC actively promotes ethical behaviours through enabling

all members of the organisation to operate in accordance with our

values, and to comply with applicable laws and regulations.

Audit & Assurance (A&A), in line with an agreed assurance plan,

provides independent assurance to senior management and the

Board on the effectiveness of risk management across the Group.

This assurance helps senior management and the Board to meet

their oversight and advisory responsibilities in fulﬁlling the Group’s

strategic objectives and building trust with patients and other

stakeholders. A&A has a dual reporting line into the Chief Financial

Ofﬁcer and the Committee.

The Committee receives regular reports from business units,

Principal Risk owners, GEC and A&A on areas of signiﬁcant risk

to the Group and on related internal controls. These reports provide

an assessment on the internal control environment within each

Principal Risk area, including enhancements to strengthen the

control environment. Following the consideration of these reports,

the Committee concludes on the effectiveness of the internal control

environment and reports to the Board annually. In accordance with

the FRC’s Code provisions, the Board, through the authority

delegated to the Committee, has conducted a robust assessment

of the Group’s Principal Risks. This includes the consideration of

the nature and extent of risk it is willing to take in achieving the

Group’s strategic objectives. The Board, through the Committee,

has maintained oversight to ensure the effectiveness of the internal

control environment and risk management processes in operation

across the Group for the whole year, and up to the date of the

approval of this Annual Report.

Business

Activities

The Framework

GSK Annual Report 2018

The Board’s review focuses on the company and its subsidiaries and

does not extend to material associated undertakings, joint ventures

or other investments, although it considers the risk of the company’s

participation in these activities. There are established procedures

and controls in place to identify entities whose results must be

consolidated with the Group’s results. We believe the process

followed by the Board, through the Committee, in reviewing regularly

the system of internal controls and risk management processes is

in accordance with the Guidance on Risk Management, Internal

Control and Related Financial and Business Reporting issued by

the FRC.

A review of the Group’s risk management approach is further

discussed in the ‘Risk management’ section of the Strategic report

on pages 34 to 36. Our management of each Principal Risk is

explained in ‘Principal risks and uncertainties’ on pages 241 to 250.

The Group’s viability is discussed in the Group ﬁnancial review

section of the Strategic report on page 37.

Internal control framework continued

Governance structure of risk management

Accountability for monitoring

Responsibility for implementing

Audit & Risk Committee

Board of Directors

Risk Oversight and

Compliance Council

Corporate Executive Team

Risk Management and

Compliance Boards

Business units

– Responsible for reviewing and approving

the adequacy and effectiveness of our risk

management and internal controls

– Responsible for our system of corporate

governance, strategy, risk management and

ﬁnancial performance

– Authorised by the Board to assist the Audit

& Risk Committee in overseeing the risk

management and internal control activities

of the Group

– Ensure that appropriate internal controls for

effective risk management are implemented

– Complemented by Country Executive Risk

Boards to ensure a consistent approach to

risk management across local territories

– Supports the CEO in managing our business

and activities

– Responsible for our system of corporate

governance, strategy, risk management and

ﬁnancial performance

Accountability continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Engagement activities

Relations with stakeholders

In the performance of its legal duty to promote the success of the

company, the Board has regard to a number of factors, including

listening to and considering the views of shareholders and other key

stakeholders and is cognisant of the potential impacts of decisions it

makes on our stakeholders, the environment and the communities in

which we operate.

Our principal Board Committees have delegated powers that enable

a more in-depth assessment of the impacts of the company’s wider

engagement with stakeholders. It also provides a means of

identifying emerging stakeholder-related issues that can be brought

to the attention of the Board, which in turn enables us to further

invest in activities to build trust in our reputation for operating

responsibly to deliver on our purpose.

Engagement with the company’s main stakeholder groups, including

our patients, shareholders, consumers, customers and employees, at

all levels of the organisation and across the enterprise is summarised

on page 11. The Board’s interactions with two of the company’s main

stakeholder groups – shareholders and people – are set out in more

detail below.

All shareholders

We try to engage with shareholders in several ways. This includes

regular communications, the AGM and other investor relations

activities. We announce our results on a quarterly basis and our

annual results are included in our Annual Report. All shareholders

receive an Annual Summary which advises them that our Annual

Report and Notice of our Annual General Meeting are available.

Our major shareholders

During the year, after publication of our quarterly results, the CEO,

Emma Walmsley, and CFO, Simon Dingemans, gave presentations

to institutional investors, analysts and the media by webcast

teleconference. In July, Emma and Dr Hal Barron held an R&D update

event at which they announced a new approach to R&D that is

designed to capitalise on the assets in the company’s promising

early-stage pipeline and build the next wave of growth for GSK for

the beneﬁt of patients and shareholders. This update to our major

shareholders concluded with a Q&A session.

Emma and Simon maintain a continual and active dialogue with

institutional shareholders on performance, plans and objectives

through a programme of regular meetings. During the year, they held

a total of 83 individual meetings with major shareholders and they

have hosted a total of 27 group meetings with major shareholders

and potential major shareholders.

Philip Hampton also meets with major shareholders to hear their

views and discuss issues of mutual importance. He then

communicates their views to the rest of the Board. During the year,

he held six individual meetings with major shareholders on a range

of issues. Our Senior Independent Non-Executive Director (SID)

and our other Non-Executive Directors are available to meet with

major shareholders.

We normally hold a governance event at the end of each year with

institutional shareholders, key investment industry bodies and

inﬂuential proxy advisory ﬁrms, at which the Chairman, SID and

each of our Committee Chairs discuss particular areas of focus

associated with our corporate governance, corporate responsibility

and remuneration arrangements. The governance event for 2018 was

cancelled as the company was in possession of inside information

ahead of its announcement of the proposed joint venture with Pﬁzer’s

consumer healthcare business.

On a continuing basis, our Investor Relations department,

with ofﬁces in London and Philadelphia, acts as a focal point for

communication with institutional investors. Our Company Secretary

acts a focal point for communications on corporate governance

matters. We also have a small central Corporate Responsibility (CR)

team which coordinates strategy, policy development and reporting

speciﬁcally with respect to CR. The team communicates with socially

responsible investors and other stakeholders.

Our retail shareholders

The Company Secretary acts as a focal point for retail investors and

manages key relationships with the company’s registrars, Equiniti in

the UK and The Bank of New York Mellon, who administer our ADR

programme in the US.

GSK Annual Report 2018

Engagement activities continued

Annual General Meeting

All shareholders are invited to attend our Annual General Meeting.

This year’s AGM will be held in May at the Soﬁtel London Heathrow

Hotel.

Our 2018 AGM had a good level of attendance and engagement

by shareholders. All our proposed resolutions were approved by

shareholders. The level of support ranged from 90% to 99%.

The AGM provides an opportunity to put questions to our Board

and the Chairs of each of our Board Committees during the formal

AGM proceedings, while providing shareholders the chance to

meet informally with our Board Directors who will make themselves

available before the meeting.

Our people

The Board is fully supportive of the Group’s commitment to being

a progressive, modern employer to attract, retain and motivate the

very best talent and drive high levels of employee engagement.

A key transformation priority for the CEO is to evolve the culture

of the company to enhance business performance. Our strategic

success relies on our ability to engage our employees behind

the delivery of the company’s long-term IPT priorities underpinned

by a continuing shift in culture. Therefore, employee engagement is

a key barometer for measuring how people feel working for GSK

and the tools we use to measure our people’s views are discussed

on page 28.

Workforce Engagement Director

To underscore the Board’s commitment to strengthen its

engagement with our people and to gather their views, it has

designated one of our independent Non-Executive Directors,

Dr Vivienne Cox, as the company’s Workforce Engagement

Director in December 2018.

The Board ﬁrmly believes that this formal model of engagement:

– is most likely to best connect our pre-existing employee

engagement activity and employee voice channels with

boardroom decision-making to promote meaningful

engagement;

– provides a regular platform for the independent element of

the Board to have direct conversations with the workforce,

individually and in group settings, to gain insights into their

experiences, concerns and perspectives, and to better

understand whether the cultural change already underway

is embedding in the organisation to support our long-term

IPT priorities; and

– is therefore the model most likely to add immediate value.

A programme of activities is being compiled to ensure that

Vivienne is accessible to the workforce and to gather their

feedback for consideration by the Board.

She is looking forward to sharing her insights and experiences

gained as our Workforce Engagement Director in next year’s

Annual Report.

Stakeholder engagement,

see page 11

Trust, see page 24

Modern employer,

see page 28

Shareholder information,

see page 251

Relations with stakeholders continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

– oversight of R&D projects portfolio governance; and

– R&D’s culture, talent, capabilities and incentive arrangements.

In particular in 2018, the Committee reviewed the key features

of Dr Barron’s new approach to R&D, which focuses on science

related to the immune system, the use of human genetics and

advanced technologies to help identify the next generation of

transformational medicines for patients.

The Committee has reviewed several assets currently in clinical

development and notes the signiﬁcant progress made to strengthen

the pharmaceuticals pipeline, particularly in the area of oncology.

The company currently has 46 assets in development, with 33

immunomodulators, of which 16 are focused on oncology. In

addition, the Committee has considered from a scientiﬁc perspective

and was pleased to recommend to the Board the following key

business development transactions:

Tesaro: strengthening the Pharmaceuticals pipeline with the

acquisition of this oncology-focused biopharmaceutical company.

It has a major marketed project, Zejula, which is an oral poly ADP

ribose polymerase (PARP) inhibitor approved in the US and Europe

for adults with recurring ovarian cancer. We believe PARP inhibitors

also offer signiﬁcant opportunities for treating patients with many

other cancer types. Several other promising oncology assets were

also acquired as part of this transaction, including a PD-1 inhibitor

(dostarlimab) currently being studied for endometrial cancer.

23andMe: forming this exclusive collaboration with the world’s

leading consumer genetics and research company. This will

combine our scientiﬁc and medical knowledge with large-scale

genetic resources and unique data science skills, improving the

probability of R&D success.

Merck: agreeing a proposed global strategic alliance with Merck

KGaA, Darmstadt, Germany to jointly develop and commercialise

M7824. This is an investigational bifunctional fusion protein

immunotherapy that is currently in clinical development, including

potential registration studies, for multiple difﬁcult-to-treat cancers.

This includes a phase II trial to investigate M7824 compared with

pembrolizumab as a ﬁrst line treatment in patients with PD-L1

expressing advanced non-small cell lung cancer.

Committee evaluation

The second annual evaluation of the Committee was internally

facilitated by the Company Secretary, who interviewed Committee

members on behalf of the Committee Chair. In terms of

enhancements, as the Committee settles into its role, consideration

would be given to how it reﬁnes its work and focus to exercise

effective oversight of the embedding of the new R&D strategy.

Next steps

The Committee will continue to review how the new approach to

R&D is progressing and the culture change underway in R&D, and

expects to see major data readouts and news ﬂow on several new

medicines in 2019. Finally, I would like to thank Professor Sir Roy

Anderson who stood down from the Committee, when he retired

from the Board in May, for his signiﬁcant contribution to helping me

shape the role and focus of the Committee.

Dr Jesse Goodman

Science Committee Chair

11 March 2019

Science Committee report

Dr Jesse Goodman

Science Committee Chair

Role

The Committee:

– undertakes periodic reviews of R&D strategy and progress

– assesses the overall performance, including relevant

ﬁnancial metrics, effectiveness and competitiveness of R&D

– helps identify critical emerging trends in science and

medicine and their potential impact on the company

– undertakes periodic reviews of the company’s scientiﬁc

capability and talent

– reviews the scientiﬁc opportunity in speciﬁc large scale

investments or business transactions

– reviews the output of the Group’s science advisory boards.

Membership

Committee members Committee member since

Dr Jesse Goodman – Chair from 1 January 2017 1 January 2017

Dr Laurie Glimcher 1 September 2017

Judy Lewent 1 January 2017

Professor Sir Roy Anderson 1 January 2017 until

3 May 2018

Details of the Committee members’ skills and experience are given in

their biographies under ‘Our Board’ on pages 69 and 70. See page 72

for Committee member attendance levels.

The Company Secretary is Secretary to the Committee

and attends all meetings. Other attendees at Committee

meetings may include:

Attendee

Regular

attendee

Attends as

required

Company Chairman ✓

Chief Executive Ofﬁcer ✓

Chief Scientiﬁc Ofﬁcer and President, R&D ✓

President, Global Vaccines ✓

Independent senior external scientiﬁc adviser(s) ✓

Chief Financial Ofﬁcer ✓

Other company executives ✓

Dear Shareholder

I am pleased to present my second report of the Science

Committee’s activities (the Committee).

During 2018, the Committee has sought to further evolve its ways of

working and oversight of R&D to support the Board and Dr Hal Barron

in considering our science, pipeline and R&D strategy and priorities.

The Committee has developed an annual programme of activities

to support its core role of R&D oversight to help discharge its

responsibilities. Items for consideration by the Committee include

receiving:

– regular updates on the Pharmaceuticals and Vaccines priority assets;

– regular R&D strategy updates;

GSK Annual Report 2018

Dear Shareholder

As Chair of the Corporate Responsibility Committee (the Committee)

I am pleased to present the Committee’s 2018 report.

The Committee forms an important part of the Board’s oversight of

the Company’s responsible business agenda, ensuring management

is working to deliver long-term value for both shareholders and

society. The Committee has a rolling agenda and receives reports

from members of the CET and senior managers to ensure that

progress in meeting our responsible business commitments is

reviewed on a regular basis.

Committee membership

Committee members bring a wide range of sector experience,

insight and stakeholder perspectives to help provide oversight on

these topics. This helps monitor the company’s work to engage

effectively with its key stakeholders and to assess if the company is

operating in a way that seeks to meet the high external expectations

of GSK as a global healthcare company.

During the year, Professor Sir Roy Anderson stood down from

the Committee when he retired from the Board in May 2018.

I greatly appreciated the insights that he brought to the work of

the Committee during his tenure, including the development of the

new commitments to support the delivery of GSK’s Trust priority.

I was pleased to invite Regis Simard, President Pharma Supply

Chain, to attend the Committee on a regular basis. Regis has

responsibility for product quality and environment, health, safety

& sustainability (EHSS); vital areas of the company’s operations

over which the Committee exercises oversight.

Areas of focus in 2018

The Committee has again focused on topics that are material

to the company’s purpose, strategy, values and expectations.

The Committee plays an integral role in the oversight of GSK’s

responsible business commitments. This year, the work of the

Committee included continued oversight of the development of a

new set of focused commitments to support the Company’s Trust

priority. These new commitments build on a strong performance

in responsible business over many years and are set in the context

of external trends and stakeholder expectations. The framework

surrounding these commitments had been subject to review by key

stakeholders after which their feedback was incorporated to further

strengthen its design and operation. The Board was pleased to

support the Committee’s recommendations.

The new framework identiﬁes 13 commitments across three focus

areas where the company can maximise its social impact: using

science and technology to address health needs; making products

affordable and available; and being a modern employer. These focus

areas are supported by commitments across the fundamentals of

being a responsible healthcare company: reliable supply; ethics

and values; data and engagement; and the environment.

Corporate Responsibility Committee report

Lynn Elsenhans

Corporate Responsibility Committee Chair

Role

The Committee reviews:

– external issues that have the potential for serious impact

upon GSK’s business and reputation

– oversight of the views and interests of internal and external

stakeholders

– consideration of GSK’s Trust priority and annual governance

oversight of progress against GSK’s commitments which

reﬂect the most important issues for responsible and

sustainable growth

Membership

The membership of the Committee and appointment dates are

set out below:

Committee members Committee member since

Lynn Elsenhans – Chair from 8 May 2015 1 October 2012

Dr Vivienne Cox 1 July 2016

Dr Jesse Goodman 1 May 2016

Professor Sir Roy Anderson 1 May 2016 until 3 May 2018

Details of the Committee members’ skills and experience are given in

their biographies under ‘Our Board’ on pages 69 and 70. See page 72

for Committee member attendance levels.

The Company Secretary is Secretary to the Committee

and attends all meetings. Other attendees at Committee

meetings may include:

Attendee

Regular

attendee

Attends as

required

Chief Executive Ofﬁcer ✓

Company Chairman ✓

Chief Scientiﬁc Ofﬁcer and President, R&D ✓

General Counsel ✓

President, Global Affairs ✓

President, Pharma Supply Chain ✓

President, Global Pharmaceuticals ✓

President, Global Vaccines ✓

CEO, GSK Consumer Healthcare ✓

Head of Human Resources ✓

SVP, Corporate Affairs ✓

VP, Trust and Global Health ✓

Other Executives ✓

Independent external corporate

responsibility adviser ✓

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

During the year, management presented to the Committee on

a number of topics across the breadth of the Trust priority:

Using science and technology to address health needs:

The Committee reviewed proposals from management for a new

global health strategy, designed to align to the company’s IPT

strategy. The new approach is more focused to achieve maximum

social impact to support the strategic theme of ﬁghting infectious

diseases impacting children and young people in developing

countries. The Committee discussed the importance of end-to-end

planning of global health assets – through partnering with others

from R&D to manufacturing – to ensure their sustainability over

the long-term.

Making products affordable and available: During the year

we also considered access and affordability, and the company’s

commitment to making our products available at prices that are

responsible and sustainable for the business. We reviewed the

global pricing strategies of our Pharmaceuticals business with a

particular focus on the US environment, which is the company’s

current largest single market, and where the operating context

continues to evolve.

Being a modern employer: The Committee also had oversight

of the company’s new commitments for being a modern employer

which centre on three main elements: engaged people; inclusion

and diversity; and health, wellbeing and development. The

Committee discussed the results from the global employee survey

and management’s plans for responding to lower scoring areas.

Responsible business: During the year the Committee reviewed

the progress made on GSK’s commitments to the fundamentals of

being a responsible business. This included oversight of progress

made to reduce the company’s environmental impacts across

carbon, water and waste, and the setting of new targets to 2030.

Updates on business conduct and engagement with healthcare

professionals were also discussed by the Committee.

The Committee also reviewed and approved the company’s reporting

on progress made on the company’s responsible business

commitments.

Stakeholder engagement and insights

The Committee pays close attention to the evolving views and

expectations of the company’s broad range of key stakeholders.

A regular report on stakeholder insights is reviewed and discussed

at each meeting to ensure the Committee considers the issues that

may have a bearing on the company’s reputation and the delivery of

its responsible business agenda. The Committee also received an

update on GSK’s reputation research to understand relevant insights

for its strategy. Employee insights were discussed in relation to the

company’s modern employer agenda and the results of the Global

employee survey.

This year we have continued to enjoy positive engagement with

investors on our responsible business approach and performance.

I meet directly with shareholders from time to time to understand

any issues and concerns they may have and other Committee

members also meet informally with shareholders before the AGM.

The Committee was very pleased to see the company maintain ﬁrst

position in the Access to Medicines Index, and second position in

the Dow Jones Sustainability Index for our industry, two investor

supported external benchmarks.

Independent external corporate responsibility advisor

Ms Sophia Tickell serves as an independent external advisor to

the Committee. Ms Tickell has extensive experience in the

pharmaceuticals industry in improving health systems’ productivity,

sustainability in energy supply and distribution, climate change

policy and short-termism in ﬁnancial markets.

She is co-founder and Director of Meteos, from where she directs

the Pharma Futures Series, which aims to better align societal and

shareholder value. She holds several other board and advisory roles.

Ms Tickell attended meetings of the Committee and provided

independent advice and guidance on corporate responsibility

matters to both the Committee Chair, the CEO and the President,

Global Affairs.

Committee evaluation

The Committee’s annual evaluation exercise was internally facilitated

by the Company Secretary, who interviewed Committee members on

behalf of the Committee Chair. It was concluded that the Committee

continued to operate effectively. In terms of enhancements, the

Committee would continue to review opportunities to develop its

remit to further support the company’s CR agenda and goals.

As part of this process, it would consider best practice at similar

committees and examine its current responsibilities in relation to

the remit of GSK’s other Board Committees.

Committee aims for 2019

Over the next year we will continue to understand GSK’s

material responsible business topics and seek to understand

how management is responding to the expectations of external

stakeholders. The Committee is well positioned in 2019 to support

the delivery of the new commitments to support Trust, one of

GSK’s long-term business priorities.

Lynn Elsenhans

Corporate Responsibility Committee Chair

11 March 2019

Area of responsibility Items addressed during 2018

External issues that have the

potential for serious impact upon

GSK’s business and reputation

– Health and safety update

– Regular reputational and emerging

issues update

– Oversight of corporate reputation

research and KPI

Oversight of stakeholder views

and engagement

– Stakeholder insights update

– Employee survey

Annual governance oversight

of progress against GSK’s

responsible business

commitments to support Trust

– Responsible Business Supplement

approval

– Oversight of new commitments

– Global health strategy

– Sustainable access and affordability

– Business conduct

– Modern employer

– Environmental targets

Corporate Responsibility Committee report continued

GSK Annual Report 2018

Our Directors’ powers are determined by UK legislation and our

Articles of Association, which contain rules about the appointment

and replacement of Directors. They provide that Directors may

be appointed by an ordinary resolution of the members or by a

resolution of the Board, provided that, if appointed by the

Board, the Director retires at the AGM following the appointment.

Our Articles also provide that all Directors are required to seek

re-election annually at the AGM in accordance with the UK

Corporate Governance Code.

A Director will cease to be a Director if he or she:

– becomes bankrupt

– ceases to be a Director by virtue of the Companies Act or the Articles

– suffers mental or physical ill health and the Board resolves

that he or she shall cease to be a Director

– has missed Directors’ meetings for a continuous period of six

months without permission and the Board resolves that he or

she shall cease to be a Director

– is prohibited from being a Director by law

– resigns, or offers to resign and the Board accepts that offer

– is required to resign by the Board.

Directors’ conﬂicts of interest

All Directors have a duty under the Companies Act 2006 to avoid

a situation in which they have, or could have, a direct or indirect

conﬂict of interest or possible conﬂict with the company. Our Articles

provide a general power for the Board to authorise such conﬂicts.

The Nominations Committee has been authorised by the Board

to grant and regularly review any potential or actual conﬂict

authorisations, which are recorded by the Company Secretary

and noted by the Board. Directors are not counted in the quorum

for the authorisation of their own actual or potential conﬂicts.

On a continuing basis, the Directors are responsible for informing

the Company Secretary of any such new actual or potential conﬂicts

that may arise or if there are any changes in circumstances that may

affect an authorisation previously given. Even when provided with

authorisation, a Director is not absolved from his or her statutory duty

to promote the success of the company. If an actual conﬂict arises

post-authorisation, the Board may choose to exclude the Director

from receipt of the relevant information and participation in the

debate, or suspend the Director from the Board, or, as a last resort,

require the Director to resign.

The Nominations Committee reviewed the register of potential

conﬂict authorisations in January 2019 and reported to the Board

that the conﬂicts had been appropriately authorised and that the

process for authorisation continues to operate effectively. Except

as described in Note 35 to the ﬁnancial statements, ‘Related party

transactions’, during or at the end of the ﬁnancial year no Director

or Person Closely Associated had any material interest in any

contract of signiﬁcance with a Group company.

Our Articles also prohibit a Director from voting on any resolution

concerning his or her appointment or the terms or termination

of his or her appointment.

Independent advice

The company has an agreed procedure for Directors to take

independent legal and/or ﬁnancial advice at the company’s

expense where they deem it necessary.

Indemniﬁcation of Directors

Qualifying third party indemnity provisions (as deﬁned in the

Companies Act 2006) are in force for the beneﬁt of Directors

and former Directors who held ofﬁce during 2018 and up to the

signing of the Annual Report.

Change of control and essential contracts

We do not have contracts or other arrangements which individually

are fundamental to the ability of the business to operate effectively,

nor is the company party to any material agreements that would take

effect, be altered, or terminate upon a change of control following

a takeover bid. We do not have agreements with any Director that

would provide compensation for loss of ofﬁce or employment

resulting from a takeover, except that provisions of the company’s

share plans may cause options and awards granted under such

plans to vest on a takeover. Details of the termination provisions in

the Executive Directors’ service contracts are given in the full version

of the company’s 2017 Remuneration policy which is available at

www.gsk.com in the Investors section.

Directors’ Report

For the purposes of the UK Companies Act 2006, the Directors’

Report of GlaxoSmithKline plc for the year ended 31 December

2018 comprises pages 65 to 94 of the Corporate Governance

Report, the Directors’ statements of responsibilities on pages 126

and 127 and pages 241 to 270 of Investor Information. The Strategic

report sets out those matters required to be disclosed in the

Directors’ Report which are considered to be of strategic

importance:

– risk management objectives and policies (pages 34 to 36

and 241 to 250)

– likely future developments of the company (Strategic report)

– research and development activities (pages 13 to 23)

– inclusion and diversity (page 28)

– provision of information to, and consultation with, employees

(page 28)

– carbon emissions (page 32)

The following information is also incorporated into the Directors’ Report:

Location in Annual Report

Interest capitalised Financial statements,

Notes 17 and 19

Publication of unaudited ﬁnancial information Group ﬁnancial review, page 37

Details of any long-term incentive schemes Remuneration report

Waiver of emoluments by a Director Not applicable

Waiver of future emoluments by a Director Not applicable

Non pre-emptive issues of equity for cash Not applicable

Non pre-emptive issues of equity for cash

by any unlisted major subsidiary undertaking

Not applicable

Parent company participation in a placing

by a listed subsidiary

Not applicable

Provision of services by a controlling

shareholder

Not applicable

Shareholder waiver of dividends Financial statements,

Notes 15 and 43

Shareholder waiver of future dividends Financial statements,

Notes 15 and 43

Agreements with controlling shareholders Not applicable

The Directors’ Report has been drawn up and presented in

accordance with and in reliance upon English company law and

the liabilities of the Directors in connection with that report shall

be subject to the limitations and restrictions provided by such law.

The Directors’ Report was approved by the Board of Directors

on 11 March 2019 and signed on its behalf by:

Philip Hampton

Chairman

11 March 2019

Directors

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Remuneration

In this section

Chairman’s annual statement 96

Annual report on remuneration 98

2017 Remuneration policy summary 120

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Remuneration report

Chairman’s annual statement

2018 Total Remuneration

The following shows a breakdown of total remuneration paid to Executive Directors in ofﬁce at 31 December 2018, in respect of 2018

and 2017.

2018 at a glance

£0m

£2m

£4m

£6m

2017

2018 2017

2018

US$0m

US$2m

US$4m

US$6m

US$8m

Fixed pay – salary, beneﬁts and pension

Emma Walmsley

CEO

71%

29%

79%

21%

Performance pay – 2018 annual bonus and LTIs earned in respect

of the three year performance period to the end of 2018

Simon Dingemans

CFO

Dr Hal Barron

(1)

Chief Scientiﬁc Ofﬁcer and President, R&D

2018

46%

54%

76%

24%

75%

25%

Dear Shareholder

On behalf of the Remuneration Committee (the Committee), I am

pleased to present to you our Remuneration report for 2018.

The Annual report on remuneration and this annual statement

will be subject to an advisory vote at our AGM on 8 May 2019.

2018 performance

Overall, 2018 was a year of very good progress for GSK. We saw

Group sales growth of 5% CER driven by growth across all three

businesses, strong commercial execution of new product launches,

especially Shingrix, continued cost discipline and better cash

generation. We also achieved earnings growth with adjusted EPS

up 12%. It was a signiﬁcant year for the Group strategically, with the

launch of a new R&D strategy focused on immunology, genetics and

new technologies, together with a series of transactions that support

GSK’s strategy and reshape of the Group’s portfolio.

2018 remuneration outcomes

All awards in relation to 2018 were made in accordance with our

approved Remuneration policy. The key decisions made by the

Committee were as follows:

– The bonus outcomes for the Executive Directors were determined

by reference to performance against the agreed ﬁnancial measure,

as well as the Committee’s assessment of their individual levels

of performance. In conjunction with assessment of individual

performance, this has resulted in bonus payments being made

above target. The Committee adjusted the Adjusted Group PBIT

target upwards to reﬂect the outperformance on this measure

attributable to the timing impact of the loss of Advair exclusivity.

The Committee believe the bonus outcomes appropriately reﬂect

the overall underlying performance in 2018. Further details of the

bonus outcomes for the year are provided on page 101.

– Vesting of the 2016 Performance Share Plan (PSP) awards and

the matching awards under the Deferred Annual Bonus Plan

(DABP) were based on the pre-agreed measures of R&D new

product performance, adjusted free cash ﬂow and relative TSR,

each with an equal weighting. Performance was measured over

the three years to 31 December 2018. The threshold target for

the TSR measure was not met, but the maximum R&D target was

achieved. In reviewing the adjusted free cash ﬂow performance

the target was adjusted upwards to reﬂect the outperformance

attributable to the timing impact of the loss of Advair exclusivity.

This resulted in an overall vesting level of 59%. Further details

of the vesting outcome for the 2016 PSP and DABP matching

awards are provided on page 103.

Remuneration policy implementation for 2019

CEO remuneration

At the time of Ms Walmsley’s appointment to the role of CEO, the

Committee set her remuneration at a level to reﬂect the fact that this

was her ﬁrst CEO role, signiﬁcantly below the previous incumbent

and the market. At that time, in the 2016 Annual report on

remuneration and again in our 2017 report, we highlighted that it was

our intention to keep Ms Walmsley’s package under review in the

coming years, subject to her development and performance in role.

Ms Walmsley has now been in position for nearly two years and

in the Board’s view has already delivered a number of signiﬁcant

achievements, including developing and deploying Innovation,

Performance and Trust strategic priorities, driving culture change

across the company and strong ﬁnancial delivery in 2017 and 2018.

Looking ahead, Ms Walmsley has also set a clear capital allocation

framework for the Group and as part of this delivered the Consumer

Healthcare business buy-out from Novartis in 2018 and announced

the proposal creation of a Consumer Healthcare Joint Venture with

Pﬁzer towards the end of the year. While this remains subject to

shareholder approval, it has created a clear pathway for the Group

to deliver substantial further value for shareholders in the longer term.

Given the above, the view of the Board is that Ms Walmsley has

established herself successfully and is already demonstrating a track

record of delivering strongly against her priorities for the business. We

believe it is now the right time to start reﬂecting this development and

performance in her remuneration. This is consistent with how we

review the remuneration of all our employees as they develop and

progress in their roles.

(1) Dr Hal Barron was appointed to the Board on

1 January 2018.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Pay for performance

Adjusted Group PBIT

Maximum

(105% of target)

Target

Threshold

(95% of target)

Maximum performance target

Performance achieved

2018 Annual bonus: ﬁnancial performance

104%

[•]%

Lapsed

Vested

2016 LTI outcome: performance period ended 31 December 2018

R&D new

products

1/3rd

Relative

TSR

1/3rd

Adjusted

free cash ﬂow

1/3rd

Overall vesting 59%

33.33%

25.67%

59.00%

Following consultation with some of our major shareholders, the

Committee has considered how to address this and has taken the

feedback from shareholders into account in deciding to implement

a two-step salary increase for Ms Walmsley’s as follows:

– An 8% increase from 1 January 2019 that results in a base

salary of £1,110,348 (currently £1,028,100); and

– An 8% increase from 1 January 2020, subject to continued

development and sustained performance in role. This would

result in a base salary from 2020 of £1,199,176.

This phased approach will enable the Committee to monitor

sustained performance as well as any market developments.

Incentive measures

Following careful consideration, the Committee has determined

that no changes to our LTI measures will be made in 2019.

As such, PSP awards granted in 2019 will be subject to the same

performance conditions as in previous grants: R&D new product

performance, adjusted free cash ﬂow and relative TSR. Further

details on our implementation for 2019 are set out on page 108.

However, we are taking this opportunity to respond to feedback from

some of our shareholders to reduce the threshold level of vesting

under the TSR element of our PSP from 30% to 25% of the

maximum. Accordingly, all our performance measures for future

awards will now vest at 25% of the maximum opportunity for

threshold performance.

New appointments to the Board

In May 2018, Simon Dingemans announced that he would retire from

the company. He is a voluntary leaver and therefore will not receive

any severance payment when he leaves the company after the AGM

on 8 May 2019.

Simon will continue to receive his base salary until he leaves

GSK. He was also eligible to receive a bonus for 2018 based on

a combination of business and individual performance. He will

not receive any bonus for the portion of 2019 for which he will be

employed and any PSP and DABP matching awards which have

not already vested prior to his departure will lapse when he leaves.

He was not eligible to receive an LTI award in 2019.

In August 2018, we announced the appointment of Iain Mackay to

the role of Chief Financial Ofﬁcer from 1 April 2019. He joined the

CET and Board on 14 January 2019. Iain’s remuneration package is

fully in line with the Remuneration policy approved by shareholders

in 2017. His base salary will be £850,000, which the Committee

felt was appropriate to reﬂect his experience and qualiﬁcations

and his total compensation was also validated as being within the

competitive range seen among our UK cross-industry comparator

group.

Looking ahead

The Committee has reviewed its current practices against the revised

UK Corporate Governance Code (the 2018 Code) published by the

Financial Reporting Council (FRC) and we will report in 2020 on

how we complied with the 2018 Code during 2019.

In line with the commitment we made in our 2017 report we have

disclosed our CEO pay ratio this year, ahead of the reporting

requirement, in line with the methodology prescribed in the

secondary legislation published by the UK Government in 2018.

Given that our Remuneration policy will expire at our 2020 AGM,

this year the Committee will be undertaking a review of GSK’s

remuneration arrangements, taking into consideration the

governance developments during the period since our current

policy was approved.

We plan to continue our regular dialogue with shareholders and

will hold our annual meeting with GSK’s largest investors later in

the year to listen to their views and feedback.

AGM

Finally, I would like to thank shareholders for their ongoing input and

engagement and I welcome all shareholders’ feedback on this report.

We look forward to receiving your support for our Annual report on

remuneration at our AGM on 8 May 2019.

Urs Rohner

Remuneration Committee Chairman

11 March 2019

GSK Annual Report 2018

Annual report on remuneration

Salary Beneﬁts Pension

Annual

bonus

Vesting

of LTI

awards

B. Pay for performanceA. Fixed pay

Total

remuneration

The total remuneration for 2018 for each Executive Director is set out in the table below:

Emma Walmsley,

CEO

Simon Dingemans,

(1)

CFO

Dr Hal Barron,

(2)

Chief Scientiﬁc Ofﬁcer

and President, R&D

Sir Patrick Vallance,

(3)

(Former President, R&D)

2018

£000

2017

£000

2018

£000

2017

£000

2018

$000

2017

$000

Jan-Mar

2018

£000

2017

£000

A. Fixed pay

Salary See page 99

1,028 965 773 754 1,700 – 203 780

Beneﬁts See page 99

234 266 141 142 807 – 42 102

Pension See page 100

207 195 155 151 1,043 – 39 156

Total ﬁxed pay 1,469 1,426 1,069 1,047 3,550 – 284 1,038

B. Pay for performance

2018 Annual bonus

(4)

See pages 101 and 102 1,912 1,540 1,368 1,090 3,009 – – 1,127

Vesting of LTI awards:

DABP matching

awards

(5)

See page 103 301 112 398 156 – – – 182

PSP

(5)

See page 103

2,205 1,805 2,367 2,012 – – – 2,041

Total pay for performance 4,418 3,457 4,133 3,258 3,009 – – 3,350

A+B = Total remuneration

5,887 4,883 5,202 4,305 6,559 – 284 4,388

Notes:

(1)

Simon Dingemans’ vested PSP shares will be subject to a two-year holding period. Ms Walmsley’s PSP shares are not subject to the same holding requirement as her grant was

awarded before she was appointed an Executive Director.

(2)

Dr Hal Barron was appointed to the Board with effect from 1 January 2018.

(3)

Sir Patrick Vallance resigned from the company and the Board on 31 March 2018. Salary reﬂects the basic salary earned for the time worked from 1 January to 31 March 2018 plus

payment in lieu of accrued holiday not taken, in accordance with GSK’s standard UK holiday pay policy.

(4)

Details of the mandatory bonus deferrals under the Deferred Annual Bonus Plan (DABP) are set out on page 114. Matching awards are no longer granted under the DABP.

(5)

Further details in respect of the vesting of DABP matching awards and Performance Share Plan (PSP) awards for the three-year period to 31 December 2018 are provided on page

103.

(6)

The Committee may in speciﬁc circumstances, and in line with stated principles, apply clawback/malus, as it determines appropriate. Following due consideration by the Committee,

there has been no recovery of sums paid (clawback) or reduction of outstanding awards or vesting levels (malus) applied during 2018 in respect of any of the Executive Directors.

Past Directors: Payments to past directors are set out on page 109. The PSP and DABP awards for Sir Andrew Witty and Dr Moncef Slaoui granted in 2015 and 2016 have now vested.

The 2015 awards vested following the one-year anniversaries of their respective leaving dates in accordance with the terms of the Executive Recoupment Policy. The 2016 awards vested in

accordance with the standard vesting policy. The 2015 and 2016 PSP awards are subject to an additional two-year holding period until February 2020 and February 2021 respectively.

As disclosed on page 136 of the 2016 Annual Report they both left GSK by mutual agreement, neither received any termination payments and any outstanding incentive awards were

treated in accordance with the 2014 Remuneration policy, approved by shareholders, under which they were granted.

2018 Total remuneration (audited)

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

Comparator groups for pay and TSR

The Committee used two pay comparator groups for all roles when considering executive pay for 2018. The primary group used for each

Executive Director was as follows:

UK cross-industry comparator group Global pharmaceutical comparator group

Emma Walmsley

Simon Dingemans

AstraZeneca

BHP Group

British American Tobacco

Diageo

Reckitt Benckiser

Rio Tinto

Royal Dutch Shell

Unilever

Vodafone

Dr Hal Barron France

Sanoﬁ

Switzerland

Novartis

Roche Holdings

AstraZeneca

AbbVie

(1)

Amgen

(1)

Bristol-Myers Squibb

Eli Lilly

Johnson & Johnson

Merck & Co

Pﬁzer

(1) AbbVie and Amgen are included for remuneration benchmarking, but are not included in the TSR comparator group.

When reviewing the CEO’s remuneration, the Committee also references pay for a group of leading European companies whose selection

is based on their size and complexity.

Salary

The table below sets out the base salaries of the Executive Directors

over the last two years. As disclosed last year, the salary increases

made in 2018 were aligned with those provided to the wider

workforce. Details of salary levels for 2019 are provided on page 108.

change

Base salary

2018 2017

Emma Walmsley 2.5% £1,028,100 £1,003,000

(1)

Simon Dingemans 2.5% £772,800 £754,000

Dr Hal Barron n/a $1,700,000 –

Sir Patrick Vallance 0% £780,000 £780,000

(1) Ms Walmsley’s salary as CEO Designate between 1 January and 31 March 2017

was £850,000. Her salary then increased from 1 April 2017 to £1,003,000 when

she became CEO.

Beneﬁts

The table opposite shows a breakdown of the grossed up cash value

of the beneﬁts received by the Executive Directors in 2018 and 2017

which included:

– Employee beneﬁts: all employee share plans, healthcare,

home security, car allowance, personal ﬁnancial advice and life

assurance/death in service cover.

– Travel expenses: include travel costs for the Executive Director

and as appropriate for their spouse/partner associated with

accompanying the Executive Director on GSK business,

which are deemed to be taxable beneﬁts on the Director.

– Other beneﬁts: expenses incurred in the ordinary course

of business, which are deemed to be taxable beneﬁts for

the individual.

2018 beneﬁts

£000

2017 beneﬁts

£000

Emma Walmsley

Employee beneﬁts 74 60

Travel

144 146

Other beneﬁts 16 60

Total 234 266

Simon Dingemans

Employee beneﬁts 55 53

Travel

74 64

Other beneﬁts 12 25

Total 141 142

Sir Patrick Vallance

Employee beneﬁts 20 48

Travel

10 46

Other beneﬁts 12 8

Total 42 102

Dr Hal Barron

(1)

$000 $000

Employee beneﬁts 42 –

Travel

464 –

Other beneﬁts 301 –

Total 807 –

(1) Dr Hal Barron is based in San Francisco and travels for business purposes which

is treated from a tax perspective as a beneﬁt. It is therefore included in the table

above. The grossed up cash value of Dr Barron’s travel in 2018 was $464,314.

Other beneﬁts includes the grossed up value of UK accommodation of $294,547.

2018 Total remuneration (audited) continued

The following sections provide details of each element of ‘Total remuneration’, including how the Committee implemented the approved

Remuneration policy in 2018.

Fixed pay (audited)

GSK Annual Report 2018

100

Pensions

Executive Director

Member since Pension arrangements in 2018

Emma Walmsley 2010 20% of base salary and matching contributions on the ﬁrst £33,333 of salary;

(1)

20% of base salary

in lieu of pension on salary in excess of £33,333

(2)

Simon Dingemans – 20% of base salary in lieu of pension

(3)

Dr Hal Barron 2018 Member of the US Cash Balance and the Supplemental Cash Balance pension plans, under which GSK

makes annual contributions of 38% of base salary, in line with other US senior executives and members

of GSK’s Corporate Executive Team.

Dr Barron is also a member of the 401(k) plan open to all US employees and the Executive Supplemental

Savings Plan (ESSP), a savings scheme open to US executives to accrue beneﬁts above the 401(k)

plan limits.

Having completed one year’s service, from 1 January 2019, Dr Barron receives a combined contribution

rate under the 401(k) and ESSP plans of 6% (2% core contributions plus a match of up to 4%) of total

base salary and bonus, less the bonus deferred under the DABP.

Sir Patrick Vallance – 20% of base salary in lieu of pension

(3)

(1)

As a member of the deﬁned contribution plan, Emma Walmsley is eligible to receive a matching award of up to 5% on the ﬁrst £33,333 of her salary in accordance with the terms

of the plan.

(2)

Emma Walmsley receives a cash payment in lieu of pension of 20% of base salary in excess of £33,333 in line with GSK’s deﬁned contribution pension plan rates.

(3)

Simon Dingemans and Sir Patrick Vallance received cash payments in lieu of pension of 20% of base salary in line with GSK’s deﬁned contribution pension plan rates.

The following table shows the breakdown of the pension values set out on page 98.

Pension remuneration values

(1)

Emma Walmsley Simon Dingemans Dr Hal Barron Sir Patrick Vallance

2018

£000

2017

£000

2018

£000

2017

£000

2018

$000

2017

$000

Jan-Mar

2018

£000

2017

£000

UK deﬁned contribution 8 9 – – – – – –

US deﬁned beneﬁt – – – – 1,043 – – –

Employer cash contributions 199 186 155 151 – – 39 156

Total pension remuneration value 207 195 155 151 1,043 – 39 156

(1) The pension remuneration ﬁgures have been calculated in accordance with the methodology set out in The Large and Medium-sized Companies and Group (Accounts and

Reports) (Amendment) Regulations 2013 (Remuneration Regulations).

Further details regarding the 2018 pension values for Dr Hal Barron, are set out in the table below.

Dr Hal Barron pension values

(1)

Accrued pension

Pension remuneration

value for 2018 $000

31 December 2018

$000

31 December 2017

$000

US – Unfunded 52 – 1,043

Total 52 – 1,043

(1) Dr Hal Barron joined GSK on 1 January 2018. The pensions ﬁgures are disclosed for Dr Barron, who is a member of the US style deﬁned beneﬁt plans. In accordance with paragraph

10.e.ii of Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended, the table shows the accrued beneﬁt (ie the

annual pension accrued to date). The pension remuneration in 2018 is calculated as the increase in the accrued beneﬁt, adjusted for inﬂation and multiplied by 20 to reﬂect the fact

that the beneﬁt will be received for a number of years.

Fixed pay (audited) continued

Annual report on remuneration continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

101

2018 performance against targets

For 2018, the ﬁnancial measures and weightings were as follows:

Weighting 2018 Adjusted Group PBIT performance

Performance measure Executive Directors 2018 target

(1)

Outcome

Positioning

against target

Adjusted Group PBIT 70% £8,423m £8,754m 104%

Individual objectives 30%

(1)

Threshold and maximum performance targets were set at 95% and 105% of Target respectively. The target for 2018 was increased by £215 million to reduce the level of over

performance attributable to the original timing assumption for the loss of Advair exclusivity.

(2)

The Adjusted Group PBIT target and outcome for the purposes of the Annual bonus calculation differ from Adjusted Group PBIT disclosed elsewhere in this Annual Report,

primarily because both the target and outcome numbers are calculated applying GSK budget exchange rates and not actual exchange rates.

The following table shows actual bonuses earned compared to bonus opportunity for 2018:

2018 bonus opportunity 2018 bonus outcome

Bonus

Target

(% of salary)

Maximum

(% of salary)

2018

Base salary

Financial

performance

(% of salary)

Individual

objectives

(% of salary)

Total 2018

bonus

(% of salary)

Total 2018

bonus

000

Emma Walmsley £1,028,100 126 60 186 £1,912

Simon Dingemans 100 200 £772,800 126 51 177 £1,368

Dr Hal Barron $1,700,000 126 51 177 $3,009

The table below provides more detail on delivery against Adjusted Group PBIT:

Financial performance

– Group turnover was £30.8 billion, a 2% increase AER and 5% CER.

– Adjusted operating proﬁt was £8,745 million, 2% higher on an AER basis and 6% higher CER.

– The Adjusted operating margin of 28.4% was ﬂat on an AER basis compared with 2017 and 0.5 % higher CER. This reﬂected the beneﬁt from sales growth

across all three businesses on a CER basis and a more favourable mix, primarily in Vaccines and Consumer Healthcare. The margin also beneﬁted from the

prioritisation of R&D expenditure and the comparison with the impact of the Priority Review Voucher utilised and expensed in 2017, as well as continued tight

control of ongoing costs across all three business. This was partly offset by continued pricing pressure, particularly in respiratory, increased input costs, the

comparison with the beneﬁt in 2017 of a settlement for lost third party supply volume in Vaccines, investments in promotional product support, particularly for

new product launches, and a reduction in royalty income.

70%

Adjusted Group PBIT

30%

Individual

objectives

Annual bonus

Pay for performance (audited)

GSK Annual Report 2018

102

The following table summarises performance against the scorecard of individual objectives agreed by the Committee for each Executive Director:

Individual objectives

Emma Walmsley

– Continued focus and progress against long-term Innovation,

Performance and Trust priorities.

– Strong ﬁnancial and operational performance for the Group in

2018. Turnover £30.8 billion, Total operating proﬁt £5.5 billion,

Free cash ﬂow £5.7 billion.

– Strong launch execution evidenced by Shingrix sales

£784 million, new Respiratory products £2,612 million and

Juluca £133 million.

– New approach to R&D launched and start of strengthening of

pipeline, particularly in oncology. New R&D senior leadership

team established with outstanding new hires. Signiﬁcant

pipeline prioritisation and new R&D portfolio governance

process across R&D and commercial.

– Signiﬁcant progress made in R&D business development

through agreement to acquire Tesaro and multi-year

collaboration with 23andMe.

– Successful implementation of portfolio/brand and geographic

prioritisation in Pharmaceuticals and Consumer Healthcare

businesses.

– Signiﬁcant transactions undertaken to support strategy and

re-shape the business:

– Successful agreement with Novartis to acquire full ownership

of Consumer Healthcare business

– Divestment of Horlicks and other Consumer Healthcare

nutrition brands to Unilever

– Proposed Consumer Healthcare Joint Venture agreed with

Pﬁzer.

– New commercial operating model in Pharmaceuticals

implemented to support the evolving portfolio.

– New 5-year Pharmaceuticals supply chain strategy implemented

resulting in savings in improved productivity whilst maintaining

compliance.

– Successful employee engagement through increased visibility of

CET members through key internal communication platforms.

– Continued successful development of CET:

– Three internal CET promotions

– New external Chief Financial Ofﬁcer appointment

– Key leadership appointments in place with 69% of top 125

leaders new in role.

– Successfully achieved diversity target of 33% women at the

Senior Vice President and the Vice President level.

Dr Hal Barron

– New approach to R&D launched and start of strengthening of

pipeline, particularly in oncology. New R&D senior leadership

team established with outstanding new hires. Signiﬁcant

pipeline prioritisation and new R&D portfolio governance

process across R&D and commercial.

– Signiﬁcant progress made in business development through

agreement to acquire Tesaro and multi-year collaboration

with 23andMe.

– Good progress made in re-shaping and building capabilities in

Medicinal science and Technology organisations within R&D.

– Continued strong momentum in delivery of new approach to

R&D including:

– Ongoing re-build of Pharmaceuticals pipeline with majority

of new medicines now in development targeting modulation

of the immune system

– Major progress made in oncology pipeline reﬂecting organic

progress and agreement to acquire Tesaro

Simon Dingemans

– Delivered strong ﬁnancial leadership for the Group in 2018.

– Improved cash ﬂow generation (Free cash ﬂow £5.7 billion),

Total operating proﬁt (£5.5 billion) and Group turnover

(£30.8 billion).

– Signiﬁcant contribution in the successful execution of our

M&A strategy:

– Successful agreement with Novartis to acquire full ownership

of Consumer Healthcare business

– Divestment of Horlicks and other Consumer Healthcare

nutrition brands to Unilever

– Proposed Consumer Healthcare Joint Venture agreed with Pﬁzer

Pay for performance (audited) continued

Annual report on remuneration continued

Malus and clawback policy

For details of our policy on malus/clawback, please refer to the 2017

Executive Director Remuneration policy summary on page 121.

From 1 January 2015 in respect of each ﬁnancial year, the Committee

decided to disclose whether it (or the Recoupment Committee) has

exercised malus or clawback.

Disclosure is only made when the matter has been the subject of

public reports of misconduct, where it has been fully resolved, where

it is legally permissible to disclose and where it can be made without

unduly prejudicing the company and therefore shareholders.

In line with these disclosure guidelines, neither the Committee (nor the

Recoupment Committee) exercised malus or clawback during 2018.

Other policies

For details of our policies on recruitment remuneration, loss of ofﬁce

and termination payments, please refer to the 2017 Remuneration

policy report on pages 137 to 146 of the 2016 Annual Report,

available at www.gsk.com in the Investors section.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

103

Performance measures

and relative weighting

Outcome and vesting level

Performance targets Outcome

% of

maximum

% of

award

R&D new product

performance

(1/3rd)

R&D new product sales performance measures aggregate three-year sales for new

products launched in the three-year performance period and the preceding two years,

i.e.2014-18.

Target % vesting

Maximum £8.53bn 100%

£7.76bn 75%

£7.37bn 50%

Threshold £6.98bn 25%

£10.44bn 10 0 33.33

Adjusted free

cash ﬂow

performance

(1/3rd)

In line with the company’s agreed principles, the AFCF ﬁgures included adjustments

for a number of material distorting items, including legal settlements, exchange rate

movements and special pension contributions.

Original

Target

Revised

Target % vesting

Maximum £13.46bn £13.72bn 100%

£12.87bn £13.12bn 75%

£11.70bn £11.93bn 50%

Threshold £11.35bn £11.57bn 25%

£13.18bn 77 25.67

Relative TSR

performance

(1/3rd)

TSR ranking within comparator group

(1)

% vesting

Maximum 1st, 2nd, 3rd 100%

4th 72%

5th 44%

Threshold

(2)

Median 30%

6th to 10th 0%

(1)

TSR comparator group: AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GSK, Johnson&Johnson,

Merck & Co, Novartis, Pﬁzer, Roche Holdings and Sanoﬁ.

(2)

The vesting schedule is based on delivering 30% vesting for median performance.

In a comparator group of ten companies, median falls between two companies.

Ranked 6th 0 0

Total vesting in respect of 2016 awards

59%

Value earned from long-term incentives (LTIs)

The following tables set out the performance achieved by management against the targets set for the company’s LTI plans and also includes

an update on performance of outstanding awards.

In line with the Committee’s agreed principles, for each measure applicable to the LTI awards, actual performance against the targets is

reviewed and adjustments made as appropriate to ensure that the vesting outcome reﬂects genuine underlying business performance.

Further details on any adjustments made will be provided at the time of vesting.

2016 awards with a performance period ended 31 December 2018

The Committee reviewed the performance of the PSP awards and the DABP matching awards granted to Executive Directors against the

targets set. The Committee decided to increase the Adjusted Free Cash Flow (‘AFCF’) target and associated vesting scale for the 2016

PSP and DABP matching awards to reduce the level of outperformance attributable to the original timing assumption for the loss of Advair

exclusivity. There are no changes to the targets set for the R&D New Product performance measure or the Relative TSR performance

measure for the 2016 PSP awards and DABP matching awards.

The performance achieved in the three years to 31 December 2018 and the vesting levels are set out in the table below.

Pay for performance (audited) continued

GSK Annual Report 2018

104

Update on performance of ongoing LTI awards

The Committee also reviewed the performance of the PSP awards granted to Executive Directors in 2017 and 2018, and of the DABP

matching awards granted to Executive Directors in 2017. The following charts provide an estimate of the vesting levels taking into account

performance to 31 December 2018. Actual vesting levels will only be determined based on performance over the full three-year performance

periods. The indications below should therefore not be regarded as predictions of the ﬁnal vesting levels.

In addition to the adjustments made to the target and associated vesting scale for the 2016 PSP awards and the DABP matching awards,

adjustments have been made to the AFCF targets and associated vesting scales for the 2017 and 2018 awards, as follows:

– The target for the 2017 PSP awards and the DABP matching awards have been decreased in aggregate by £557m to £11.26bn.

This is to reﬂect:

(i) a reduction to the target due to the forecast impact of the Tesaro acquisition and the major restructuring programme announced

with the Q2 2018 results; and

(ii) an increase to the target to reduce the level of Advair outperformance attributable to the delayed loss of exclusivity. The overall net

impact is a reduction to the target.

– The target for the 2018 PSP award has been similarly adjusted for the same factors applicable to the 2017 PSP. The net overall impact

is a decrease to the target of £1.29bn to £10.79bn. The reduction is primarily driven by the impact of the restructuring programme and

the Tesaro acquisition. The adjustment for the delayed loss of exclusivity results in an increase to target.

There are no changes to the targets set for the R&D New Product performance measure or the TSR performance measure for the 2017

and 2018 awards.

R&D new

product

(1/3rd)

Adjusted free

cash ﬂow

(1/3rd)

TSR

(1/3rd)

Maximum

Threshold

Ranked 3rd

or above £12.41bn

122% of

threshold

2018 award – Performance update

Median £10.47bn

Commercially

sensitive

R&D new

product

(1/3rd)

Adjusted free

cash ﬂow

(1/3rd)

TSR

(1/3rd)

Maximum

Threshold

Ranked 3rd

or above £12.95bn

122% of

threshold

Estimated vesting level

2017 award – Performance update

Median £10.93bn

Commercially

sensitive

Pay for performance (audited) continued

Annual report on remuneration continued

For threshold performance, 25% of each award will vest in respect of R&D new product and AFCF measures and 30% for the TSR element.

The TSR comparator group remains unchanged from that shown on page 103 in respect of the 2016 awards.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

105

DABP awards PSP awards

2017

% of total bonus

deferred

2018

Number of

2018

Face value

of award

(1)

2018

Award level as %

of base salary

2018

Number of

2018

Face value

of award

(2)

Emma Walmsley 50% 58,889 shares £0.770m 550% 437,997 shares £5.7m

Simon Dingemans 50% 41,674 shares £0.545m 400% 239,442 shares £3.1m

Dr Hal Barron

(4)

n/a – – 500% 233,132 ADS $8.5m

Sir Patrick Vallance

(5)

50% 43,111 shares £0.563m – – –

(1)

The face values of the DABP awards have been calculated based on a share price of £13.07, being the closing price on 28 February 2018. These are nil-cost options.

No performance conditions are attached to the DABP awards, as they reﬂect the mandatory deferrals in respect of the 2017 annual bonus earned.

(2)

The face values of the PSP awards have been calculated based on a share price of £12.91, and an ADS price of $36.46, being the closing prices on 13 February 2018.

These are conditional shares, based on three equally weighted measures; (i) R&D New Product Performance; (ii) Adjusted free cash ﬂow; and (iii) Relative TSR. The ﬁrst

two performance measures vest at 25% at threshold, and the third performance measure at 30% at threshold.

(3)

The performance period for the PSP 2018 awards is from 1 January 2018 to 31 December 2020.

(4)

Dr Hal Barron was appointed to the Board on 1 January 2018.

(5)

Sir Patrick Vallance’s DABP award will vest as normal three years after the date it was granted.

2018 LTI awards

The levels of participation in the DABP in respect of 2017 bonus deferrals are shown in the table below. The table also shows the PSP award

details for 2018.

Historical vesting for GSK’s LTIs

2012

2013

2014

2011

2010

2009

2008

R&D new product

Adjusted free cash ﬂow

TSR

Business diversiﬁcation

Lapsed

Year of grant Performance measures Total vesting level

Performance measures key

Lapsed

0% 10% 20% 30%

40% 50% 60%

70% 80% 90% 100%

21 17

7 7

13 16 11

9 16

9 40

2015

15 21 33

2016

0 26 33

Pay for performance (audited) continued

All-employee share plans

UK Executive Directors may participate in HMRC approved

all-employee share plans, i.e. Share Save and Share Reward plans.

Participants of the Share Save Plan may save up to £250 a month

for three years and at the end of the period have the option to buy

GSK shares at a 20% discount to the share price at the start of the

savings contract. Participants of the Share Reward Plan contribute

up to £125 a month to purchase GSK shares which the company

then matches.

Monthly saving

Share Save (£) Share Reward (£)

Emma Walmsley 250 125

Simon Dingemans 150 125

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 2018 is as follows:

0604020

Actual Limit

080604020 10

All GSK employee share plans

10%

1.94%

Executive share plans

1.66%

GSK Annual Report 2018

106

4 6 8 10 16

cross-industry

group

European

cross-industry

group

12 14

Global

pharmaceutical

group

Lower quartile

to median

Median to upper

quartile

Emma Walmsley’s

current position

(£m)

Remuneration includes salary and the expected value of incentives based on the

Committee’s agreed benchmarking methodology.

CEO pay comparison

Annual report on remuneration continued

2018 CEO total remuneration positioning

CEO pay ratios

Financial Year Methodology

P25 (Lower

Quartile)

P50

(Median)

P75 (Upper

Quartile)

2018 Option A 122:1 90:1 56:1

The pay ratios above are calculated by using actual earnings for the

CEO and UK employees. The CEO total single ﬁgure remuneration

of £5,886,672 is given on page 98 of this Report.

Total remuneration for all UK full-time equivalent employees of the

company on 31 December 2018 have been calculated in line with

the single ﬁgure methodology and reﬂects their actual earnings

received in 2018 (excluding business expense), which were used

to produce the percentile calculation under Option A. Business

expenses have been excluded as they are reimbursed to the

employees and not substantial in value to signiﬁcantly impact

the ratios.

GSK has chosen Option A because it is the most robust and

statistically accurate way for the company to calculate the three

ratios from the options available in the Regulations.

Set out in the table below is the base salary and total pay and

beneﬁts for each of the percentiles.

25th Percentile

(P25)

Median

(P50)

75th Percentile

(P75)

Salary 33,090 44,944 64,185

Total pay and beneﬁts 48,370 65,149 105,045

The Committee believes that the median pay ratio is consistent with

the company’s pay, reward and progression policies. Base salaries

of all employees, including our Executive Directors, are set with

reference to a range of factors including market practice, experience

and performance in role.

Supplemental/Additional Ratios

GSK’s CEO pay ratio is likely to vary, potentially signiﬁcantly, over

time since it will be driven largely by CEO variable pay outcomes.

In line with our reward principles, the CEO has a larger portion of her

pay based on performance than the individuals at P25, P50 and

P75. This means that depending on GSK’s performance the ratio

could increase or decrease signiﬁcantly. The Committee believes

that our senior executives should have a signiﬁcant proportion of

their pay directly linked to performance.

In light of this we have also provided supplemental ratios, where

Long Term Incentive compensation has been excluded. We believe

this provides an additional view as long term incentive forms a

substantial 42.6% of the CEO’s total remuneration in 2018, which

is highly variable and dependent on business performance. The

CEO single ﬁgure of remuneration excluding Long Term Incentive

Compensation is £3,381,135.

Financial Year Methodology

P25 (Lower

Quartile)

P50

(Median)

P75 (Upper

Quartile)

2018 Option A* 70:1 52:1 34:1

*Total single ﬁgure remuneration less Long-Term Incentive Plans

Historic CEO remuneration

Emma Walmsley Sir Andrew Witty

2018

£000

2017

£000

2017

£000

2016

£000

2015

£000

2014

£000

2013

£000

2012

£000

2011

£000

2010

£000

2009

£000

Single

ﬁgure of

remuneration

5,887 4,883 715

(3)

6,830 6,661 3,902 7,207 4,386 6,807 4,562 5,790

Annual

bonus

award

(2)

(% of

maximum)

93% 77% 0%

(3)

97% 100% 42% 88% 44% 100% 59% 100%

Vesting of

LTI awards

(% of

maximum)

59% 69% 0%

(4)

33% 38% 14% 31% 24% 70% 35% 35%

(1) Ms Walmsley’s single ﬁgure of remuneration includes her pay for the period 1 January

to 31 March 2017, before she became CEO.

(2) 2009 and 2010 bonuses include amounts paid under the Operational Efﬁciency Bonus

in place for those years. The overall maximum bonus receivable was still subject to a

limit of 200% of base salary.

(3) Sir Andrew received a pro-rata payment for 2017 in lieu of a variable bonus opportunity,

in accordance with the 2014 Remuneration policy.

(4) PSP and DABP awards for Sir Andrew granted in 2015 did not vest until April 2018,

in accordance with the terms of the Executive Financial Recoupment Policy.

Performance graph

The following graph sets out the performance of the company

relative to the FTSE 100 index and to the pharmaceutical

performance comparator group for the ten-year period to 31

December 2018. These indices were selected for comparison

purposes as they reﬂect both the primary index of which GSK is

a constituent and the industry in which it operates.

(1)

* This index comprises AstraZeneca, Bristol-Myers Squibb, Eli Lilly, Johnson &

Johnson, Merck & Co, Novartis, Pﬁzer, Roche Holdings and Sanoﬁ.

100

220

GSK Total Return

FTSE 100

Total Return Index

GSK Pharma Peers

Total Return Index*

340

31.12.08 31.12.09 31.12.10 31.12.11 31.12.12 31.12.13 31.12.14 31.12.15 31.12.16 31.12.17 31.12.18

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

107

Percentage change in remuneration of CEO

Emma Walmsley UK Employees

2018

£000

% change

Salary

1,028 2.5% 2.5%

Beneﬁts

234 (12.03)% 0%

Annual bonus

1,912 24.16% 8%

For the wider UK employee population, the salary increase includes

the annual salary review as well as any additional changes in the

year, e.g. on promotion. UK employee beneﬁts are unchanged on

the previous year as there have been no changes to our beneﬁt

policies or levels. It does not reﬂect any changes to the level of

beneﬁts an individual may have received as a result of a change in

role, e.g. promotion. The UK population was considered to be the

most relevant comparison as it most closely reﬂects the economic

environment encountered by the CEO.

Relative importance of spend on pay

The table shows total employee pay and the Group’s dividends paid

to shareholders.

2018

£m

2017

£m

Total employee pay 9,440 9,122

Dividends 3,927 3,906

The ﬁgures in the table above, which reﬂect payments made

during each year and the impact of movements in exchange

rates, are as set out on pages 158 and 164. However,

dividends declared in respect of 2018 were £3,935 million

(2017 – £3,911 million) an increase of 0.5%.

Total employee pay is based on 96,851 employees, the average

number of people employed during 2018 (2017 – 99,349).

Service contracts

The table below sets out the relevant dates of the Executive

Directors’ service contracts, which are available for review at the

company’s registered ofﬁce during ofﬁce hours and on gsk.com.

Each Executive Director’s service contract contains a 12-month

notice period, as set out in our Remuneration policy.

Date of contract Effective date Expiry date

Emma Walmsley 29.03.17 01.04.17 30.06.34

Simon Dingemans 08.09.10 04.01.11 30.04.28

Dr Hal Barron 16.12.17 01.01.18 31.12.24

Iain Mackay 18.09.18 14.01.19 n/a

Shareholder votes on remuneration matters

The table below shows most recent shareholder votes in respect

of the Remuneration report and Remuneration policy.

2018 AGM

Total votes

cast (billion)

Total votes

for (%)

Total votes

against (%)

Votes

withheld

(million)

Remuneration report 2.9 90.4 9.59 752

2017 AGM

Remuneration policy 3.4 95.23 4.77 66

External appointments for Executive Directors

The Board encourages Executive Directors to hold one listed

company external directorship (or equivalent) each as they

become established in their roles, to broaden their experience

and development, from which they may retain any fees. Any such

appointments are considered by the Nominations Committee and the

Board, in line with the company’s policy on external appointments, to

ascertain the nature and scope of the appointments and ensure they

would not cause an actual or potential conﬂict of interest, and that

the individual Executive Director continues to meet their existing

commitments to GSK. It is the company’s policy that remuneration

earned from such appointments may be kept by the individual.

The Board recognises the importance of ensuring that Dr Hal Barron

remains connected to the life sciences community and has therefore

approved his appointment to the boards of GRAIL Inc (a private

company), and Juno Therapeutics Inc (a NASDAQ listed company).

Prior to his appointment to GRAIL, Dr Barron was a director of Juno

until its acquisition by Celgene Corporation in March 2018.

Company Position For period Fees earned

Juno Therapeutics Inc

(NASDAQ listed)

Non-Executive

Director

January to March

2018

$29,232

GRAIL, Inc

(private company)

Non-Executive

Director

From August 2018 $5,914

Additional remuneration disclosures

GSK Annual Report 2018

108

Salary

The Committee determined the following salary increases taking

into account the average increase for the wider workforce:

2019 % change

Wider workforce

(1)

– 2.5

Emma Walmsley

(2)

£1,110,348 8

Simon Dingemans £772,800 –

Iain Mackay £850,000 n/a

Dr Hal Barron $1,742,500 2.5

(1) Based on the average increase budget for employees below the level of CET in the UK.

(2) As referenced in the Chairman’s annual statement following shareholder consultation the

Committee has decided to adjust Ms Walmsley’s pay to reﬂect her development and

performance in role.

Beneﬁts

No signiﬁcant changes to the provision of beneﬁts are proposed

for 2019. For full details of the policy in relation to beneﬁts, please

refer to the details in the 2017 Remuneration policy report on pages

137 to 146 of the 2016 Annual Report, available at www.gsk.com

in the Investors section.

Pension

The table below provides an overview of the pension arrangements

for each ongoing Executive Director in 2019.

Pension contribution

Emma Walmsley

Iain Mackay

20% of base salary and matching contributions of 5%

on the ﬁrst £33,333 of salary in accordance with the terms

of the plan open to all employees, and 20% of base salary

in lieu of pension on salary in excess of £33,333

Dr Hal Barron 38% of base salary.

In addition, from 1 January 2019, a combined contribution

rate under the 401(k) and ESSP plans of 6% (2% core

contribution plus a match of up to 4%) of total base salary

and bonus, less the bonus deferred under the DABP.

Annual bonus

No signiﬁcant changes to the operation of the Annual bonus plan,

in accordance with the shareholder approved 2017 Remuneration

policy, are proposed for 2019.

Target Maximum

Emma Walmsley

Iain Mackay

100% 200%

Dr Hal Barron

The ﬁnancial measure is Adjusted Group PBIT, which represents

a weighting of 70% for the Annual Bonus Plan. The individual

performance measure represents the remaining weighting of 30%.

Inevitably, targets linked directly to the ﬁnancial and strategic plan

are commercially sensitive. The Committee does not consider it

appropriate to disclose annual bonus targets during the year as it

may result in competitive harm. However, details of the performance

targets will be disclosed on a retrospective basis in the 2019

Annual Report.

Long Term Incentive plans

Deferred Annual Bonus Plan (DABP) awards

The table below provides details of the mandatory deferral into the

DABP of 50% of 2018 annual bonus payments and the associated

awards granted. The shares awarded have no performance

conditions but must be held for three years, regardless of

continued employment.

% of total bonus

deferred into shares (number shares)

2019 DABP award

(number ADS)

Emma Walmsley 50 61,813

Simon Dingemans 50 44,215

Dr Hal Barron 50 37,120

Performance Share Plan (PSP) awards

The table below provides details of awards granted under the PSP:

2019 PSP award

(% of salary) (number shares)

2019 PSP award

(number ADS)

Emma Walmsley 550 404,592

Iain Mackay 400 225,255

Dr Hal Barron 500 217,161

Performance measures

The metrics for the PSP awards remain unchanged. The 2019

awards will continue to be based on three equally weighted

measures:

– R&D new product performance;

– adjusted free cash ﬂow; and

– relative TSR.

As in prior years, targets for R&D new products are commercially

sensitive at the time of grant. However, the Committee intends to

disclose targets in full following the end of the performance period.

In addition, the Committee will continue to provide shareholders

with interim performance updates for this element over the course

of the performance period.

TSR will continue to be measured against global pharmaceutical

peers. For achieving threshold performance, 25% of each award will

continue to vest in respect of the R&D new product performance

and AFCF performance measures. The relative TSR vesting

schedule for the 2019 awards has been revised as follows:

Ranking position

Vesting Schedule for the

2019 awards

Vesting Schedule for the

2018 awards

1st, 2nd or 3rd 100% 100%

4th 70% 72%

5th 40% 44%

Median (Threshold vesting) 25% 30%

6th or below 0% 0%

The TSR comparator group remains unchanged from that shown

on page 103 in respect of the 2016 awards.

The adjusted free cash ﬂow targets for the 2019 awards are as follows:

Target % vesting

Maximum £13.91bn 100%

£13.31bn 75%

£12.10bn 50%

Threshold £11.74bn 25%

Implementation of Remuneration policy for 2019

Annual report on remuneration continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

109

Shareholdings versus Share Ownership Requirement (SOR)

To align the interests of Executive Directors with those of

shareholders, they are required to build and maintain signiﬁcant

holdings of shares in GSK over time. Executive Directors are required

to continue to satisfy these share ownership requirements for a

minimum of 12 months after leaving GSK.

Payments for loss of ofﬁce (audited)

No loss of ofﬁce payments were made in 2018.

Termination arrangements for CFO

As announced in 2018, Simon Dingemans will leave the Board in

May 2019. As Simon Dingemans is a voluntary leaver, he will not

receive any severance payment when he leaves the company.

Salary, bonus and outstanding incentive awards will be treated in

accordance with the shareholder approved 2017 Remuneration policy.

Full disclosure of all payments made upon cessation will be included

in the 2019 Annual report on remuneration.

Remuneration element Summary of treatment

Annual bonus Will not receive any bonus for 2019.

PSP and DABP Will not be granted PSP awards in 2019, but 50%

of his 2018 bonus will be deferred into DABP.

Outstanding PSP and

DABP matching awards

Any awards not vested prior to Simon Dingemans’

departure will lapse when he leaves GSK.

DABP deferred

bonus awards

Awards for bonuses deferred in respect of 2018 and

prior years will vest at the normal vesting dates.

In addition to the above, Simon Dingemans will be required to

maintain a shareholding equal to his share ownership requirement

for at least 12 months after leaving the company.

Remuneration arrangements for CFO Designate

Iain Mackay joined GSK as Chief Financial Ofﬁcer Designate on

14 January 2019, and is an Executive Director. A summary of his

remuneration is set out below:

Notes

Base salary £850,000 The comparator group for pay for the

CFO position is the UK cross-industry

comparator group.

Annual bonus £850,000 The on-target bonus would be 100%

with a maximum of 200% as for the

outgoing CFO.

Award of LTIs £1,700,000 This assumes an expected value of 50%

of an award of performance shares under

the company’s 2017 Performance Share

Plan at a 4x multiple of base salary as for

the outgoing CFO.

Share Ownership

Requirement

(SOR)

300% of

base salary

This is in line with GSK’s 2017

Remuneration policy.

Pension 20% of base

salary and

matching

contributions

Pension is in line with GSK’s 2017

Remuneration policy.

Beneﬁts Beneﬁts will be in line with GSK’s 2017

Remuneration policy.

There were no buy-out arrangements.

Implementation of Remuneration policy for 2019 continued

0 2x 4x 6x

Dr Hal Barron

(1)

Simon Dingemans

Emma Walmsley

8x 10x

SOR 31 December 2018 shareholding

(1)

Dr Hal Barron was appointed to the Board on 1 January 2018, at which

point he had a shareholding of 1,644 GSK ADS.

Share ownership vs SOR (multiples of base salary)

10.7x

3.0x

6.5x4.2x

3.0x

Payments to past Directors (audited)

As set out in our 2016 Annual Report, Sir Andrew Witty and Dr Moncef Slaoui left the Board on 31 March 2017 by mutual agreement.

In accordance with the Remuneration policy, approved by shareholders in 2014, their 2015 PSP awards and 2015 DABP awards vested

following the one-year anniversary of their termination dates in 2018 under the terms of the Executive Financial Recoupment Policy.

Dr Moncef Slaoui Sir Andrew Witty

Number of

ADS awarded

% vested in

July 2018

ADS price

Equating to

Number of

shares awarded

% vested in

April 2018

Share price

Equating to

2015 PSP 108,725 69 40.85 4,441,444 2015 PSP 357,352 69 14.21 5,077,972

2015 DABP 9,937 69 40.85 405,929 2015 DABP 25,122 69 14.21 356,984

Other beneﬁts: the grossed up cost of the post employment

ﬁnancial planning provided following his leaving the company

was $45,809.

Other beneﬁts: the grossed up cost of the post employment

ﬁnancial planning and home security following his leaving the

company was £23,184.

GSK Annual Report 2018

110

Role of the Committee

The role of the Committee is to set the company’s remuneration

policy so that GSK is able to recruit, retain and motivate its

executives.

The Remuneration policy is regularly reviewed to ensure that it

is consistent with the company’s scale and scope of operations,

supports the business strategy and growth plans and helps drive

the creation of shareholder value.

Terms of reference

The Committee’s full terms of reference are available on the

company’s website. The terms of reference are reviewed at least

annually and were last revised in January 2019 to reﬂect best

practice, particularly in respect of the new UK Corporate

Governance Code.

Governance

The Board considers all of the members of the Committee to

be independent Non-Executive Directors in accordance with

the UK Corporate Governance Code.

Membership

The members of the Committee, together with their appointment

dates, are set out below:

Committee members Committee member since

Urs Rohner

Chair

1 January 2015

(Chair since 7 May 2015)

Vindi Banga 1 January 2016

Dr Vivienne Cox 1 January 2017

Judy Lewent 1 January 2013

Committee meetings usually include a closed session, during which

only members of the Committee are present. Other individuals may

also be invited to attend Committee meetings during the year.

Executives and other Committee attendees are not involved in any

decisions, and are not present at any discussions, regarding their

own remuneration.

Details of the Committee members’ skills and experience are

given in their biographies under ‘Our Board’ on pages 68 to 70.

See page 72 for Committee member attendance levels.

The Company Secretary is Secretary to the Committee and attends

all meetings. Other attendees at the Committee include:

Committee attendees

Attendee

Regular

attendee

Attends as

required

CEO

✓

CFO

✓

Head of Human Resources

✓

Head of Reward

✓

Committee Adviser (PwC)

✓

Judy Lewent and Vindi Banga, as members of the Audit & Risk

and Remuneration Committees, provide input on the Audit & Risk

Committee’s review of the Group’s performance and oversight of

any risk factors relevant to remuneration decisions.

Adviser to the Committee

The company undertook a full commercial tender process during

2018 and appointed PricewaterhouseCoopers LLP (PwC) as

independent adviser to the Committee with effect from 6 September

2018. PwC replaced Willis Towers Watson LLP (WTW) who served

as independent adviser for the ﬁrst part of 2018. Both PwC and

WTW are members of the Remuneration Consultants’ Group and,

as such, voluntarily operate under the code of conduct in relation to

executive remuneration consulting in the UK. The code of conduct

can be found at www.remunerationconsultantsgroup.com.

PwC resigned as the Group’s statutory auditor after GSK’s 2017

Annual Report was signed in March 2018 and provided other

consulting and assurance services during the time they have been

the Committee’s independent advisers. WTW provided additional

market data to the Committee and also provided other HR consulting

services to the company prior to PwC’s appointment. In line with the

protocols agreed and set by the Committee Chair under which PwC

and WTW provided their advice, the Committee is satisﬁed that such

advice has been objective and independent.

During their respective tenures in 2018, PwC and WTW have

provided independent commentary on matters under consideration

by the Committee and updates on market practice and legislative

requirements. PwC’s and WTW’s fees for advice during that period,

which were charged on a time and materials basis, were £51,250

and $144,880 respectively. The Committee is satisﬁed that this did

not compromise either ﬁrm’s independence.

Committee evaluation

The Committee’s annual evaluation was facilitated by the Company

Secretary, who interviewed Committee members on behalf of the

Committee Chair. It was concluded that the Committee continued

to operate effectively. In terms of enhancements to the Committee’s

work, it was agreed that the Committee will examine the philosophy

underpinning the remuneration policy framework when reviewing our

policy for approval at the 2020 AGM.

Remuneration governance

Annual report on remuneration continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

111

What the Committee did during 2018

Areas of Committee focus Items discussed

Remuneration policy

The Committee sets the broad structure for the Remuneration policy

and determines the remuneration of the Executive Directors, the

Chairman and other corporate ofﬁcers for Board approval.

– Remuneration impact of 2018 major Group restructuring

– Engagement with shareholders

– Employee consultation on setting policy and pay

Salary review

The Committee periodically reviews and considers the remuneration

environment of Executive Directors and CET, approving annual

adjustments as necessary.

– Remuneration environment (including wider employee trends)

– Executive Director and CET benchmarking, competitiveness

and GSK comparator groups

– Executive Director and CET salary recommendations and

increases for 2019

– Setting remuneration for Iain Mackay

Annual bonus

The Committee is responsible for setting speciﬁc performance

measures for the Annual bonus.

– CEO, Executive Director and CET 2017 bonus recommendations

and 2018 bonus objectives

LTI plans

The Committee is responsible for approving LTI plan rule changes,

grants, assessments of performance, and the vesting of LTI awards

for the Executive Directors, CET and below.

– LTI performance outcomes and vesting of LTI awards for CET

and below

– LTI grants for CET and below

Governance and other areas of focus

The Committee adheres to a robust remuneration governance

framework, ensuring alignment between internal actions and

external reporting/compliance requirements.

– Committee evaluation process

– 2017 Remuneration report

– Remuneration considerations and committee programme for 2018

– AGM and Remuneration report feedback, the external remuneration

environment and performance target disclosure for incentive plans

– Chairman’s fees

– 2018 Remuneration report disclosures, including CEO pay ratio

– Remuneration Committee external adviser tender process

– Gender pay gap reporting

– Recruitment policy brieﬁng

Remuneration governance continued

GSK Annual Report 2018

112

Chairman and other Non-Executive Directors

The company aims to provide the Chairman and other Non-Executive

Directors with fees that are competitive with those paid by other

companies of equivalent size and complexity, subject to the limits

contained in GSK’s Articles of Association.

Chairman’s fees

The Chairman, Philip Hampton, is paid a fee of £700,000 per annum,

of which he has elected to take 25% in GSK shares. The Chairman’s

fees were reviewed during the year but were not changed.

Non-Executive Directors’ fees

Non-Executive Director fees were reviewed during the year following

the last increase in January 2013 and it was decided not to make any

change at this time. A minimum of 25% of fees will continue to be

delivered as shares or ADS deferred until the Non-Executive Director

steps down from the Board.

The Non-Executive Directors’ fees that applied during 2018 are set

out in the table below:

Per annum

Standard annual fee £85,000

Supplemental fees

Chair of the Audit & Risk Committee £80,000

Senior Independent Director

Scientiﬁc/Medical Experts

Chairs of the Remuneration, Corporate

Responsibility and Science Committees

£30,000

Non-Executive Director undertaking intercontinental

travel to meetings

£7,500 per meeting

The audited table below sets out the value of fees and beneﬁts received by the Non-Executive Directors in the form of cash and shares or

ADS. Further details of the Non-Executive Directors’ share allocation plan are set out on page 113. Non-Executive Directors’ fees that are

paid in a currency other than Sterling are converted using an average exchange rate that is reviewed from time to time. Beneﬁts comprise the

grossed up cash value of travel and subsistence costs incurred in the normal course of business, in relation to attendance at Board and

Committee meetings. For overseas-based Directors, this includes travel to meetings in the UK.

Non-Executive Directors’

emoluments (000) (audited)

2018 2017

Fixed fees Fixed fees

Cash Shares/ADS Beneﬁts Total pay Cash Shares/ADS Beneﬁts Total pay

Vindi Banga £65 £50 £3 £118 – £123 £8 £131

Dr Vivienne Cox £64 £21 £11 £96 £69 £23 £14 £106

Lynn Elsenhans

(1)

$56 $175 $90 $321 £15 £137 £70 £222

Dr Laurie Glimcher – $231 $73 $304 – $69 $32 $101

Dr Jesse Goodman $208 $69 $115 $392 $216 $72 $140 $428

Philip Hampton £525 £175 £19 £719 £525 £175 £20 £720

Judy Lewent $230 $77 $130 $437 $239 $80 $157 $476

Urs Rohner £86 £29 £23 £138 £92 £31 £16 £139

Former directors:

Professor Sir Roy Anderson

(2)

£39 £7 £18 £64 £92 £31 £9 £132

Sir Deryck Maughan

(3)

– – £5 £5

Dr Daniel Podolsky

(3)

– – £7 £7

Hans Wijers

(4)

– – £8 £8 – – £6 £6

(1) Lynn Elsenhans elected to receive her Non-Executive Director fees in USD in 2018.

(2) Professor Sir Roy Anderson retired from the Board on 3 May 2018.

(3) Dr Daniel Podolsky and Sir Deryck Maughan retired from the Board on 5 May 2016.

(4) Hans Wijers retired from the Board on 7 May 2015.

2018 Non-Executive Directors’ fees

Annual report on remuneration continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

113

The interests of the Directors of the company in ofﬁce during 2018 and their persons closely associated (PCA) are shown in the tables below.

Total share plan interests as at 31 December 2018 or date of retirement

Total directors’ interests as at

Shares/ADS Options

1 March

2019

31 December

2018

or date of

leaving

1 January

2018

(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

Emma Walmsley

(a,b,c,d,e,f)

416,292 281,726 147,665 – 1,073,823 129,348 67,255 137,040 21,096

Simon Dingemans

(a,b,c,d,e,f)

734,039 540,663 329,298 161,231 711,292 118,238 74,368 266 29,465

Sir Patrick Vallance

(a,b,c,d,f)

404,201 303,733 – 539,829 98,955 55,844 – 34,344

ADS

Dr Hal Barron

(a,c,e)

38,764 1,644 1,644 – 242,727 – – – –

Share allocation plan for Non-Executive Directors

Total directors’ interests as at Number of shares or ADS

1 March

2019

31 December

2018

or date of

leaving

1 January

2018

or date of

appointment

Dividends

reinvested

after year

end

31 December

2018

Paid out

Dividends

reinvested

during the

year

Allocated

& elected

31 December

2017

Non-Executive Directors

(g)

Professor Sir Roy Anderson

(h)

– 32,152 29,306 – – 32,152 1,785 1,061 29,306

Vindi Banga 58,326 56,753 50,802 1,091 21,553 – 779 5,172 15,602

Dr Vivienne Cox 3,857 3,352 1,804 150 3,352 – 75 1,473 1,804

Philip Hampton 56,208 51,157 37,398 2,125 44,239 – 1,631 12,128 30,480

Urs Rohner 8,74 8 7, 7 8 5 5,591 382 7,885 – 301 1,993 5,591

ADS

(g)

Lynn Elsenhans 33,134 30,587 24,398 1,497 29,587 – 1,225 4,964 23,398

Dr Laurie Glimcher 7,562 5,961 350 202 5,961 – 5 5,606 350

Dr Jesse Goodman 5,167 4,538 2,610 206 4,538 – 89 1,839 2,610

Judy Lewent 25,459 24,271 21,630 718 14,105 – 609 2,033 11,463

a) Unvested options not subject to performance of 129,348 for Emma Walmsley represent bonus deferrals of 128,604 and Share Save options of 744.

Unvested shares not subject to performance of 161,231 for Simon Dingemans represent 100% of the shares awarded at the end of the three-year performance

period for the 2015 PSP grant, together with subsequent re-invested dividends. These shares are subject to a further two-year holding period. Unvested options

not subject to performance of 118,238 for Mr Dingemans represent bonus deferrals of 117,782 and Share Save options of 456.

Unvested options not subject to performance of 98,955 for Sir Patrick Vallance represent bonus deferrals.

b) Total Directors’ interests includes shares purchased through the GlaxoSmithKline Share Reward Plan. During 2018, Emma Walmsley and Simon Dingemans

were each awarded 103 shares under the plan. The total number of shares held within the plan are as follows:

Share Reward Plan (Shares)

1 March 2019 31 December 2018 1 January 2018

Emma Walmsley 1,546 1,496 1,219

Simon Dingemans 1,999 1,943 1,642

Sir Patrick Vallance – – 3,263

Dr Hal Barron is a US employee and is not eligible to participate in the Share Reward Plan, as this is only open to UK employees.

Directors’ interests in shares (audited)

GSK Annual Report 2018

114

Annual report on remuneration continued

c) Total directors’ interests includes options over shares or ADS resulting from the deferral of bonus (and the subsequent re-investment of dividends) under the

DABP. The totals shown in the table below include bonus deferrals, but exclude any unvested matching awards which are subject to ongoing performance

criteria. The amounts represent the gross share and ADS balances prior to the sale of any shares or ADS to satisfy tax liabilities.

Deferred Annual Bonus Plan (Bonus deferrals) 1 March 2019

31 December 2018

or date of retirement 1 January 2018

Emma Walmsley Shares 159,409 128,604 75,959

Simon Dingemans Shares 120,406 117,782 87,575

Dr Hal Barron ADS 37,120 – –

Sir Patrick Vallance Shares – 98,955 75,092

d) Total directors’ interests at 1 March 2019 includes any shares or ADS which vested due to performance being met under elements of the DABP and PSP

(2016-2018 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 115 to 118 for further details).

e) Share Save Plan

For Emma Walmsley and Simon Dingemans the unvested options not subject to performance include holdings of 744 and 456 respectively in the Share

Save Plan, in which Ms Walmsley and Mr Dingemans participate on the same terms as all other employees. Ms Walmsley was granted 744 options under

the plan on 29 November 2018.

f) The following table sets out details of options (all nil-cost options under the DABP) exercised during 2018 by Executive Directors.

Type of award

Date of grant

Number of shares

under option

Date of

exercise

Grant price

Market price

at exercise

Gain on exercise

(000)

Emma Walmsley

DABP – deferral 11.02.15 12,482 16.02.18 – £13.16 £164

DABP – matching 11.02.15 8,614 16.02.18 – £13.16 £113

21,096 £277

Simon Dingemans

DABP – deferral 11.02.15 17,435 16.02.18 – £13.12 £229

DABP – matching 11.02.15 12,030 16.02.18 – £13.12 £158

29,465 £387

Sir Patrick Vallance

DABP – deferral 11.02.15 20,322 19.02.18 – £13.18 £268

DABP – matching 11.02.15 14,022 19.02.18 – £13.18 £185

34,344 £453

In respect of nil-cost options under the DABP, the bonus which is deferred by the Director is recorded as remuneration (under Annual bonus) for the year to

which it relates. The gain recorded on exercise of the nil-cost option comprises this remuneration, the total of the amounts received in re-invested dividends

prior to vesting and the gains or losses resulting from movements in the share price between the dates of grant and exercise for the initial bonus amount

deferred and the dates of dividend reinvestment and exercise for the re-invested dividends.

For the matching element of the DABP, the remuneration of the Executive Director is recorded in the year that the performance period ends and represents

the number of vested shares multiplied by the price at vesting. The gain recorded on exercise of the nil-cost option comprises the total of this remuneration

and the gain or loss resulting from the movement in the share price between vesting and exercise.

Directors’ interests in shares (audited) continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

115

For Emma Walmsley:

– The gain of £164,263 recorded following the exercise of the 12,482 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises

remuneration of £159,715 recorded in 2014 as Annual bonus and a net gain of £4,548 relating to the re-investment of dividends prior to vesting and

movements in the share price between grant and dividend re-investment dates and the exercise date.

– The gain of £113,360 recorded following the exercise of the 8,614 nil-cost options relating to the DABP matching award comprises remuneration of

£111,982 recorded in 2017 in relation to the DABP (see table below) and an investment gain of £1,378 relating to the movement in the share price between

the vesting and exercise dates.

For Simon Dingemans:

– The gain of £228,747 recorded following the exercise of the 17,435 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises

remuneration of £223,065 recorded in 2014 as Annual bonus and a net gain of £5,682 relating to the re-investment of dividends prior to vesting and

movements in the share price between grant and dividend re-investment dates and the exercise date.

– The gain of £157,833 recorded following the exercise of the 12,030 nil-cost options relating to the DABP matching award comprises remuneration of

£156,390 recorded in 2017 in relation to the DABP (see page 116) and an investment gain of £1,444 relating to the movement in the share price between

the vesting and exercise dates.

For Sir Patrick Vallance:

– The gain of £267,844 recorded following the exercise of the 20,322 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises

remuneration of £260,015 recorded in 2014 as Annual bonus and a net gain of £7,829 relating to the re-investment of dividends prior to vesting and

movements in the share price between grant and dividend re-investment dates and the exercise date.

– The gain of £184,810 recorded following the exercise of the 14,022 nil-cost options relating to the DABP matching award comprises remuneration of

£182,286 recorded in 2017 in relation to the DABP (see page 116) and an investment gain of £2,524 relating to the movement in the share price between

the vesting and exercise dates.

g) For Non-Executive Directors, total interests include shares or ADS received as part or all of their fees under the Non-Executive Directors’ Share Allocation

Plan. Note that dividends received on shares or ADS under the plan during 2018 and January 2019 were converted into shares or ADS as at 6 February 2019.

h) Professor Sir Roy Anderson retired from the Board on 3 May 2018.

Directors’ interests in shares (audited) continued

Deferred Annual Bonus Plan matching awards

The following tables provide details for each Executive Director in ofﬁce during 2018 in respect of DABP matching awards.

Market price at grant and at vesting represent the closing share prices from the business day prior to those dates.

Emma Walmsley – Shares

Performance period

2015-2017 2016-2018 2017-2019

Market price at grant £15.20 £13.59 £15.77

Unvested at 31 December 2017 12,306 30,474 33,179

Dividends reinvested 176 1,724 1,878

Vested (8,614) – –

Lapsed (3,868) – –

Unvested at 31 December 2018 – 32,198 35,057

Dividends reinvested 398 432

Vested (19,234) –

Lapsed (13,362) –

Unvested at 1 March 2019 – 35,489

Vested shares

Number of shares 8,614 19,234

Market price at vesting £13.00 £15.66

Gain:

(000) (000)

Remuneration for 2017 £112 –

Remuneration for 2018 – £301

GSK Annual Report 2018

116

Annual report on remuneration continued

Directors’ interests in shares (audited) continued

Deferred Annual Bonus Plan matching awards continued

Simon Dingemans – Shares

Performance period

2015-2017 2016-2018 2017-2019

Market price at grant £15.20 £13.59 £15.77

Unvested at 31 December 2017 17,188 40,244 30,143

Dividends reinvested 245 2,276 1,705

Vested (12,030) – –

Lapsed (5,403) – –

Unvested at 31 December 2018 – 42,520 31,848

Dividends reinvested 524 392

Vested (25,398) –

Lapsed (17,646) –

Unvested at 1 March 2019 – 32,240

Vested shares

Number of shares 12,030 25,398

Market price at vesting £13.00 £15.66

Gain:

(000) (000)

Remuneration for 2017 £156 –

Remuneration for 2018 – £398

Sir Patrick Vallance – Shares

Performance period

2015-2017 2016-2018 2017-2019

Market price at grant £15.20 £13.59 £15.77

Unvested at 31 December 2017 20,035 32,590 22,468

Dividends reinvested 286 997 687

Vested (14,022) – –

Lapsed (6,299) (33,587) (23,155)

Unvested at 31 December 2018 – – –

Dividends reinvested

Vested

Lapsed

Unvested at 1 March 2019 – – –

Vested shares

Number of shares 14,022 –

Market price at vesting £13.00 –

Gain:

(000) (000)

Remuneration for 2017 £182 –

Remuneration for 2018 – –

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

117

Performance Share Plan awards

The following tables provide details for each Executive Director in ofﬁce during 2018 in respect of PSP awards.

Market price at grant and at vesting represent the closing share prices on those dates.

Emma Walmsley – Shares

Performance period

2015-2017 2015-2017 2016-2018 2017-2019 2018-2020 2019-2021

Market price at grant £15.20 £14.01 £13.59 £15.46 £12.91 £15.12

Unvested at 31 December 2017 130,642 67,715 223,024 361,379 – –

Granted – – – – 437,997 –

Face value at grant (000) – – – – £5,655 –

Dividends reinvested 1,865 967 12,639 20,479 18,305 –

Vested (91,430) (47,391) – – – –

Lapsed (41,077) (21,291) – – – –

Unvested at 31 December 2018 – – 235,663 381,858 456,302 –

Dividends reinvested 2,915 4,723 5,645 –

Vested (140,762) – – –

Lapsed (97,816) – – –

Unvested at 1 March 2019 – 386,581 461,947 –

Granted – – – 404,592

Face value at grant (000) – – – £6,117

Unvested at 8 March 2019 – 386,581 461,947 404,592

Vested shares

Number of shares 91,430 47,391 140,762

Market price at vesting £13.00 £13.00 £15.66

Gain: (000) (000) (000)

Total

(000)

Remuneration for 2017 £1,189 £616 – £1,805

Remuneration for 2018 – – £2,204 £2,204

Simon Dingemans – Shares

Performance period

2015-2017

2016-2018 2017-2019 2018-2020

Market price at grant £15.20 £13.59 £15.46 £12.91

Unvested at 31 December 2017 221,136 239,499 197,574 –

Granted – – – 239,442

Face value at grant (000) – – – £3,091

Dividends reinvested 3,158 13,573 11,197 10,007

Vested (154,763) – – –

Lapsed (69,531) – – –

Unvested at 31 December 2018 – 253,072 208,771 249,449

Granted – – –

Face value at grant (000) – – –

Dividends reinvested 3,130 2,582 3,086

Vested (151,161) – –

Lapsed (105,041) – –

Unvested at 1 March 2019 – 211,353 252,535

Vested shares

Number of shares 154,763 151,161

Market price at vesting £13.00 £15.66

Gain: (000) (000)

Remuneration for 2017 £2,012 –

Remuneration for 2018 – £2,367

Directors’ interests in shares (audited) continued

GSK Annual Report 2018

118

Annual report on remuneration continued

Directors’ interests in shares (audited) continued

Performance Share Plan awards continued

Sir Patrick Vallance – Shares

Performance period

2015-2017 2016-2018 2017-2019

Market price at grant £15.20 £13.59 £15.46

Unvested at 31 December 2017 224,309 276,745 255,484

Granted – – –

Dividends reinvested 3,203 8,468 7,817

Vested (156,984) – –

Lapsed (70,528) (285,213) (263,301)

Unvested at 31 December 2018 – – –

Vested shares:

Number of shares 156,984

Market price at vesting £13.00

Gain: (000)

Remuneration for 2017 £2,041

Iain Mackay was appointed to the Board from 14 January 2019. The following table provides details of PSP awards granted to him on

11 March 2019:

Iain Mackay – Shares

Performance period

2019-2021

Market price at grant £15.12

Number of shares 225,255

Face value at grant (000) £3,406

Unvested at 8 March 2019 225,255

Dr Hal Barron – ADS

Performance period

2018-2020 2019-2021

Market price at grant $36.46 $40.12

Unvested at 31 December 2017 – –

Granted 233,132 –

Face value at grant (000) $8,500 –

Dividends reinvested 9,595 –

Unvested at 31 December 2018 242,727 –

Dividends reinvested 2,953 –

Unvested at 1 March 2019 245,680 –

Granted – 217,161

Face value at grant (000) – $8,172

Unvested at 8 March 2019 245,680 217,161

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

119

Further information is provided on compensation and interests of Directors and Senior Management as a group (the group). For this purpose,

the group is deﬁned as the Non-Executive and Executive Directors, other members of the CET and the Company Secretary. For the ﬁnancial

year 2018, the following table sets out aggregate remuneration for the group for the periods during which they served in that capacity.

Remuneration for 2018

(£)

Total compensation paid 29,142,577

Aggregate increase in accrued pension beneﬁts (net of inﬂation) 906,937

Aggregate payments to deﬁned contribution schemes 363,756

During 2018, members of the group were awarded shares and ADS under the company’s various executive share plans, as set out in the

table below. To align the interests of Senior Management with those of shareholders, Directors and Senior Management are required to build

and maintain signiﬁcant holdings of shares in GSK over time. CET members are required to hold shares to an equivalent multiple of two times

base salary, and are required to continue to satisfy these share ownership requirements for a minimum of 12 months after leaving GSK.

Awards Dividend reinvestment awards

Awarded during 2018

Shares ADS Shares ADS

Deferred Annual Bonus Plan – – 19,804 1,827

Performance Share Plan 2,002,494 438,542 229,872 37,819

Deferred Investment Awards

(a) (b)

101,327 6,320 6,600 673

Share Value Plan

(b)

11,060 – – –

At 1 March 2019, the group and their PCAs had the following interests in shares and ADS of the company. Interests awarded under the

various executive share plans are described in Note 43 to the ﬁnancial statements, ‘Employee share schemes’ on page 212.

Interests at 1 March 2019

Shares ADS

Owned 1,382,607 141,889

Unexercised options 149,382 7,670

Deferred Annual Bonus Plan 646,472 81,555

Performance Share Plan 3,359,591 562,043

Deferred Investment Awards

(a) (b)

120,454 13,021

Share Value Plan

(b)

36,200 6,320

(a) Notional shares and ADS.

(b) Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan.

Directors and Senior Management

GSK Annual Report 2018

120

The following is a summary of this policy.

2017 Remuneration policy summary

Executive Director Remuneration policy

Salary To provide a core reward for the role. Set at a level appropriate to secure and retain high calibre individuals needed to deliver

the Group’s strategic priorities.

Operation

Individual’s role, experience and performance and

independently sourced data for relevant comparator

groups considered when determining salary levels.

Opportunity

There is no formal maximum limit and, ordinarily, salary

increases will be broadly in line with the average increases

for the wider GSK workforce.

However, increases may be higher to reﬂect a change in the

scope of the individual’s role, responsibilities or experience.

Salary adjustments may also reﬂect wider market conditions

in the geography in which the individual operates.

Details of current salary levels are set out in the

Annual report on remuneration on pages 99 and 108.

Performance measures

The overall performance of the

individual is a key consideration

when determining salary

increases.

Beneﬁts Levels are set to recruit and retain high calibre individuals to execute the business strategy.

Operation

Executive Directors are generally eligible to receive

beneﬁts in line with the policy for other employees

which may vary by location. These include travel

allowances (including spouse/partner travel), healthcare,

life assurance/death in service (where not provided as

part of the individual’s pension arrangements), personal

ﬁnancial advice and contractual post-retirement beneﬁts.

Opportunity

There is no formal maximum limit as beneﬁts costs can

ﬂuctuate depending on changes in provider cost and

individual circumstances.

Details of current beneﬁts and costs are set out in the

Annual report on remuneration on page 99.

Performance measures

None.

Pension Pension arrangements provide a competitive level of retirement income.

Operation

Pension arrangements are structured in accordance

with the plans operated in the country in which the

individual is likely to retire. Where the individual

chooses not to become a member of the pension

plan, cash in lieu of the relevant pension contribution

is paid instead.

New Executive Directors in the UK will be entitled

either to join the deﬁned contribution pension plan

or to receive a cash payment in lieu of pension

contribution. Where an individual is a member

of a GSK legacy deﬁned beneﬁt plan, a deﬁned

contribution plan or an alternative pension plan

arrangement and is subsequently appointed to

the Board, he or she may remain a member of

that plan.

Opportunity

The policy for all current Executive Directors and new external

recruits is:

UK: – 20% of salary contribution to deﬁned

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 .

Performance measures

None.

Annual To incentivise and recognise execution of the business strategy on an annual basis. Rewards the achievement

bonus of stretching annual ﬁnancial and strategic business targets and delivery of personal objectives.

Operation

Financial, operational and business targets are

set at the start of the year by the Committee and

bonus levels are determined by the Committee

based on performance against those targets.

Individual objectives are set at the start of the

year by the Committee and performance against

objectives is assessed by the Committee.

Executive Directors are required to defer 50%

of any bonus earned into shares, or ADS as

appropriate, for three years. Deferred shares

vest at the end of the three years.

Opportunity

The maximum bonus opportunity for Executive Directors

is 200% of salary. For threshold performance, the bonus

pay-out will be nil.

For target performance, the bonus payout will be 50%

of the maximum opportunity.

Performance measures

Based on a combination of

ﬁnancial targets and individual/

strategic performance

objectives, with the majority

of the bonus assessed against

the ﬁnancial measures. The

weighting between different

measures will be determined

each year according to

business priorities.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

121

Executive Director Remuneration policy continued

LTI awards To incentivise and recognise delivery of the longer term business priorities, ﬁnancial growth and increases in shareholder value

compared to other pharmaceutical companies. To provide alignment with shareholder interests, a retention element, to encourage

long-term shareholding and discourage excessive risk taking.

PSP

Operation

Conditional awards are made annually with vesting

dependent on the achievement of performance

conditions over three years and are subject to an

additional two-year holding period.

The Committee may adjust the formulaic vesting

outcome (either up or down) to ensure that the

overall outcome reﬂects underlying business

performance over the vesting period.

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:

% 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 company’s strategic

plan. Up to 30% of awards

will vest at threshold

performance.

DABP (current)

Operation

For bonus payments from 2018 onwards, Executive

Directors are required to defer 50% of any bonus

earned into shares for three years.

DABP (legacy, pre 2018)

Operation

For bonus payments until 2017, Executive Directors were

required to defer 25% of any bonus earned into shares

for three years. They could also voluntarily defer up to an

additional 25% of any bonus earned.

Opportunity

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.

To align the interests of Executive Directors with those of shareholders,

they are required to build and maintain signiﬁcant holdings of shares in

GSK over time. The SOR requirement for the CEO is 650% of salary,

and the SOR requirement for other Executive Directors is 300% of salary.

Executive Directors are required to continue to satisfy these requirements

for a minimum of 12 months following retirement from GSK.

Share Ownership Requirements (SOR)

In the event of a ‘triggering event’ (e.g. signiﬁcant misconduct by way of

violation of regulation, law, or a signiﬁcant GSK policy, such as the Code

of Conduct), the company will have the ability to claw back up to three

years’ annual and deferred bonuses as well as vested and unvested

LTIs. In addition, if a participant in the new 2017 PSP or DABP, which

shareholders approved at the 2017 AGM, is subject to an investigation,

then the vesting of their awards may be delayed until the outcome of that

investigation.

A separate Recoupment Committee has been established to investigate

relevant claims of misconduct. The Recoupment Committee exercises this

authority for the wider employee base. It comprises of senior executives

with relevant oversight and appropriate experience, including the Senior

Vice President, Global Ethics and Compliance, and the Senior Vice

President & General Counsel.

In respect of each ﬁnancial year, the Remuneration Committee will

disclose whether it (or the Recoupment Committee) has exercised

clawback or malus. Disclosure will only be made when the matter has been

subject to public reports of misconduct, where it has been fully resolved,

where it is legally permissible to disclose and where it can be made

without unduly prejudicing the company and therefore shareholders.

Additionally, where there has been continuity of responsibility between

initiation of an adverse event and its emergence as a problem, the adverse

event should be taken into account in assessing annual bonus awards and

LTI vesting levels in the year the problem is identiﬁed and for future

periods. The Remuneration Committee (or Recoupment Committee) may

make appropriate adjustments to individual annual bonuses as well as

grant and vesting levels of LTI awards to reﬂect this.

Clawback and malus

GSK Annual Report 2018

122

The charts opposite provide illustrations of the future total

remuneration for each of the Executive Directors in respect of

the remuneration opportunity granted to each of them in 2019

under the policy. A range of potential outcomes is provided for each

Executive Director and the underlying assumptions are set out below.

All scenarios:

– 2019 base salary has been used.

– 2018 beneﬁts and pension ﬁgures have been used for the CEO,

CFO and the Chief Scientiﬁc Ofﬁcer and President, R&D, i.e.

based on actual amounts received in 2018 in respect of the

ongoing policy. As the CFO Designate was not in role during

2018, the beneﬁts value for this role is based on the value of

beneﬁts for the CFO in 2018 and on the pension arrangements

to apply in 2019.

– The amounts shown under value of PSP awards are based on

the relevant multiples for 2019. They do not include amounts

in respect of dividends reinvested and do not factor in changes

to share price over the vesting period.

Fixed:

– None of the pay for performance (Annual bonus and PSP)

would be payable.

Expected:

– For the Annual bonus, it is assumed that target performance

is achieved.

– For the PSP awards, threshold levels of vesting are assumed.

Maximum:

– It is assumed that the Annual bonus would be payable at the

maximum level and that the awards under the PSP would vest

in full.

Scenarios for future total remuneration

Emma Walmsley, CEO (£000)

10,000

8,000

6,000

4,000

2,000

100%

Fixed Expected Maximum

37% 16%

36%

22%

£1.55m

27%

62%

£4.19m

£9.88m

Fixed Expected Maximum

100% 48% 23%

29%

Dr Hal Barron, Chief Scientiﬁc Ofﬁcer and President, R&D ($000)

16,000

12,000

8,000

4,000

22%

55%

$3.59m

23%

$15.79m

$7.51m

(1) CFO will leave GSK in May 2019 and is not eligible for bonus or a PSP award for

2019. The ﬁgures represent his actual remuneration for January through 8 May 2019.

PSPAnnual bonusFixed pay

2017 Remuneration policy summary continued

Simon Dingemans, CFO

(1)

(£000)

£0.37m

100%

Fixed Expected Maximum

6,000

4,000

2,000

£0.37m

100%

£0.37m

100%

Iain Mackay, CFO Designate (£000)

£1.16m

100%

Fixed Expected Maximum

40% 19%

30%

6,000

4,000

2,000

£2.86m

£6.26m

27%

54%

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

123

The company’s Remuneration policy for Non-Executive Directors, set out below, was approved on 4 May 2017

at GSK’s Annual General Meeting.

Non-Executive Director Remuneration policy

Chairman’s To provide an inclusive ﬂat rate fee that is competitive with those paid by other companies of equivalent size and complexity subject to the

fees limits contained in GSK’s Articles of Association.

Operation

The Committee is responsible for evaluating and making

recommendations to the Board on the fees payable to the

Chairman. The Chairman does not participate in discussions

in respect of his fees.

Fees can be paid in a combination of cash and/or GSK

shares or ADS via the Non-Executive Directors’ Share

Allocation Plan.

Opportunity

There is no formal maximum. However, fees are reviewed

annually and set by reference to a review of the Chairman’s

performance and independently sourced market data.

Details of current fees are set out in the Annual report

on remuneration on page 112.

Performance measures

None

Basic fees As above

Operation

The Chairman and CEO are responsible for evaluating and

making recommendations to the Board on the fees payable

to the company’s Non-Executive Directors.

A minimum of 25% is delivered in the form of GSK shares

or ADS, using the Non-Executive Directors’ Share Allocation

Plan which delivers the shares or ADS to the Non-Executive

Director following retirement from the Board.

Opportunity

As with the Chairman, fees are reviewed annually and

set by reference to independently sourced data.

Details of current fees are set out in the Annual report

on remuneration on page 112.

Performance measures

None

Supplemental To compensate Non-Executive Directors (other than the Chairman) for taking on additional Board responsibilities or undertaking

fees intercontinental travel.

Operation

Additional fees for Committee Chairmen, the Senior

Independent Non-Executive Director, Science and

Medical Experts and intercontinental travel.

Opportunity

Details of supplemental fees are set out in the

Annual report on remuneration on page 112.

Performance measures

None

Beneﬁts To facilitate execution of responsibilities and duties required by the role.

Operation

Travel and subsistence costs for Non-Executive Directors

are incurred in the normal course of business in relation

to meetings on Board and Committee matters and other

GSK-hosted events. For overseas-based Non-Executive

Directors, this includes travel to meetings in the UK.

In the event it is necessary for business purposes, whilst

not normal practice, Non-Executive Directors may be

accompanied by their spouse or partner to these meetings

or events. The costs associated with the above are all met

by the company and, in some instances, they are deemed

to be taxable and therefore treated as beneﬁts for the

Non-Executive Director.

Opportunity

There is no formal maximum limit as beneﬁt costs can

ﬂuctuate depending on changes in provider costs and

individual circumstances.

Details of current beneﬁts and costs are set out in the

Annual report on remuneration on page 112.

Performance measures

None

GSK Annual Report 2018

124

The Remuneration policy (Policy) is set out on pages 138 to 146 of

the 2016 Annual Report and it is intended that the Policy for GSK’s

Executive and Non-Executive Directors will operate for a period of

three years from the date of approval at the company’s Annual

General Meeting on 4 May 2017.

The Committee wrote the Policy principally in relation to the

remuneration arrangements for the Executive Directors, whilst

taking into account the possible recruitment of a replacement or

an additional Executive Director during the operation of the Policy.

The Committee intends the Policy to operate for the period set out

above in its entirety. However, it may after due consideration seek

to change the Policy during this period, but only if it believes it is

appropriate to do so for the long-term success of the company,

after consultation with shareholders and having sought shareholder

approval at a general meeting.

The Committee reserves the right to make any remuneration

payments and/or payments for loss of ofﬁce (including exercising

any discretions available to it in connection with such payments)

notwithstanding that they are not in line with the Policy where the

terms of the payment were agreed:

(i) before the AGM on 7 May 2014 (the date the company’s

ﬁrst shareholder-approved Directors’ remuneration policy came

into effect);

(ii) before the Policy came into effect, provided that the terms

of the payment were consistent with the shareholder-approved

Remuneration policy in force at the time they were agreed; or

(iii) at a time when the relevant individual was not a Director of the

company and, in the opinion of the Committee, the payment was

not in consideration for the individual becoming a Director of the

company. For these purposes ‘payments’ includes the Committee

satisfying awards of variable remuneration and, in relation to an

award over shares or ADS, the terms of the payment are ‘agreed’

at the time the award is granted.

Performance Share Plan and Deferred Annual Bonus Plan awards

are subject to the terms of the relevant plan rules under which the

award has been granted. The Committee may adjust or amend

awards only in accordance with the provisions of the plan rules.

This includes making adjustments to reﬂect one-off corporate

events, such as a change in the company’s capital structure.

The Committee may also make minor amendments to the Policy

(for regulatory, exchange control, tax or administrative purposes

or to take account of a change in legislation) without obtaining

shareholder approval for such amendments.

Statement of consideration of shareholder views

The Committee engages in regular dialogue with shareholders and

holds annual meetings with GSK’s largest investors to discuss and

take feedback on its Remuneration policy and governance matters.

The Annual report on remuneration has been prepared in

accordance with the Companies Act 2006 and The Large and

Medium-sized Companies and Groups (Accounts and Reports)

(Amendment) Regulations 2013 (the Regulations). In accordance

with the Regulations, the following parts of the Annual report on

remuneration are subject to audit: total remuneration ﬁgures for

Executive Directors including further details for each element of

remuneration (salary, beneﬁts, pension, annual bonus and long-term

incentive awards); Non-Executive Directors’ fees and emoluments

received in the year; Directors’ interests in shares, including interests

in GSK share plans; payments to past Directors; payments for loss

of ofﬁce; and share ownership requirements and holdings, for which

the opinion thereon is expressed on page 137. The remaining

sections of the Annual report on remuneration are not subject to

audit nor are the pages referred to from within the audited sections.

The Annual report on remuneration has been approved

by the Board of Directors and signed on its behalf by:

Urs Rohner

Remuneration Committee Chairman

11 March 2019

Operation and scope of Remuneration policy

Basis of preparation

2017 Remuneration policy summary continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

125

Financial

statements

In this section

Directors’ statement of responsibilities 126

Independent Auditor’s report 128

Financial statements 140

Notes to the ﬁnancial statements 144

Financial statements of GlaxoSmithKline plc

prepared under UK GAAP 219

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

125

GSK Annual Report 2018

126

The Directors are responsible for preparing the Annual Report, the

Remuneration report and the Group and parent company ﬁnancial

statements in accordance with applicable law and regulations.

UK company law requires the Directors to prepare ﬁnancial

statements for each ﬁnancial year. The Directors are required

to prepare the Group ﬁnancial statements in accordance with

International Financial Reporting Standards (IFRS) as adopted by

the European Union. In preparing the Group ﬁnancial statements,

the Directors have also elected to comply with IFRS as issued by

the International Accounting Standards Board (IASB). The Directors

have elected to prepare the parent company ﬁnancial statements

in accordance with United Kingdom Accounting Standards and

applicable law (United Kingdom Generally Accepted Accounting

Practice). Under company law the Directors must not approve the

ﬁnancial statements unless they are satisﬁed that they give a true

and fair view of the state of affairs of the Group and its proﬁt or loss

for that period.

In preparing the ﬁnancial statements, the Directors are required to:

– select suitable accounting policies and then apply them

consistently;

– make judgements and accounting estimates that are

reasonable and prudent;

– state that the Group ﬁnancial statements comply with IFRS as

adopted by the European Union and IFRS as issued by the IASB,

subject to any material departures disclosed and explained in the

Group ﬁnancial statements;

– state with regard to the parent company ﬁnancial statements that

applicable UK Accounting Standards have been followed, subject

to any material departures disclosed and explained in the parent

company ﬁnancial statements; and

– prepare the ﬁnancial statements on a going concern basis unless

it is inappropriate to presume that the Group and the parent

company will continue in business.

The Directors are responsible for keeping adequate accounting

records that are sufﬁcient to show and explain the company’s

transactions and disclose with reasonable accuracy at any time

the ﬁnancial position of the Group and to enable them to ensure that

the Group ﬁnancial statements and the Remuneration report comply

with the Companies Act 2006 and Article 4 of the IAS Regulation.

They are also responsible for safeguarding the assets of the Group

and hence for taking reasonable steps for the prevention and

detection of fraud and other irregularities.

The Group ﬁnancial statements for the year ended 31 December

2018, comprising principal statements and supporting notes,

are set out in the ‘Financial statements’ on pages 140 to 218 of this

report. The parent company ﬁnancial statements for the year ended

31 December 2018, comprising the balance sheet for the year

ended 31 December 2018 and supporting notes, are set out on

pages 219 to 222.

The responsibilities of the auditor in relation to the ﬁnancial

statements are set out in the Independent Auditor’s report on

pages 128 to 139.

The ﬁnancial statements for the year ended 31 December 2018 are

included in the Annual Report, which is published in printed form and

made available on our website. The Directors are responsible for the

maintenance and integrity of the Annual Report on our website in

accordance with UK legislation governing the preparation and

dissemination of ﬁnancial statements. Access to the website is

available from outside the UK, where comparable legislation may

be different.

Each of the current Directors, whose names and functions are listed

in the Corporate Governance section of the Annual Report 2018

conﬁrms that, to the best of his or her knowledge:

– the Group ﬁnancial statements, which have been prepared

in accordance with IFRS as adopted by the EU and IFRS

as issued by the IASB, give a true and fair view of the assets,

liabilities, ﬁnancial position and proﬁt of the Group; and

– the Strategic report and risk sections of the Annual Report,

which represent the management report, include a fair review of

the development and performance of the business and the position

of the company and the Group taken as a whole, together with a

description of the principal risks and uncertainties that it faces.

Disclosure of information to auditor

The Directors in ofﬁce at the date of this Annual Report have each

conﬁrmed that:

– so far as he or she is aware, there is no relevant audit information

of which the company’s auditor is unaware; and

– he or she has taken all the steps that he or she ought to have taken

as a Director to make himself or herself aware of any relevant audit

information and to establish that the company’s auditor is aware of

that information.

This conﬁrmation is given and should be interpreted in accordance

with the provisions of section 418 of the Companies Act 2006.

Going concern basis

Pages 38 to 64 contain information on the performance of the

Group, its ﬁnancial position, cash ﬂows, net debt position and

borrowing facilities. Further information, including Treasury risk

management policies, exposures to market and credit risk and

hedging activities, is given in Note 42 to the ﬁnancial statements,

‘Financial instruments and related disclosures’. Having assessed the

principal risks and other matters considered in connection with the

viability statement, the Directors considered it appropriate to adopt

the going concern basis of accounting in preparing the ﬁnancial

statements.

Directors’ statement of responsibilities

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

127

Directors’ statement of responsibilities continued

Internal control

The Board, through the Audit & Risk Committee, has reviewed the

assessment of risks and the internal control framework that operates

in GSK and has considered the effectiveness of the system of internal

control in operation in the Group for the year covered by this Annual

Report and up to the date of its approval by the Board of Directors.

The UK Corporate Governance Code

The Board considers that GlaxoSmithKline plc applies the principles

and complies with the provisions of the UK Corporate Governance

Code maintained by the Financial Reporting Council, as described

in the Corporate Governance section on pages 65 to 94. The Board

further considers that the Annual Report, taken as a whole, is fair,

balanced and understandable, and provides the information

necessary for shareholders to assess the Group’s position and

performance, business model and strategy.

As required by the Financial Conduct Authority’s Listing Rules,

the auditor has considered the Directors’ statement of compliance in

relation to those points of the UK Corporate Governance Code

which are speciﬁed for their review.

Annual Report

The Annual Report for the year ended 31 December 2018,

comprising the Report of the Directors, the Remuneration report,

the Financial statements and Additional information for investors, has

been approved by the Board of Directors and signed on its behalf by

Philip Hampton

Chairman

11 March 2019

GSK Annual Report 2018

128

Independent Auditor’s report to the members

of GlaxoSmithKline plc

Report on the audit of the ﬁnancial statements

Opinion

In our opinion:

– the ﬁnancial statements of GlaxoSmithKline plc (the ‘Parent

company’) and its subsidiaries (the ‘Group’) give a true and fair

view of the state of the Group’s and of the Parent company’s

affairs as at 31 December 2018 and of the Group’s proﬁt for

the year then ended;

– the Group ﬁnancial statements have been properly prepared in

accordance with International Financial Reporting Standards

(IFRSs) as adopted by the European Union and IFRSs as issued

by the International Accounting Standards Board (IASB);

– the Parent company ﬁnancial statements have been properly

prepared in accordance with United Kingdom Generally Accepted

Accounting Practice including FRS 101 ‘Reduced Disclosure

Framework’; and

– the ﬁnancial statements have been prepared in accordance with

the requirements of the Companies Act 2006 and, as regards the

Group ﬁnancial statements, Article 4 of the IAS Regulation.

We have audited the ﬁnancial statements which comprise the:

Group:

– consolidated balance sheet as at 31 December 2018;

– consolidated income statement for the year then ended;

– consolidated statement of comprehensive income for the year

then ended;

– consolidated statement of changes in equity for the year then

ended;

– consolidated cash ﬂow statement for the year then ended; and

– notes 1 to 46 to the ﬁnancial statements, which includes the

accounting principles and policies.

Parent company:

– balance sheet as at 31 December 2018;

– statement of changes in equity for the year then ended; and

– notes A to N to the ﬁnancial statements, which includes the

accounting principles and policies.

The ﬁnancial reporting framework that has been applied in the

preparation of the Group ﬁnancial statements is applicable law and

IFRSs as adopted by the European Union. The ﬁnancial reporting

framework that has been applied in the preparation of the Parent

company ﬁnancial statements is applicable law and United Kingdom

Accounting Standards, including FRS 101 ‘Reduced Disclosure

Framework’ (United Kingdom Generally Accepted Accounting

Practice).

Basis for opinion

We conducted our audit in accordance with International Standards

on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities

under those standards are further described in the auditor’s

responsibilities for the audit of the ﬁnancial statements section of

our report.

We are independent of the Group and the Parent company in

accordance with the ethical requirements that are relevant to our

audit of the ﬁnancial statements in the UK, including the Financial

Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to

listed public interest entities, and we have fulﬁlled our other ethical

responsibilities in accordance with these requirements.

We conﬁrm that non-audit services prohibited by the FRC’s Ethical

Standard were not provided to the Group or the Parent company.

We believe that the audit evidence we have obtained is sufﬁcient

and appropriate to provide a basis for our opinion.

Summary of our audit approach

First year audit transaction

This is the ﬁrst year we have been appointed as auditors to the

Group. We undertook a number of transitional procedures to

prepare for the audit. Before we commenced our audit we had to

establish our independence of the Group which involved ceasing

a number of commercial relationships. We used the time prior to

commencing our audit to meet with key members of management

to gain an understanding of the business, its issues and the

environment in which it operates.

We became independent of the Group and commenced our audit

planning on 4 July 2017. From this date we attended all Audit & Risk

Committee meetings, initially in an observer capacity. We worked

alongside the former auditor and reviewed their working papers to

gain an understanding of the Group’s processes, their audit risk

assessment, the controls on which they relied for the purposes of

issuing their audit opinion, as well as understanding the evidence

they obtained on the key complex or signiﬁcant judgements which

they made.

In September 2017, we held a two day meeting of audit partners

and senior staff who would be responsible for undertaking the audits

in the most signiﬁcant locations in the Group. The main purpose of

this meeting was to outline our central audit approach including the

use of our data analytics tools, discuss possible signiﬁcant audit

risks and brief our teams on the Group’s key processes, systems

and structure. A subsequent strategic planning meeting was held

in September 2018 with the same participants to take into account

any current period updates that impacted our audit approach.

During these meetings, we also heard directly from Group

management on the changes impacting the business to inform

our audit planning and risk assessment.

Key audit matters

The key audit matters that we identiﬁed in the current year were:

– valuation of acquisition-related liabilities;

– valuation of US Returns and Rebates (RAR) accruals;

– valuation of intangible assets;

– valuation of uncertain tax positions, including transfer pricing

and updates to the impacts of the US Tax Reform; and

– IT systems which impact ﬁnancial reporting.

Key audit matters considered by the Group’s auditor in the prior

year were broadly aligned with the items identiﬁed above, but also

included consideration of litigations and investigations into the

Group’s commercial operations, which are less signiﬁcant in the

current year.

Materiality

The materiality that we used for the Group ﬁnancial statements

was £270 million, which was determined on the basis of a

composite benchmarking approach. This approach considers

proﬁt before tax, adjusted proﬁt before tax, revenue and net cash

ﬂows from operations.

Risk assessment at group level

We applied a top-down risk assessment methodology which

considers the enterprise, industry and ﬁnancial risks in the context of

the ﬁnancial statements

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

129

As part of this process, we spent time understanding the key

ﬁnancial and business processes of the Group and how they are

implemented across the organisation. We used our audit analytics

tools to analyse client data and the ﬂow of business transactions

to inform our fact-based risk assessment.

Audit scope and execution

We structured our approach to the audit to reﬂect how the Group

is organised as well as ensuring our audit was both effective and

risk focused. It can be summarised into the following areas which

enabled us to obtain the evidence required to form an opinion on

the Group and Parent company ﬁnancial statements:

– Risk assessment and audit planning at a Group level.

The central control and common systems throughout most of the

Group, enabled us to structure the audit more centrally. In addition

to appointing partners for each of three businesses, we also had

partners coordinate the component and legal entity audits in each

country. These global business partners met regularly with the

relevant management to understand strategy and matters which

arose throughout the year that could have impacted on the

ﬁnancial reporting. The regular meetings we had with members

of the Internal Audit, the internal Legal Counsel and the Global

Ethics & Compliance team allowed us to understand their work,

to review their reports and to enhance our risk assessment.

– Audit work performed at global shared service centres.

A signiﬁcant amount of the Group’s operational processes which

cover ﬁnancial reporting are undertaken in shared service centres.

Our central team, which included senior individuals responsible

for each of the global processes, coordinated our audit work at

the shared service centres in scope for the Group audit, to ensure

we developed a good understanding of the end-to-end view of

the key processes that supported material account balances,

classes of transactions and disclosures within the Group ﬁnancial

statements. We then evaluated the effectiveness of internal

controls over ﬁnancial reporting for these processes and

considered the implications for the remainder of our audit work.

– Audit work executed at component and individual

legal entities.

The following components were subject to market-speciﬁc audit

procedures as well as the assessment of the internal controls over

ﬁnancial reporting: Belgium; Canada; France; Germany; Italy;

Japan; Spain; Switzerland; United Kingdom and United States.

The Group audit team was in active dialogue throughout the year

with the component audit teams responsible for the audit work

under the direction and supervision of the Group audit team. This

included determining whether the work was planned and

performed in accordance with the overall Group audit strategy

and the requirements of our Group audit instructions to the

components. As part of supervising the work of the components,

the Group audit team visited all the component countries, as well

as locations of all shared service centre audits.

– Audit procedures undertaken at a Group level and on

the Parent company.

In addition to the above, we also performed audit work at Group

and on the Parent company ﬁnancial statements, including but not

limited to the consolidation of the Group’s results, the preparation

of the ﬁnancial statements, certain disclosures within the Directors

remuneration report, litigation provisions and exposures in addition

to management’s entity level and oversight controls relevant to

ﬁnancial reporting. We also carried out analytical procedures to

conﬁrm our conclusion that there were no signiﬁcant risks of

material misstatement of the aggregated ﬁnancial information of

the remaining components not subject to the market-speciﬁc audit

procedures.

The coverage obtained from this strategy is summarised as follows:

Benchmark Revenue

Proﬁt

before tax

Total

assets

Covered by market - speciﬁc procedures 66% 73% 83%

Covered by review at Group level 34% 27% 17%

The residual consists of components or legal entities each with

annual revenue (turnover) less than 1.8% of the total Group revenue.

These entities and components are non-signiﬁcant components that

individually and in the aggregate do not present a reasonable

possibility of risk of material misstatement.

Conclusions relating to going concern, principal risks

and viability statement

Going concern

We have reviewed the directors’ statement in notes 1 and A to the

ﬁnancial statements about whether they considered it appropriate

to adopt the going concern basis of accounting in preparing them

and their identiﬁcation of any material uncertainties to the Group’s

and Company’s ability to continue to do so over a period of at least

12 months from the date of approval of the ﬁnancial statements.

We considered as part of our risk assessment the nature of the Group,

its business model and related risks including where relevant the

impact of Brexit, the requirements of the applicable ﬁnancial reporting

framework and the system of internal control. We evaluated the

directors’ assessment of the Group’s ability to continue as a going

concern, including challenging the underlying data and key assumptions

used to make the assessment, and evaluated the directors’ plans for

future actions in relation to their going concern assessment.

We are required to state whether we have anything material to add

or draw attention to in relation to that statement required by Listing

Rule 9.8.6R(3) and report if the statement is materially inconsistent

with our knowledge obtained in the audit.

We conﬁrm that we have nothing material to report, add or

draw attention to in respect of these matters.

Principal risks and viability statement

Based solely on reading the directors’ statements and considering

whether they were consistent with the knowledge we obtained in the

course of the audit, including the knowledge obtained in the evaluation

of the directors’ assessment of the Group’s and the Company’s ability

to continue as a going concern, we are required to state whether we

have anything material to add or draw attention to in relation to:

– the disclosures on pages 34 to 36 that describe the principal

risks and explain how they are being managed or mitigated;

– the directors’ conﬁrmation on page 87 that they have carried out

a robust assessment of the principal risks facing the Group,

including those that would threaten its business model, future

performance, solvency or liquidity; or

– the directors’ explanation on page 44 as to how they have

assessed the prospects of the Group, over what period they have

done so and why they consider that period to be appropriate, and

their statement as to whether they have a reasonable expectation

that the Group will be able to continue in operation and meet its

liabilities as they fall due over the period of their assessment,

including any related disclosures drawing attention to any

necessary qualiﬁcations or assumptions.

We are also required to report whether the directors’ statement relating

to the prospects of the Group required by Listing Rule 9.8.6R(3) is

materially inconsistent with our knowledge obtained in the audit.

We conﬁrm that we have nothing material to report, add or

draw attention to in respect of these matters.

Report on the audit of the ﬁnancial statements continued

GSK Annual Report 2018

130

Report on the audit of the ﬁnancial statements continued

Key audit matter description How the scope of our audit responded to the key audit matter

Valuation of acquisition-related liabilities

In recent years the Group has completed a number of signiﬁcant

transactions which resulted in the recognition of material and

judgemental acquisition-related liabilities. The most signiﬁcant

of these liabilities were:

– ViiV Healthcare Shionogi contingent consideration liability

(‘ViiV CCL’): The Group completed the acquisition of the

remaining 50% interest in the Shionogi-ViiV Healthcare joint

venture in 2012. Upon completion, the Group recognised a

contingent consideration liability for the fair value of the

expected future payments to be made to Shionogi. As at

31 December 2018, the liability was valued at £5,937 million

(2017 – £5,542 million); and

– Pﬁzer put option: The Group granted Pﬁzer a put option in

2009, enabling Pﬁzer to put its non-controlling interest in

ViiV Healthcare back to the Group in the future. As at

31 December 2018, the liability was valued at £1,240 million

(2017 – £1,304 million).

In the prior year, the acquisition-related liabilities also included the

Consumer Healthcare joint venture put option. The liability

represented the present value of the expected redemption price

of a put option over Novartis’ non-controlling interest in Consumer

Healthcare joint venture. On 3 May 2018, the Consumer

healthcare joint venture put option was de-recognised following

approval by shareholders of the acquisition of Novartis’

non-controlling interest in the Consumer healthcare joint venture

and therefore this liability did not exist at the year end.

The valuations of the liabilities are sensitive to changes in

exchange rates, discount rates and sales forecasts, which are

based upon management’s assessment of the probability of

success of pipeline products, expected launch dates, subsequent

sales volumes and pricing.

The key risks in the valuation of the acquisition-related liabilities,

speciﬁcally the sales forecast used to value the ViiV CCL and

particularly the dolutegravir-based regimens as, in our view, these

give rise to the most material source of estimation uncertainty.

The acquisition related liabilities are disclosed as a key

accounting judgement and estimate in note 3 of the Group

ﬁnancial statement with further disclosures provided in notes 27,

38, 39 and 42. The matter is also discussed in the Audit & Risk

Committee report within the Corporate Governance section of

the Annual Report.

Audit procedures performed

We performed the following audit procedures where relevant:

– made enquiries of key individuals from the senior leadership

team, commercial strategy team and key personnel involved in

the budgeting and forecasting process, to discuss, challenge

and evaluate management’s evidence to support key inputs

and assumptions;

– challenged the business assumptions applied by management

in estimating sales forecasts, including benchmarking of sales

forecasts to external data. This included analysis of the results

of demand studies conducted by third parties on new drug

launches. We assessed the results of clinical studies and

the target medicine proﬁle of new drugs to understand their

relative position in the market and to assess any sources of

contradictory evidence;

– assessed the historical accuracy of management’s forecasts

including estimates of the probability of success of pipeline

products;

– benchmarked sales forecasts against analyst expectations to,

both assess the estimations made by management and, for

consideration of any contradictory evidence available;

– assessed the reasonableness of valuation-speciﬁc assumptions

used by management, including exchange rates, discount rate,

valuation multiples and whether these assumptions were

consistent with how a well-informed independent third party

would value these liabilities;

– assessed the appropriateness of the accounting for acquisition-

related liabilities; and

– evaluated the disclosures in respect to these liabilities included

in the notes to the ﬁnancial statements to determine whether

they were compliant with the requirements of the relevant

accounting standards.

Internal controls over ﬁnancial reporting

We tested the design, implementation and operating effectiveness

of key controls identiﬁed over the valuation of the acquisition-related

liabilities, such as the review and approval of both the long-range

forecast and the valuation models.

Key observations communicated to the Audit & Risk Committee

Whilst there are signiﬁcant commercial risks to the forecasts for the

future sales of dolutegravir-based regimens and related products,

we are satisﬁed that the valuations of associated liabilities are within

an acceptable range of values.

The approach to valuing the acquisition-related liabilities was

consistent with prior periods and we are satisﬁed that the valuations

of the acquisition-related liabilities are reasonable and consistent

with IFRS.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most signiﬁcance in our audit of the ﬁnancial statements of

the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) that we identiﬁed.

These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing

the efforts of the engagement team.

These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we

do not provide a separate opinion on these matters.

Independent Auditor’s report continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

131

Report on the audit of the ﬁnancial statements continued

Key audit matter description How the scope of our audit responded to the key audit matter

Valuation of US Returns and Rebates (RAR) accruals

In the US the Group sells to customers under various commercial

and government mandated contracts and reimbursement

arrangements that include rebates, chargebacks and a right of

return for certain products. As such, revenue recognition reﬂects

gross-to-net sales adjustments which involve signiﬁcant estimation

and judgement. These adjustments are known as the Returns and

Rebates (‘RAR’) accruals and are a source of estimation and

uncertainty which could have a material impact on reported revenue.

The three most signiﬁcant payer channels within the RAR accrual are

managed healthcare organisations, Medicaid and Medicare Part D.

The two main causes of signiﬁcant estimation uncertainty are:

– the utilisation rates (the portion of total sales which will be made

into each payer channel) estimated by management in recording

the accruals. The utilisation assumption is the most challenging

of the key assumptions used to derive the accrual given that it

is inﬂuenced by market demand and other factors outside the

control of the Group; and

– the time lag between the point of sale and the point at which

exact rebate amounts are known to the Group (upon receipt of

a claim). Those payer channels with the longest time lag result

in a greater accrued period, and as such a greater level of

estimation uncertainty.

The level of estimation uncertainty is also impacted by signiﬁcant

shifts in channel mix driven by changes in the competitive

landscape.

In the US Pharmaceuticals business in 2018, £10,774 million of

RAR deductions were made to gross revenue of £18,227 million,

resulting in net revenue of £7,453 million. The balance sheet

accrual at 31 December 2018 accrual for the combined

Pharmaceuticals and Vaccines businesses amounted to

£4,356 million.

Returns and rebates are disclosed as a key accounting judgement

and estimate in note 3 of the Group ﬁnancial statement with further

disclosures provided in note 27. The matter is also discussed in the

Audit & Risk Committee report within the Corporate Governance

section of the Annual Report.

Audit procedures performed

We performed the following audit procedures:

– assessed the historical accuracy of management’s estimates

against actual outcomes to evaluate the impact and inform our

assessment of the current year accrual;

– developed an expectation of the accrual balance for each of the

key channels, based on historical claims received adjusted to

reﬂect market changes in the period including an assessment of

the time lag between the initial point of sale and the claim receipt.

We then used this expectation to consider the appropriateness of

management’s ending accrual position;

– recalculated the accrual recognised to determine that it is

consistent with the assumptions determined through

management’s process;

– substantively tested individual utilisation rates on a sample basis;

– evaluated, through monitoring of news events and industry

developments, the appropriateness of period end adjustments

to the liability made as part of the ongoing review of the estimated

accrual;

– evaluated and benchmarked the methodology applied by

management in estimating the accrual against industry practice;

and

– monitored the market for any signiﬁcant events in the period, giving

a particular focus to any potential generic competition in respect

to Advair, one of the Group’s most signiﬁcant products. A generic

Advair competitor product was not approved by the US Food and

Drug Administration (‘FDA’) until the end of January 2019, and

therefore there was no additional risk associated with market

events in determining the 2018 Advair RAR liability.

Internal controls over ﬁnancial reporting

We tested the design, implementation and operating effectiveness of

key controls over the estimation of RAR accruals including the review

of forecasts and monthly accruals.

Key observations communicated to the Audit & Risk Committee

Based on our assessment of the accuracy of historical estimates

made by management by comparing them to actual rebates claimed,

we determined that the estimates have been accurate in the past

giving further assurance over the strength of management’s process

for estimating the liability at the reporting date.

We are satisﬁed with the appropriateness of the RAR accruals at the

period end, and that management’s estimated liability is reasonable.

GSK Annual Report 2018

132

Report on the audit of the ﬁnancial statements continued

Key audit matter description How the scope of our audit responded to the key audit matter

Valuation of intangible assets

As at 31 December 2018, the Group held £16,156 million of

intangible assets (including licences, patents, trademarks and

brand names, but excluding goodwill and computer software).

The recoverable value of these intangible assets relies on certain

assumptions and estimates of future trading performance which

impact the valuation.

The assumptions applied by management in determining the

recoverable value include the discount rate, future sales growth

rate, the impact of the expiry of patents on the product and

potential product obsolescence. Changes in these assumptions

could lead to an impairment to the carrying value of the intangible

assets.

The assets most at risk of material impairment were identiﬁed using

sensitivity analysis on key assumptions and a review of potential

triggering events that could be indicative of an impairment in the

carrying value of associated assets.

The disclosures relating to other intangible assets are included in

note 19 of the Group ﬁnancial statements. The matter is also

discussed in the Audit & Risk Committee report within the

Corporate Governance section of the Annual Report.

Audit procedures performed

We assessed the appropriateness of the carrying value of the

intangible assets by performing the following audit procedures:

– assessed the valuation methodology used by management,

with involvement of our valuation specialists, and tested the

mechanical accuracy of the impairment models;

– evaluated the reasonableness of the valuation assumptions,

such as discount rates, used by management through reference

to external market data;

– reviewed analyst reports and other external sources of

information to identify any contradictory evidence which

could indicate an impairment is required;

– challenged the appropriateness of the business assumptions

used by management, such as sales growth and the probability

of success of products in development by assessing externally

available reference data to look for contradictory evidence,

evaluate past performances where relevant and assessing

historical accuracy of the forecast produced by management;

– enquired of and challenged management on the commercial

strategy associated with the products to ensure that it was

consistent with the assumptions used in estimating future

cash ﬂows; and

– considered whether events or transactions that occurred after

the balance sheet date but before the reporting date affect the

conclusions reached on the carrying values of the assets and

associated disclosures.

Internal controls over ﬁnancial reporting

We tested the design, implementation and operating effectiveness

of key controls over the impairment review process including the

review and approval of forecasts and review of valuation models.

Key observations communicated to the Audit & Risk Committee

Our audit procedures did not identify any additional impairments.

We are satisﬁed that management’s intangible impairments

estimates are reasonable and in accordance with IFRS.

Independent Auditor’s report continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

133

Report on the audit of the ﬁnancial statements continued

Key audit matter description How the scope of our audit responded to the key audit matter

Valuation of uncertain tax positions, including transfer pricing

and updates to the impacts of the US Tax Reform

The Group operates in numerous jurisdictions and there are

open tax and transfer pricing issues and exposures with UK

and overseas tax authorities that give rise to uncertain tax

positions. The range of possible outcomes for provisions and

contingencies can be wide and management is required to make

certain judgements in respect of estimates of tax exposures and

contingencies in order to assess the adequacy of tax provisions.

At 31 December 2018, the Group has recorded provisions of

£1,082 million in respect of uncertain tax positions (2017 –

£1,175 million).

On 22 December 2017, the US Tax Cuts and Jobs Act was

enacted. There was limited guidance provided by the US

Treasury on how to apply the principles of the reform in practice

and, as such, judgement was required as at 2017 year end.

Management continued to monitor the impact of the reform

on the US business and the associated accounting records.

Given the complexity and uncertainty relating to US tax reform,

management is required to make judgements, assumptions and

interpretations of the tax law. Following additional guidance

released by the Internal Revenue Service during 2018, the

Group reduced its estimate of the 2017 impact of US tax reform

by £125 million.

Valuation of uncertain tax positions is disclosed as a key

accounting judgement and estimate in note 3 of the Group

ﬁnancial statements with further disclosures included in note 14.

The matter is also discussed in the Audit & Risk Committee

report within the Corporate Governance section of the Annual

Report.

Audit procedures performed

With the support of tax specialists, we assessed the

appropriateness of the uncertain tax provisions by performing the

following audit procedures:

– assessed and challenged provisions for uncertain tax positions,

and focused our work on those jurisdictions where the Group

has the greatest potential exposure and where the highest level

of judgement is required;

– involved our transfer pricing specialists to review the transfer

pricing methodology of the Group and associated approach

to provisioning;

– involved our UK, US and international tax and transfer specialists

to challenge the conclusions reached by management, both in

relation to the expected outcome and the ﬁnancial impact;

– considered evidence such as the actual results of previous

outturns, recent and current tax authority audits and enquiries,

third party tax advice where obtained and our tax specialists

own knowledge of market practice in relevant jurisdictions; and

– involved Deloitte US Tax specialists to determine the

reasonableness of the judgements in respect of the US

Tax Reform.

Internal controls over ﬁnancial reporting

We tested the design, implementation and operating effectiveness

of key controls over preparation of tax packs and tax consolidation.

Key observations communicated to the Audit & Risk Committee

We are satisﬁed that management’s judgements in relation to

uncertain tax positions and the related disclosures are in

accordance with IFRS. From our work we concluded that

management’s judgements were prudent, consistent with prior

periods, within an acceptable range and continue to be

appropriately recorded.

GSK Annual Report 2018

134

Key audit matter description How the scope of our audit responded to the key audit matter

IT systems which impact ﬁnancial reporting

In our audit plan we set out to place a signiﬁcant level of reliance

on the IT systems, underpinned by our ability to rely on effective

IT controls. The IT systems within the Group form a critical

component of the Group’s ﬁnancial reporting activities and

impact all account balances. IT controls, in the context of our

scope for the ﬁnancial audit, primarily relate to user access

security and change control. The purpose of such controls is to

prevent inappropriate changes being made to IT systems in

relation to application functionality, transactional processing and

direct changes to underlying data. GSK place signiﬁcant reliance

on their IT systems and the associated controls.

Audit procedures performed over IT systems

We performed the following risk assessment and audit procedures

to test IT controls over the in scope IT systems, which are those

systems that we considered key for ﬁnancial reporting purposes:

– identiﬁed the IT risks for each IT system based on our

understanding of the ﬂows of transactions and the IT environment;

– determined whether each general IT control, individually or

in combination with other controls, is appropriately designed

to address the associated IT risk; and

– tested the design, implementation and operating effectiveness

of the relevant general IT controls.

IT control deﬁciencies were noted around user access

management for certain in scope IT systems and the associated

infrastructure. The existence of these deﬁciencies in the year

resulted in a heightened risk that data, reports and automated

system functionality (e.g. calculations) from the affected systems

might not be reliable.

We assessesed the impact of the deﬁciencies noted around user

access management on all account balances to determine the

speciﬁc impact on our audit plan.

Key observations communicated to the Audit & Risk Committee

During the year, the Group implemented a remediation plan to

address the user access deﬁciencies. This primarily involved the

removal of inappropriate access together with the implementation of

appropriate privileged access management processes and controls

which is planned to be fully complete in 2019. The Group has layers

of business process controls at many levels which help to mitigate

this IT risk. An additional programme to identify and validate these

controls, as well as some enhancement to these controls was

completed during 2018.

The IT deﬁciencies were reported to the Audit & Risk Committee

throughout the year and have been disclosed in the Audit & Risk

Committee section of the Annual Report. The matter is also

discussed in the Audit & Risk Committee report within the

Corporate Governance section of the Annual Report.

We were satisﬁed that the mitigating business process controls

addressed the risks of material misstatement.

Report on the audit of the ﬁnancial statements continued

Independent Auditor’s report continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

135

Our application of materiality

We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of

a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and

in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows:

Group ﬁnancial statements Parent company ﬁnancial statements

Materiality £270 million £67 million

Basic for

determining

materiality

In determining our benchmark for materiality we

considered the metrics used by investors and other

readers of the ﬁnancial statements. In particular, we

considered: Statutory proﬁt before tax, Adjusted proﬁt

before tax, Revenue and Net cash ﬂows from

operations. However, given the importance of all these

metrics, we concluded that a composite approach was

most appropriate, based on the range of materiality we

determined using the benchmarks listed above.

Using professional judgement we have determined

preliminary materiality to be £270 million to apply

conservatism to our determination given that this is the

ﬁrst year of our audit.

Metric %

Statutory proﬁt before tax 5.6

Adjusted proﬁt before tax* 3.3

Revenue 0.9

Net cash inﬂow from operating activities 3.2

* A reconciliation between the Statutory proﬁt before tax and

Adjusted proﬁt before tax is detailed in the Adjusting Items

section of the Strategic Report.

The materiality used by the former auditor in the audit

of the prior year’s Group ﬁnancial statements was

£290 million.

Materiality was determined using the total assets

benchmark.

The materiality used by the former auditor in the audit

of the prior year’s Parent company ﬁnancial statements

was £70 million.

Rationale for

the benchmark

applied

We calculated the range for each of the relevant

benchmarks and used these ranges in exercising our

professional judgement to determine materiality. Our

chosen materiality of £270 million was deemed to be

appropriate taking into account various metrics used by

investors and other readers of the ﬁnancial statements.

The component materiality allocated to the in-scope

components ranged between £67 million and

£189 million.

The range of materiality allocated across components

by the former auditor in the audit of the prior year’s

Group ﬁnancial statements was between £15 million

and £154 million.

The Parent company holds the Group’s investments and

is not in itself proﬁt-oriented. The strength of the balance

sheet is the key measure of ﬁnancial health that is

important to shareholders since the primary concern for

the Parent company is the payment of dividends. Using

a benchmark of total assets is therefore most

appropriate.

We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £10 million (2017 –

£10 million was used by the previous auditor) as well as differences below that threshold that, in our view, warranted reporting on qualitative

grounds. We also report to the Audit & Risk Committee on disclosure matters that we identiﬁed when assessing the overall presentation of

the ﬁnancial statements.

Report on the audit of the ﬁnancial statements continued

GSK Annual Report 2018

136

The directors are responsible for the other information. The other information comprises the information included in the Annual Report,

other than the ﬁnancial statements and our auditor’s report thereon.

Our opinion on the ﬁnancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report,

we do not express any form of assurance conclusion thereon.

In connection with our audit of the ﬁnancial statements, our responsibility is to read the other information and, in doing so, consider whether

the other information is materially inconsistent with the ﬁnancial statements or our knowledge obtained in the audit or otherwise appears to

be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material

misstatement in the ﬁnancial statements or a material misstatement of the other information. If, based on the work we have performed, we

conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in respect of these matters.

We summarise below our work in relation to areas of the other information including those areas upon which we are speciﬁcally required to

report:

Matters we are speciﬁcally required to report

Our responsibility Our reporting

Fair, balanced and understandable

Consider whether the statement given by the directors that they consider the

Annual Report and ﬁnancial statements taken as a whole is fair, balanced and

understandable and provides the information necessary for shareholders to

assess the Group’s position and performance, business model and strategy

is materially inconsistent with our knowledge obtained from the audit.

We consider that the directors’ statement is materially

consistent with our knowledge obtained from the audit.

Audit & Risk Committee report

Consider whether it deals appropriately with those matters that we reported

to the Audit & Risk Committee.

All matters we reported have been appropriately covered in

the Audit & Risk Committee report.

Directors’ statement of compliance with the UK Corporate Governance

Code (‘the Code’)

Consider whether the parts of the Directors’ statement required under the

Listing Rules relating to the Parent company’s compliance with the Code

containing provisions speciﬁed for review by the auditor in accordance with

Listing Rule 9.8.10R(2) properly discloses any departure from a relevant

provision of the Code.

We did not identify any such matters.

Viability statement

Review the conﬁrmation and description in the light of the knowledge

gathered during the audit, including making enquiries and considering the

directors’ processes used to support the statements made.

Consider if the statements are aligned with the relevant provisions of the

UK Corporate Governance Code (the ‘Code’).

As set out in the section ‘Conclusions relating to going

concern, principal risks and viability statement’, we have

nothing material to report, add or draw attention to in respect

of these matters.

Directors’ Remuneration report

Report whether the part of the directors’ remuneration report to be audited

is properly prepared and the disclosures speciﬁed by the Companies Act

have been made.

As set out in the section ‘Opinions on other matters

prescribed by the Companies Act 2006’, in our opinion, the

part of the directors’ remuneration report to be audited has

been prepared in accordance with the Companies Act 2006.

Strategic report and Directors’ report

Report whether they are consistent with the audited ﬁnancial statements

and are prepared in accordance with applicable legal requirements.

Report if we have identiﬁed any material misstatements in either report in

the light of the knowledge and understanding of the group and of the Parent

company and their environment obtained in the course of the audit.

As set out in the section ‘Opinions on other matters

prescribed by the Companies Act 2006’, in our opinion,

based on the work undertaken in the course of the audit, the

information in these reports is consistent with the audited

ﬁnancial statements and has been prepared in accordance

with applicable legal requirements.

Other information

Independent Auditor’s report continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

137

Other reporting on other information

Our responsibility Our reporting

Alternative performance measures (APMs)

APMs are measures that are not deﬁned by generally accepted accounting

practice (GAAP) and therefore are not typically included in the ﬁnancial

statement part of the Annual Report. The Group use APMs, such as adjusted

proﬁt, free cash ﬂow and constant currency growth rates in some of its

quarterly and annual reporting of ﬁnancial performance.

We have reviewed and assessed management’s calculation and reporting of

these metrics to assess consistency with the Group’s published deﬁnitions

and policies for these items.

We have also considered and assessed whether the use of APMs in the

Group’s reporting results is consistent with the guidelines produced by

regulators such as the European Securities and Markets Authority (‘ESMA’)

guidelines on the use of APMs and the FRC Alternative Performance Measures

Thematic Review published in November 2017.

We also considered whether there was an appropriate balance between the

use of statutory metrics and APMs, in addition to whether clear deﬁnitions and

reconciliation for APMs used in ﬁnancial reporting.

Based on the work undertaken in the course of the audit, in

our opinion:

– the use, calculation and disclosure of APMs is consistent

with the Group’s published deﬁnitions and policies;

– the use of APMs in the Group’s reporting results is

consistent with the guidelines produced by ESMA

and FRC; and

– there is an appropriate balance between the use of

statutory metrics and APMs, together with clear deﬁnitions

and reconciliation for APMs used in ﬁnancial reporting.

Approach to Brexit

Consider whether the Brexit risks have been appropriately reﬂected.

The Group’s approach to Brexit is outlined in the Strategic report

(page 36).

Based on the work undertaken in the course of the audit, in

our opinion, the risks in relation to Brexit have been

appropriately reﬂected.

Dividends and distribution policy

Consider whether the dividends policy is transparent and the dividends paid

are consistent with the policy.

Based on the work undertaken in the course of the audit, in

our opinion, the dividends policy is appropriately disclosed

and dividends paid are consistent with the policy.

Other information continued

GSK Annual Report 2018

138

Responsibilities of directors

As explained more fully in the directors’ responsibilities statement,

the directors are responsible for the preparation of the ﬁnancial

statements and for being satisﬁed that they give a true and fair view,

and for such internal control as the directors determine is necessary

to enable the preparation of ﬁnancial statements that are free from

material misstatement, whether due to fraud or error.

In preparing the ﬁnancial statements, the directors are responsible

for assessing the Group’s and the Parent company’s ability to

continue as a going concern, disclosing as applicable, matters

related to going concern and using the going concern basis of

accounting unless the directors either intend to liquidate the Group

or the Parent company or to cease operations, or have no realistic

alternative but to do so.

Auditor’s responsibilities for the audit of the ﬁnancial

statements

Our objectives are to obtain reasonable assurance about whether

the ﬁnancial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an auditor’s

report that includes our opinion. Reasonable assurance is a high level

of assurance, but is not a guarantee that an audit conducted in

accordance with ISAs (UK) will always detect a material

misstatement when it exists. Misstatements can arise from fraud or

error and are considered material if, individually or in the aggregate,

they could reasonably be expected to inﬂuence the economic

decisions of users taken on the basis of these ﬁnancial statements.

Details of the extent to which the audit was considered capable of

detecting irregularities, including fraud are set out below.

A further description of our responsibilities for the audit of the

ﬁnancial statements is located on the FRC’s website at: www.frc.org.

uk/auditorsresponsibilities. This description forms part of our

auditor’s report.

Extent to which the audit was considered capable of

detecting irregularities, including fraud

We identify and assess the risks of material misstatement of the

ﬁnancial statements, whether due to fraud or error, and then design

and perform audit procedures responsive to those risks, including

obtaining audit evidence that is sufﬁcient and appropriate to provide

a basis for our opinion.

Identifying and assessing potential risks related to

irregularities

In identifying and assessing the risks of material misstatement in

respect of irregularities, including fraud and non-compliance with

laws and regulations, our procedures included the following:

– enquiring of management, internal audit and the Audit & Risk

Committee, including obtaining and reviewing supporting

documentation, concerning the Group’s policies and procedures

relating to:

– identifying, evaluating and complying with laws and regulations

and whether they were aware of any instances of non-

compliance;

– detecting and responding to the risks of fraud and whether they

have knowledge of any actual, suspected or alleged fraud;

– the internal controls established to mitigate risks related to fraud

or non-compliance with laws and regulations;

– discussing among the engagement team including signiﬁcant

component audit teams and involving relevant internal specialists,

including tax, valuations, pensions, IT and industry specialists

regarding how and where fraud might occur in the ﬁnancial

statements and any potential indicators of fraud; and

– obtaining an understanding of the legal and regulatory frameworks

that the Group operates in, focusing on those laws and regulations

that had a direct effect on the ﬁnancial statements, such as

provisions of the UK Companies Act, pensions legislation and tax

legislations or that had a fundamental effect on the operations of

the Group, including the Good Clinical Practice, the FDA

regulations, General Data Protection requirements, Anti-bribery

and corruption policy and the Foreign Corrupt Practices Act.

Audit response to risks identiﬁed

Our procedures to respond to risks identiﬁed included the following:

– reviewing the ﬁnancial statement disclosures and testing to

supporting documentation to assess compliance with relevant

laws and regulations discussed above;

– enquiring of management, the Audit & Risk Committee and

in-house and external legal counsel concerning actual and

potential litigation and claims;

– performing analytical procedures to identify any unusual or

unexpected relationships that may indicate risks of material

misstatement due to fraud; and

– reading minutes of meetings of those charged with governance

and reviewing internal audit reports.

We have also considered the risks noted above in addressing the risk

of fraud through management override of controls:

– testing the appropriateness of journal entries and other

adjustments;

– assessing whether the judgements made in making accounting

estimates are indicative of a potential bias; and

– evaluating the business rationale of any signiﬁcant transactions

that are unusual or outside the normal course of business.

We also communicated relevant identiﬁed laws and regulations and

potential fraud risks to all engagement team members and signiﬁcant

component audit teams, and remained alert to any indications of

fraud or non-compliance with laws and regulations throughout

the audit.

Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act

2006

In our opinion, the part of the directors’ remuneration report to be

audited has been properly prepared in accordance with the

Companies Act 2006.

In our opinion, based on the work undertaken in the course of the

audit:

– the information given in the Strategic report and the Directors’

report for the ﬁnancial year for which the ﬁnancial statements are

prepared is consistent with the ﬁnancial statements; and

– the Strategic report and the Directors’ report have been prepared

in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Group and of

the Parent company and their environment obtained in the course of

the audit, we have not identiﬁed any material misstatements in the

strategic report or the directors’ report.

Independent Auditor’s report continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

139

Matters on which we are required to report by

exception

Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if,

in our opinion:

– we have not received all the information and explanations we

require for our audit; or

– adequate accounting records have not been kept by the Parent

company, or returns adequate for our audit have not been received

from branches not visited by us; or

– the Parent company ﬁnancial statements are not in agreement with

the accounting records and returns.

We have nothing to report in respect of these matters.

Directors’ remuneration

Under the Companies Act 2006 we are also required to report if in

our opinion certain disclosures of directors’ remuneration have not

been made or the part of the directors’ remuneration report to be

audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Other matters

Auditor tenure

Following the recommendation of the Audit & Risk Committee, we

were appointed by the Company at its annual general meeting on 3

May 2018 to audit the ﬁnancial statements of GlaxoSmithKline plc for

the year ending 31 December 2018 and subsequent ﬁnancial

periods. The period of uninterrupted engagement including previous

renewals and reappointments of the ﬁrm is accordingly one year.

Consistency of the audit report with the additional report to the

Audit & Risk Committee

Our audit opinion is consistent with the additional report to the Audit

& Risk Committee we are required to provide in accordance with

ISAs (UK).

Use of our report

This report is made solely to the Company’s members, as a body, in

accordance with Chapter 3 of Part 16 of the Companies Act 2006.

Our audit work has been undertaken so that we might state to the

Company’s members those matters we are required to state to them

in an auditor’s report and for no other purpose. To the fullest extent

permitted by law, we do not accept or assume responsibility to

anyone other than the Company and the Company’s members as a

body, for our audit work, for this report, or for the opinions we have

formed.

The Parent company has passed a resolution in accordance with

section 506 of the Companies Act that the senior statutory auditor’s

name should not be stated.

Deloitte LLP

Statutory Auditor

London, United Kingdom

11 March 2019

GSK Annual Report 2018

140

Consolidated income statement

for the year ended 31 December 2018

Notes

2018

£m

2017

£m

2016

£m

Turnover 6 30,821 30,186 27,889

Cost of sales (10,241) (10,342) (9,290)

Gross proﬁt 20,580 19,844 18,599

Selling, general and administration (9,915) (9,672) (9,366)

Research and development (3,893) (4,476) (3,628)

Royalty income 299 356 398

Other operating income/(expense) 7 (1,588) (1,965) (3,405)

Operating proﬁt 8 5,483 4,087 2,598

Finance income 11 81 65 72

Finance expense 12 (798) (734) (736)

Proﬁt on disposal of interest in associates 3 94 –

Share of after tax proﬁts of associates and joint ventures 13 31 13 5

Proﬁt before taxation 4,800 3,525 1,939

Taxation 14 (754) (1,356) (877)

Proﬁt after taxation for the year 4,046 2,169 1,062

Proﬁt attributable to non-controlling interests 423 637 150

Proﬁt attributable to shareholders 3,623 1,532 912

4,046 2,169 1,062

Basic earnings per share (pence) 15 73.7p 31.4p 18.8p

Diluted earnings per share (pence) 15 72.9p 31.0p 18.6p

Consolidated statement of comprehensive income

for the year ended 31 December 2018

2018

£m

2017

£m

2016

£m

Proﬁt for the year 4,046 2,169 1,062

Items that may be subsequently reclassiﬁed to income statement:

Exchange movements on overseas net assets and net investment hedges 34 (480) 462 646

Reclassiﬁcation of exchange on liquidation or disposal of overseas subsidiaries 34 – 109 –

Fair value movements on equity investments (14) 251

Deferred tax on fair value movements on equity investments 47 –

Reclassiﬁcation of fair value movements on equity investments – (42) (245)

Deferred tax reversed on reclassiﬁcation of equity investments – (18) 51

Fair value movements on cash ﬂow hedges 140 (10) 2

Deferred tax on fair value movements on cash ﬂow hedges (22) – 2

Reclassiﬁcation of cash ﬂow hedges to income statement (175) – 1

Deferred tax reversed on reclassiﬁcation of cash ﬂow hedges 20 – –

(517) 534 708

Items that will not be reclassiﬁed to income statement:

Exchange movements on overseas net assets of non-controlling interests 34 (1) (149) 603

Fair value movements on equity investments 180

Deferred tax on fair value movements on equity investments 10

Remeasurement gains/(losses) on deﬁned beneﬁt plans 728 549 (475)

Tax on remeasurement of deﬁned beneﬁt plans (146) (221) 126

771 179 254

Other comprehensive income for the year 34 254 713 962

Total comprehensive income for the year 4,300 2,882 2,024

Total comprehensive income for the year attributable to:

Shareholders 3,878 2,394 1,271

Non-controlling interests 422 488 753

Total comprehensive income for the year 4,300 2,882 2,024

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

141

Consolidated balance sheet

as at 31 December 2018

Notes

2018

£m

2017

£m

Non-current assets

Property, plant and equipment 17 11,058 10,860

Goodwill 18 5,789 5,734

Other intangible assets 19 17,202 17,562

Investments in associates and joint ventures 20 236 183

Other investments 21 1,322 918

Deferred tax assets 14 3,887 3,796

Derivative ﬁnancial instruments 42 69 8

Other non-current assets 22 1,576 1,413

Total non-current assets 41,139 40,474

Current assets

Inventories 23 5,476 5,557

Current tax recoverable 14 229 258

Trade and other receivables 24 6,423 6,000

Derivative ﬁnancial instruments 42 188 68

Liquid investments 31 84 78

Cash and cash equivalents 25 3,874 3,833

Assets held for sale 26 653 113

Total current assets 16,927 15,907

Total assets 58,066 56,381

Current liabilities

Short-term borrowings 31 (5,793) (2,825)

Contingent consideration liabilities 39 (837) (1,076)

Trade and other payables 27 (14,037) (20,970)

Derivative ﬁnancial instruments 42 (127) (74)

Current tax payable 14 (965) (995)

Short-term provisions 29 (732) (629)

Total current liabilities (22,491) (26,569)

Non-current liabilities

Long-term borrowings 31 (20,271) (14,264)

Corporation tax payable 14 (272) (411)

Deferred tax liabilities 14 (1,156) (1,396)

Pensions and other post-employment beneﬁts 28 (3,125) (3,539)

Other provisions 29 (691) (636)

Derivative ﬁnancial instruments 42 (1) –

Contingent consideration liabilities 39 (5,449) (5,096)

Other non-current liabilities 30 (938) (981)

Total non-current liabilities (31,903) (26,323)

Total liabilities (54,394) (52,892)

Net assets 3,672 3,489

Equity

Share capital 33 1,345 1,343

Share premium account 33 3,091 3,019

Retained earnings 34 (2,137) (6,477)

Other reserves 34 2,061 2,047

Shareholders’ equity 4,360 (68)

Non-controlling interests (688) 3,557

Total equity 3,672 3,489

The ﬁnancial statements on pages 140 to 218 were approved by the Board on 11 March 2019 and signed on its behalf by

Philip Hampton

Chairman

GSK Annual Report 2018

142

Shareholders’ equity

capital

£m

premium

£m

Retained

earnings

£m

Other

reserves

£m

Total

£m

Non-controlling

interests

£m

Total

equity

£m

At 1 January 2016 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)

Derecognition of liabilities with non-controlling interests – – 1,244 – 1,244 – 1,244

Changes in non-controlling interests – – 17 – 17 15 32

Shares issued 2 87 – – 89 – 89

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

Proﬁt for the year – – 1,532 – 1,532 637 2,169

Other comprehensive income for the year – – 899 (37) 862 (149) 713

Total comprehensive income for the year – – 2,431 (37) 2,394 488 2,882

Distributions to non-controlling interests – – – – – (789) (789)

Contribution from non-controlling interests – – – – – 21 21

Dividends to shareholders – – (3,906) – (3,906) – (3,906)

Changes in non-controlling interests – – – – – (2) (2)

Shares issued 1 55 – – 56 – 56

Shares acquired by ESOP Trusts – 10 581 (656) (65) – (65)

Write-down of shares held by ESOP Trusts – – (520) 520 – – –

Share-based incentive plans – – 333 – 333 – 333

Tax on share-based incentive plans – – (4) – (4) – (4)

At 31 December 2017 1,343 3,019 (6,477) 2,047 (68) 3,557 3,489

Implementation of IFRS 15 – – (4) – (4) – (4)

Implementation of IFRS 9 – – 277 (288) (11) – (11)

At 31 December 2017, as adjusted 1,343 3,019 (6,204) 1,759 (83) 3,557 3,474

Proﬁt for the year – – 3,623 – 3,623 423 4,046

Other comprehensive income for the year – – 124 131 255 (1) 254

Total comprehensive income for the year – – 3,747 131 3,878 422 4,300

Distributions to non-controlling interests – – – – – (570) (570)

Contribution from non-controlling interests – – – – – 21 21

Derecognition of non-controlling interests in Consumer

Healthcare Joint Venture – – 4,056 – 4,056 (4,118) (62)

Dividends to shareholders – – (3,927) – (3,927) – (3,927)

Realised proﬁts on disposal of equity investments – – 56 (56) – – –

Share of associates and joint ventures realised proﬁts on

disposal of equity investments – – 38 (38) – – –

Shares issued 2 72 – – 74 – 74

Write-down of shares held by ESOP Trusts – – (265) 265 – – –

Share-based incentive plans – – 360 – 360 – 360

Tax on share-based incentive plans – – 2 – 2 – 2

At 31 December 2018 1,345 3,091 (2,137) 2,061 4,360 (688) 3,672

Consolidated statement of changes in equity

for the year ended 31 December 2018

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

143

Consolidated cash ﬂow statement

for the year ended 31 December 2018

Notes

2018

£m

2017

£m

2016

£m

Cash ﬂow from operating activities

Proﬁt after taxation for the year 4,046 2,169 1,062

Adjustments reconciling proﬁt after tax to operating cash ﬂows 36 5,701 6,089 7,044

Cash generated from operations 9,747 8,258 8,106

Taxation paid (1,326) (1,340) (1,609)

Net cash inﬂow from operating activities 8,421 6,918 6,497

Cash ﬂow from investing activities

Purchase of property, plant and equipment (1,344) (1,545) (1,543)

Proceeds from sale of property, plant and equipment 168 281 98

Purchase of intangible assets (452) (657) (809)

Proceeds from sale of intangible assets 256 48 283

Purchase of equity investments (309) (80) (96)

Proceeds from sale of equity investments 151 64 683

Contingent consideration paid (153) (91) (73)

Purchase of businesses, net of cash acquired 38 – – 17

Disposal of businesses 38 26 282 72

Investments in associates and joint ventures 20 (10) (15) (11)

Proceeds from disposal of interests in associates 38 3 196 –

Decrease in liquid investments – 4 –

Interest received 72 64 68

Dividends from associates, joint ventures and equity investments 39 6 42

Net cash outﬂow from investing activities (1,553) (1,443) (1,269)

Cash ﬂow from ﬁnancing activities

Shares acquired by ESOP Trusts – (65) (74)

Issue of share capital 33 74 56 89

Purchase of non-controlling interests (9,320) (29) –

Increase in long-term loans 10,138 2,233 –

Repayment of short-term Notes (2,067) (2,636) (865)

Increase in/(repayment of) other short-term loans 81 (564) 1,013

Net repayment of obligations under ﬁnance leases (28) (23) (18)

Interest paid (766) (781) (732)

Dividends paid to shareholders (3,927) (3,906) (4,850)

Distributions to non-controlling interests (570) (779) (534)

Contributions from non-controlling interests 21 21 –

Other ﬁnancing cash ﬂows (25) 93 (421)

Net cash outﬂow from ﬁnancing activities (6,389) (6,380) (6,392)

Increase/(decrease) in cash and bank overdrafts 37 479 (905) (1,164)

Cash and bank overdrafts at beginning of year 3,600 4,605 5,486

Exchange adjustments 8 (100) 283

Increase/(decrease) in cash and bank overdrafts 479 (905) (1,164)

Cash and bank overdrafts at end of year 4,087 3,600 4,605

Cash and bank overdrafts at end of year comprise:

Cash and cash equivalents 3,874 3,833 4,897

Cash and cash equivalents reported in assets held for sale 485 – –

4,359 3,833 4,897

Overdrafts (272) (233) (292)

4,087 3,600 4,605

GSK Annual Report 2018

144

Notes to the ﬁnancial statements

1. Presentation of the ﬁnancial statements

Description of business

GSK is a major global healthcare group which is engaged in the

creation and discovery, development, manufacture and marketing

of pharmaceutical products, vaccines, over-the-counter (OTC)

medicines and health-related consumer products. GSK’s principal

pharmaceutical products include medicines in the following

therapeutic areas: respiratory, HIV, immuno-inﬂammation, anti-virals,

central nervous system, cardiovascular and urogenital, metabolic,

anti-bacterials and dermatology.

Compliance with applicable law and IFRS

The ﬁnancial statements have been prepared in accordance with

the Companies Act 2006, Article 4 of the IAS Regulation and

International Financial Reporting Standards (IFRS) and related

interpretations, as adopted by the European Union.

The ﬁnancial statements are also in compliance with IFRS as issued

by the International Accounting Standards Board.

Composition of ﬁnancial statements

The consolidated ﬁnancial statements are drawn up in Sterling,

the functional currency of GlaxoSmithKline plc, and in accordance

with IFRS accounting presentation. The ﬁnancial statements

comprise:

– Consolidated income statement

– Consolidated statement of comprehensive income

– Consolidated balance sheet

– Consolidated statement of changes in equity

– Consolidated cash ﬂow statement

– Notes to the ﬁnancial statements.

Composition of the Group

A list of the subsidiaries and associates which, in the opinion of

the Directors, principally affected the amount of proﬁt or net assets

of the Group is given in Note 44, ‘Principal Group companies’.

Financial period

These ﬁnancial statements cover the ﬁnancial year from 1 January to

31 December 2018, with comparative ﬁgures for the ﬁnancial years

from 1 January to 31 December 2017 and, where appropriate, from

1 January to 31 December 2016.

Accounting principles and policies

The ﬁnancial statements have been prepared using the historical

cost convention modiﬁed by the revaluation of certain items, as

stated in the accounting policies, and on a going concern basis.

The ﬁnancial statements have been prepared in accordance

with the Group’s accounting policies approved by the Board

and described in Note 2, ‘Accounting principles and policies’.

Information on the application of these accounting policies,

including areas of estimation and judgement is given in Note 3,

‘Key accounting judgements and estimates’.

The preparation of the ﬁnancial statements in conformity with

generally accepted accounting principles requires management

to make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent

assets and liabilities at the date of the ﬁnancial statements and

the reported amounts of revenues and expenses during the reporting

period. Actual results could differ from those estimates.

Implementation of IFRS 9 ‘Financial instruments’

The Group has applied IFRS 9 ‘Financial instruments’ with effect

from 1 January 2018. IFRS 9 introduces new requirements for the

classiﬁcation and measurement of ﬁnancial assets and ﬁnancial

liabilities, impairments for ﬁnancial assets and general hedge

accounting.

Details of these new requirements as well as their impact on the

Group’s consolidated ﬁnancial statements are described below.

The Group has adopted IFRS 9 retrospectively but with certain

permitted exceptions as detailed below.

Classiﬁcation and measurement of ﬁnancial assets

The date of initial application was 1 January 2018. The Group has

not applied the requirements of IFRS 9 to instruments that were

derecognised prior to 1 January 2018 and has not restated prior

years. Any difference between the previous carrying amount and the

revised carrying amount at 1 January 2018 has been recognised as

an adjustment to opening retained earnings at 1 January 2018.

All ﬁnancial assets that are within the scope of IFRS 9 are required to

be measured at amortised cost or fair value, with movements through

other comprehensive income or the income statement on the basis of

GSK’s business model for managing the ﬁnancial assets and the

contractual cash ﬂow characteristics of the ﬁnancial assets.

IFRS 9 had the following impact on the Group’s assets:

– The Group has elected to recognise movements in the fair value of

equity investments in other comprehensive income under IFRS 9.

Investments in equity instruments that were previously classiﬁed as

available-for-sale ﬁnancial assets measured at fair value have been

designated as measured at fair value through other comprehensive

income (FVTOCI) under IFRS 9. As a result, fair value movements

are now recorded in other comprehensive income along with gains

or losses on disposal of the investments.

– The Group’s investments in limited life funds included in Other

investments that were previously classiﬁed as available-for-sale

ﬁnancial assets under IAS 39 and measured at fair value have

been classiﬁed as measured at fair value through proﬁt or loss

(FVTPL) under IFRS 9 as the contractual cash ﬂows are not solely

payments of principal and interest on the principal amount

outstanding.

– Liquid investments that were classiﬁed as available-for-sale

ﬁnancial assets measured at fair value under IAS 39 have been

classiﬁed as measured at amortised cost under IFRS 9 as they are

held within a business model, the objective of which is to collect

the contractual cash ﬂows.

– Investments in money market funds included in Cash and cash

equivalents that were classiﬁed as amortised cost ﬁnancial assets

under IAS 39 have been classiﬁed as FVTPL under IFRS 9 as the

contractual cash ﬂows are not solely payments of principal and

interest on the principal amount outstanding.

– The Group’s trade receivables were all classiﬁed as ﬁnancial

assets measured at amortised cost under IAS 39. Under IFRS 9,

the business model under which each portfolio of trade

receivables held has been assessed. The Group has portfolios

in each of the three business models under IFRS 9: to collect the

contractual cash ﬂows (measured at amortised cost), to sell the

contractual cash ﬂows (measured at FVTPL), and both to collect

and to sell the contractual cash ﬂows (measured at FVTOCI).

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

145

– Amounts receivable under insurance contracts included in Other

non-current assets were held at FVTPL or amortised cost under

IAS 39. Under IFRS 9, as the contractual cash ﬂows are not

solely payments of principal and interest on the principal amount

outstanding, the amounts receivable are classiﬁed as measured

at FVTPL.

There were no material changes in carrying value of ﬁnancial assets

as a result of these changes in measurement basis.

Impairment of ﬁnancial assets

IFRS 9 requires an expected credit loss (ECL) model to be applied

to ﬁnancial assets rather than the incurred credit loss model required

under IAS 39. The expected credit loss model requires the Group

to account for expected losses as a result of credit risk on initial

recognition of ﬁnancial assets and to recognise changes in those

expected credit losses at each reporting date.

12-month ECLs are applied to all ﬁnancial assets not measured

at FVTPL except for net trade receivables which are measured

reﬂecting lifetime ECLs using the simpliﬁed approach. An additional

ECL allowance of £15 million for trade receivables was recognised

on transition to IFRS 9. There were no other transition adjustments

arising from the change in impairment basis.

The additional ECL allowance of £15 million at 1 January 2018 has

been recognised against opening retained earnings, together with

a related deferred tax impact of £3 million.

General hedge accounting

The new general hedge accounting requirements retain the three

types of hedge accounting which were available under IAS 39:

fair value hedges, cash ﬂow hedges and net investment hedges.

However, the effectiveness testing requirements have been

simpliﬁed.

The Group has applied the IFRS 9 hedge accounting requirements

prospectively from the date of initial application of 1 January 2018.

All existing hedging relationships are eligible, and continued to be

effective, under IFRS 9.

Implementation of IFRS 15 ‘Revenue from contracts

with customers’

The Group has applied IFRS 15 ‘Revenue from contracts with

customers’ with effect from 1 January 2018. IFRS 15 provides a

single, principles-based approach to the recognition of revenue

from all contracts with customers. It focuses on the identiﬁcation

of performance obligations in a contract and requires revenue to be

recognised when or as those performance obligations are satisﬁed.

GSK adopted IFRS 15 applying the modiﬁed retrospective

approach. IFRS 15 did not have a material impact on the amount

or timing of recognition of reported revenue. At 1 January 2018, a

cumulative adjustment to decrease retained earnings of £4 million

was recognised. In accordance with the requirements of IFRS 15

where the modiﬁed retrospective approach is adopted, prior year

results have not been restated.

Impact of new standards on each ﬁnancial

statement line item

The table below shows the amount of adjustment for each ﬁnancial

statement line item affected by the application of IFRS 9 and IFRS 15

at 1 January 2018.

As previously

reported

£m

IFRS 9

adjustments

£m

IFRS 15

adjustments

£m

As restated

£m

Trade and other receivables 6,000 (15) – 5,985

Liquid investments 78 1 – 79

Other payables - returns

and rebates

(3,463) – (29) (3,492)

Other payables - deferred

income

(240) – 27 (213)

Deferred tax assets 3,796 3 (2) 3,797

Total effect on net assets 3,489 (11) (4) 3,474

Fair value reserve 329 (288) – 41

Retained earnings (6,477) 277 (4) (6,204)

Total effect on equity 3,489 (11) (4) 3,474

The £288 million transfer between retained earnings and the

fair value reserve resulted from the reclassiﬁcation of previous

impairment losses on equity investments now designated as

measured at FVTOCI under IFRS 9 from retained earnings to

the fair value reserve.

The application of IFRS 9 and IFRS 15 has had no impact on the

consolidated cash ﬂows of the Group.

Parent company ﬁnancial statements

The ﬁnancial statements of the parent company, GlaxoSmithKline

plc, have been prepared in accordance with UK GAAP and with UK

accounting presentation. The company balance sheet is presented

on page 219 and the accounting policies are given on page 220.

1. Presentation of the ﬁnancial statements continued

GSK Annual Report 2018

146

Consolidation

The consolidated ﬁnancial statements include:

– the assets and liabilities, and the results and cash ﬂows, of the

company and its subsidiaries, including ESOP Trusts

– the Group’s share of the results and net assets of associates

and joint ventures

– the Group’s share of assets, liabilities, revenue and expenses

of joint operations.

The ﬁnancial statements of entities consolidated are made up to

31 December each year.

Entities over which the Group has the power to direct the relevant

activities so as to affect the returns to the Group, generally through

control over the ﬁnancial and operating policies, are accounted for

as subsidiaries.

Where the Group has the ability to exercise joint control over, and

rights to the net assets of, entities, the entities are accounted for

as joint ventures. Where the Group has the ability to exercise joint

control over an arrangement, but has rights to speciﬁed assets

and obligations for speciﬁed liabilities of the arrangement, the

arrangement is accounted for as a joint operation. Where the Group

has the ability to exercise signiﬁcant inﬂuence over entities, they are

accounted for as associates. The results and assets and liabilities of

associates and joint ventures are incorporated into the consolidated

ﬁnancial statements using the equity method of accounting. The

Group’s rights to assets, liabilities, revenue and expenses of joint

operations are included in the consolidated ﬁnancial statements in

accordance with those rights and obligations.

Interests acquired in entities are consolidated from the date the

Group acquires control and interests sold are de-consolidated from

the date control ceases.

Transactions and balances between subsidiaries are eliminated and

no proﬁt before tax is taken on sales between subsidiaries until the

products are sold to customers outside the Group. The relevant

proportion of proﬁts on transactions with joint ventures, joint

operations and associates is also deferred until the products are

sold to third parties. Transactions with non-controlling interests are

recorded directly in equity. Deferred tax relief on unrealised intra-

Group proﬁt is accounted for only to the extent that it is considered

recoverable.

Business combinations

Business combinations are accounted for using the acquisition

accounting method. Identiﬁable assets, liabilities and contingent

liabilities acquired are measured at fair value at acquisition date.

The consideration transferred is measured at fair value and includes

the fair value of any contingent consideration.

The fair value of contingent consideration liabilities are re-assessed

at each balance sheet date with changes recognised in the income

statement. Payments of contingent consideration reduce the balance

sheet liability and as a result are not recorded in the income statement.

The part of each payment relating to the original estimate of the fair

value of the contingent consideration on acquisition is reported within

investing activities in the cash ﬂow statement and the part of each

payment relating to the increase in the liability since the acquisition

date is reported within operating cash ﬂows.

Where the consideration transferred, together with the non-controlling

interest, exceeds the fair value of the net assets, liabilities and

contingent liabilities acquired, the excess is recorded as goodwill.

The costs of acquisition are charged to the income statement in the

period in which they are incurred.

Goodwill is capitalised as a separate item in the case of subsidiaries

and as part of the cost of investment in the case of joint ventures and

associates. Goodwill is denominated in the currency of the operation

acquired.

Where the cost of acquisition is below the fair value of the net assets

acquired, the difference is recognised directly in the income statement.

Where not all of the equity of a subsidiary is acquired the non-

controlling interest is recognised either at fair value or at the non-

controlling interest’s share of the net assets of the subsidiary, on a

case-by-case basis. Changes in the Group’s ownership percentage

of subsidiaries are accounted for within equity.

Foreign currency translation

Foreign currency transactions are booked in the functional currency

of the Group company at the exchange rate ruling on the date of

transaction. Foreign currency monetary assets and liabilities are

retranslated into the functional currency at rates of exchange ruling

at the balance sheet date. Exchange differences are included in the

income statement.

On consolidation, assets and liabilities, including related goodwill,

of overseas subsidiaries, associates and joint ventures, are translated

into Sterling at rates of exchange ruling at the balance sheet date. The

results and cash ﬂows of overseas subsidiaries, associates and joint

ventures are translated into Sterling using average rates of exchange.

Exchange adjustments arising when the opening net assets and the

proﬁts for the year retained by overseas subsidiaries, associates and

joint ventures are translated into Sterling, less exchange differences

arising on related foreign currency borrowings which hedge the

Group’s net investment in these operations, are taken to a separate

component of equity.

When translating into Sterling the assets, liabilities, results and cash

ﬂows of overseas subsidiaries, associates and joint ventures which

are reported in currencies of hyper-inﬂationary economies,

adjustments are made where material to reﬂect current price levels.

Any loss on net monetary assets is charged to the consolidated

income statement.

Revenue (applicable from 1 January 2018)

The Group receives revenue for supply of goods to external

customers against orders received. The majority of contracts that

GSK enters into relate to sales orders containing single performance

obligations for the delivery of pharmaceutical, vaccine and consumer

healthcare products. The average duration of a sales order is less

than 12 months.

Product revenue is recognised when control of the goods is passed

to the customer. The point at which control passes is determined by

each customer arrangement, but generally occurs on delivery to the

customer.

Product revenue represents net invoice value including ﬁxed and

variable consideration. Variable consideration arises on the sale of

goods as a result of discounts and allowances given and accruals for

estimated future returns and rebates. Revenue is not recognised in

full until it is highly probable that a signiﬁcant reversal in the amount

of cumulative revenue recognised will not occur.

2. Accounting principles and policies

Notes to the ﬁnancial statements continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

147

The methodology and assumptions used to estimate rebates and

returns are monitored and adjusted regularly in the light of contractual

and legal obligations, historical trends, past experience and

projected market conditions. Once the uncertainty associated with

the returns and rebates is resolved, revenue is adjusted accordingly.

GSK enters into development and marketing collaborations and

out-licences of the Group’s compounds or products to other parties.

These contracts give rise to ﬁxed and variable consideration from

upfront payments, development milestones, sales-based milestones

and royalties.

Income dependent on the achievement of a development milestone

is recognised when it is highly probable that a signiﬁcant reversal in

the amount of cumulative revenue recognised will not occur, which

is usually when the related event occurs. Sales-based milestone

income is recognised when it is highly probable that the sales

threshold will be reached.

Sales-based royalties on a licence of intellectual property are not

recognised until the relevant product sale occurs.

If the time between the recognition of revenue and payment from

the customer is expected to be more than one year and the impact

is material, the amount of consideration is discounted using

appropriate discount rates.

Value added tax and other sales taxes are excluded from revenue.

Expenditure

Expenditure is recognised in respect of goods and services received

when supplied in accordance with contractual terms. Provision is

made when an obligation exists for a future liability in respect of a

past event and where the amount of the obligation can be reliably

estimated. Manufacturing start-up costs between validation and

the achievement of normal production are expensed as incurred.

Advertising and promotion expenditure is charged to the income

statement as incurred. Shipment costs on inter-company transfers

are charged to cost of sales; distribution costs on sales to customers

are included in selling, general and administrative expenditure.

Restructuring costs are recognised and provided for, where

appropriate, in respect of the direct expenditure of a business

reorganisation where the plans are sufﬁciently detailed and well

advanced, and where appropriate communication to those affected

has been undertaken.

Research and development

Research and development expenditure is charged to the income

statement in the period in which it is incurred. Development

expenditure is capitalised when the criteria for recognising an asset

are met, usually when a regulatory ﬁling has been made in a major

market and approval is considered highly probable. Property, plant

and equipment used for research and development is capitalised

and depreciated in accordance with the Group’s policy.

Environmental expenditure

Environmental expenditure related to existing conditions resulting

from past or current operations and from which no current or future

beneﬁt is discernible is charged to the income statement. The Group

recognises its liability on a site-by-site basis when it can be reliably

estimated. This liability includes the Group’s portion of the total costs

and also a portion of other potentially responsible parties’ costs

when it is probable that they will not be able to satisfy their respective

shares of the clean-up obligation. Recoveries of reimbursements are

recorded as assets when virtually certain.

Legal and other disputes

Provision is made for the anticipated settlement costs of legal or

other disputes against the Group where an outﬂow of resources is

considered probable and a reliable estimate can be made of the likely

outcome. In addition, provision is made for legal or other expenses

arising from claims received or other disputes. In respect of product

liability claims related to certain products, there is sufﬁcient history

of claims made and settlements to enable management to make a

reliable estimate of the provision required to cover unasserted claims.

In certain cases, an incurred but not reported (IBNR) actuarial

technique is used to determine this estimate.

The Group may become involved in legal proceedings, in respect of

which it is not possible to make a reliable estimate of the expected

ﬁnancial effect, if any, that could result from ultimate resolution of the

proceedings.

In these cases, appropriate disclosure about such cases would be

included but no provision would be made. Costs associated with

claims made by the Group against third parties are charged to the

income statement as they are incurred.

Pensions and other post-employment beneﬁts

The costs of providing pensions under deﬁned beneﬁt schemes are

calculated using the projected unit credit method and spread over

the period during which beneﬁt is expected to be derived from the

employees’ services, consistent with the advice of qualiﬁed actuaries.

Pension obligations are measured as the present value of estimated

future cash ﬂows discounted at rates reﬂecting the yields of high-

quality corporate bonds. Pension scheme assets are measured at

fair value at the balance sheet date.

The costs of other post-employment liabilities are calculated in a

similar way to deﬁned beneﬁt pension schemes and spread over

the period during which beneﬁt is expected to be derived from the

employees’ services, in accordance with the advice of qualiﬁed

actuaries.

Actuarial gains and losses and the effect of changes in actuarial

assumptions, are recognised in the statement of comprehensive

income in the year in which they arise.

The Group’s contributions to deﬁned contribution plans are charged

to the income statement as incurred.

Employee share plans

Incentives in the form of shares are provided to employees under

share option and share award schemes.

The fair values of these options and awards are calculated at their

grant dates using a Black-Scholes option pricing model and charged

to the income statement over the relevant vesting periods.

The Group provides ﬁnance to ESOP Trusts to purchase company

shares to meet the obligation to provide shares when employees

exercise their options or awards. Costs of running the ESOP Trusts

are charged to the income statement. Shares held by the ESOP

Trusts are deducted from other reserves. A transfer is made between

other reserves and retained earnings over the vesting periods of the

related share options or awards to reﬂect the ultimate proceeds

receivable from employees on exercise.

2. Accounting principles and policies continued

GSK Annual Report 2018

148

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 entity’s assets,

liabilities and contingent liabilities exceeds the consideration paid,

this excess is recognised immediately as a gain in the income

statement.

Other intangible assets

Intangible assets are stated at cost less provisions for amortisation

and impairments.

Licences, patents, know-how and marketing rights separately

acquired or acquired as part of a business combination are

amortised over their estimated useful lives, generally not exceeding

20 years, using the straight-line basis, from the time they are available

for use. The estimated useful lives for determining the amortisation

charge take into account patent lives, where applicable, as well as

the value obtained from periods of non-exclusivity. Asset lives are

reviewed, and where appropriate adjusted, annually.

Contingent milestone payments are recognised at the point that

the contingent event becomes probable. Any development costs

incurred by the Group and associated with acquired licences,

patents, know-how or marketing rights are written off to the income

statement when incurred, unless the criteria for recognition of

an internally generated intangible asset are met, usually when a

regulatory ﬁling has been made in a major market and approval

is considered highly probable.

Acquired brands are valued independently as part of the fair value of

businesses acquired from third parties where the brand has a value

which is substantial and long term and where the brands either are

contractual or legal in nature or can be sold separately from the rest

of the businesses acquired. Brands are amortised over their

estimated useful lives of up to 20 years, except where it is considered

that the useful economic life is indeﬁnite.

The costs of acquiring and developing computer software for internal

use and internet sites for external use are capitalised as intangible

ﬁxed assets where the software or site supports a signiﬁcant

business system and the expenditure leads to the creation of a

durable asset. ERP systems software is amortised over seven to

ten years and other computer software over three to ﬁve years.

Impairment of non-current assets

The carrying values of all non-current assets are reviewed for

impairment, either on a stand-alone basis or as part of a larger cash

generating unit, when there is an indication that the assets might

be impaired. Additionally, goodwill, intangible assets with indeﬁnite

useful lives and intangible assets which are not yet available for use

are tested for impairment annually. Any provision for impairment is

charged to the income statement in the year concerned.

Impairments of goodwill are not reversed. Impairment losses on other

non-current assets are only reversed if there has been a change in

estimates used to determine recoverable amounts and only to the

extent that the revised recoverable amounts do not exceed the

carrying values that would have existed, net of depreciation or

amortisation, had no impairments been recognised.

Investments in associates, joint ventures and joint

operations

Investments in associates and joint ventures are carried in the

consolidated balance sheet at the Group’s share of their net assets

at date of acquisition and of their post-acquisition retained proﬁts

or losses together with any goodwill arising on the acquisition. The

Group recognises its rights to assets, liabilities, revenue and

expenses of joint operations.

Expected credit losses are recognised in the income statement on

ﬁnancial assets measured at amortised cost and at fair value through

other comprehensive income apart from equity investments.

Inventories

Inventories are included in the ﬁnancial statements at the lower of

cost (including raw materials, direct labour, other direct costs and

related production overheads) and net realisable value. Cost is

generally determined on a ﬁrst in, ﬁrst out basis. Pre-launch inventory

is held as an asset when there is a high probability of regulatory

approval for the product. Before that point a provision is made

against the carrying value to its recoverable amount; the provision

is then reversed at the point when a high probability of regulatory

approval is determined.

2. Accounting principles and policies continued

Notes to the ﬁnancial statements continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

149

Financial instruments (applicable from 1 January 2018)

Financial assets

Financial assets are measured at amortised cost, fair value through

other comprehensive income (FVTOCI) or fair value through proﬁt

or loss (FVTPL). The measurement basis is determined by reference

to both the business model for managing the ﬁnancial asset and

the contractual cash ﬂow characteristics of the ﬁnancial asset. For

ﬁnancial assets other than trade receivables a 12-month expected

credit loss (ECL) allowance is recorded on initial recognition. If there

is subsequent evidence of a signiﬁcant increase in the credit risk of

an asset, the allowance is increased to reﬂect the full lifetime ECL.

If there is no realistic prospect of recovery, the asset is written off.

Other investments

Other investments comprise equity investments and investments

in limited life funds. The Group has elected to designate equity

investments as measured at FVTOCI. They are initially recorded at

fair value plus transaction costs and then remeasured at subsequent

reporting dates to fair value. Unrealised gains and losses are

recognised in other comprehensive income.

On disposal of the equity investment, gains and losses that have

been deferred in other comprehensive Income are transferred directly

to retained earnings. Investments in limited life funds are measured at

FVTPL. They are initially recorded at fair value and then remeasured

at subsequent reporting dates to fair value. Unrealised gains and

losses are recognised in the income statement.

Dividends on equity investments and distributions from funds are

recognised in the income statement when the Group’s right to

receive payment is established.

Purchases and sales of Other investments are accounted for on

the trade date.

Trade receivables

Trade receivables are measured in accordance with the business

model under which each portfolio of trade receivables is held. The

Group has portfolios in each of the three business models under IFRS

9: to collect the contractual cash ﬂows (measured at amortised cost),

to sell the contractual cash ﬂows (measured at FVTPL), and both to

collect and to sell the contractual cash ﬂows (measured at FVTOCI).

Trade receivables measured at amortised cost are carried at the

original invoice amount less allowances for expected credit losses.

Expected credit losses are calculated in accordance with the simpliﬁed

approach permitted by IFRS 9, using a provision matrix applying

lifetime historical credit loss experience to the trade receivables. The

expected credit loss rate varies depending on whether and the extent

to which settlement of the trade receivables is overdue and it is also

adjusted as appropriate to reﬂect current economic conditions and

estimates of future conditions. For the purpose of determining credit

loss rates, customers are classiﬁed into groupings that have similar

loss patterns. The key drivers of the loss rate are the nature of the

business unit and the location and type of customer.

When a trade receivable is determined to have no reasonable

expectation of recovery it is written off, ﬁrstly against any expected

credit loss allowance available and then to the income statement.

Subsequent recoveries of amounts previously provided for or written

off are credited to the income statement. Long-term receivables are

discounted where the effect is material.

Cash and cash equivalents

Cash held in deposit accounts is measured at amortised cost.

Investments in money market funds are held at fair value through

proﬁt or loss.

Borrowings

All borrowings are initially recorded at the amount of proceeds

received, net of transaction costs. Borrowings are subsequently

carried at amortised cost, with the difference between the proceeds,

net of transaction costs, and the amount due on redemption being

recognised as a charge to the income statement over the period of

the relevant borrowing.

Derivative ﬁnancial instruments

Derivative ﬁnancial instruments are used to manage exposure to

market risks. The principal derivative instruments used by GSK are

foreign currency swaps, interest rate swaps, foreign exchange

forward contracts and options. The Group does not hold or issue

derivative ﬁnancial instruments for trading or speculative purposes.

Derivative ﬁnancial assets and liabilities, including derivatives

embedded in host contracts which have been separated from the

host contract, are classiﬁed as held-for-trading and are measured at

fair value. Changes in the fair value of any derivative instruments that

do not qualify for hedge accounting are recognised immediately in

the income statement.

Hedge accounting

Derivatives designated as hedging instruments are classiﬁed on

inception as cash ﬂow hedges, net investment hedges or fair value

hedges.

Changes in the fair value of derivatives designated as cash ﬂow

hedges are recognised in other comprehensive income to the extent

that the hedges are effective. Ineffective portions are recognised in

proﬁt or loss immediately. Amounts deferred in other comprehensive

income are reclassiﬁed to the income statement when the hedged

item affects proﬁt or loss.

Net investment hedges are accounted for in a similar way to cash

ﬂow hedges.

Changes in the fair value of derivatives designated as fair value

hedges are recorded in the income statement, together with the

changes in the fair value of the hedged asset or liability.

Taxation

Current tax is provided at the amounts expected to be paid applying

tax rates that have been enacted or substantively enacted by the

balance sheet date.

Deferred tax is provided in full, on temporary differences arising

between the tax bases of assets and liabilities and their carrying

amounts in the ﬁnancial statements. Deferred tax assets are

recognised to the extent that it is probable that future taxable proﬁts

will be available against which the temporary differences can be

utilised. Deferred tax is provided on temporary differences arising

on investments in subsidiaries, associates and joint ventures, except

where the timing of the reversal of the temporary difference can be

controlled and it is probable that the temporary difference will not

reverse in the foreseeable future. Deferred tax is provided using rates

of tax that have been enacted or substantively enacted by the

balance sheet date.

Where an uncertain tax position is identiﬁed, management will make

a judgement as to what the probable outcome will be. Where it is

assessed that an economic outﬂow is probable to arise a provision

is made for the best estimate of the liability. In estimating any such

liability GSK applies a risk-based approach which takes into account,

as appropriate, the probability that the Group would be able to obtain

compensatory adjustments under international tax treaties. These

estimates take into account the speciﬁc circumstances of each

dispute and relevant external advice.

2. Accounting principles and policies continued

GSK Annual Report 2018

150

Discounting

Where the time value of money is material, balances are discounted

to current values using appropriate discount rates. The unwinding of

the discounts is recorded in ﬁnance income and ﬁnance expense.

Revenue (applicable up to 31 December 2017)

Revenue is recognised in the income statement when goods or

services are supplied or made available to external customers against

orders received, title and risk of loss is passed to the customer,

reliable estimates can be made of relevant deductions and all relevant

obligations have been fulﬁlled, such that the earnings process is

regarded as being complete.

Turnover represents net invoice value after the deduction of

discounts and allowances given and accruals for estimated future

rebates and returns. The methodology and assumptions used to

estimate rebates and returns are monitored and adjusted regularly

in the light of contractual and legal obligations, historical trends, past

experience and projected market conditions. Market conditions are

evaluated using wholesaler and other third-party analyses, market

research data and internally generated information. Value added tax

and other sales taxes are excluded from revenue.

Where the Group co-promotes a product and the counterparty

records the sale, the Group records its share of revenue as

co-promotion income within turnover. The nature of co-promotion

activities is such that the Group records no costs of sales. In

addition, initial or event-based milestone income (excluding royalty

income) arising on development or marketing collaborations of the

Group’s compounds or products with other parties is recognised

in turnover.

Royalty income is recognised on an accruals basis in accordance

with the terms of the relevant licensing agreements.

Financial instruments (applicable up to 31 December 2017)

Available-for-sale investments

Liquid investments and other investments are classiﬁed as available-

for-sale investments and are initially recorded at fair value plus

transaction costs and then remeasured at subsequent reporting

dates to fair value. Unrealised gains and losses on available-for-sale

investments are recognised directly in other comprehensive income.

Impairments arising from the signiﬁcant or prolonged decline in fair

value of an equity investment reduce the carrying amount of the asset

directly and are charged to the income statement.

On disposal or impairment of the investments, any gains and

losses that have been deferred in other comprehensive income

are reclassiﬁed to the income statement. Dividends on equity

investments are recognised in the income statement when the

Group’s right to receive payment is established. Equity investments

are recorded in non-current assets unless they are expected to be

sold within one year.

Purchases and sales of equity investments are accounted for on the

trade date and purchases and sales of other available-for-sale

investments are accounted for on settlement date.

Trade receivables

Trade receivables are carried at original invoice amount less any

provisions for doubtful debts. Provisions are made where there is

evidence of a risk of non-payment, taking into account ageing,

previous experience and general economic conditions. When a trade

receivable is determined to be uncollectable it is written off, ﬁrstly

against any provision available and then to the income statement.

Subsequent recoveries of amounts previously provided for are

credited to the income statement. Long-term receivables are

discounted where the effect is material.

Borrowings

All borrowings are initially recorded at the amount of proceeds

received, net of transaction costs. Borrowings are subsequently

carried at amortised cost, with the difference between the proceeds,

net of transaction costs, and the amount due on redemption being

recognised as a charge to the income statement over the period of

the relevant borrowing.

Derivative ﬁnancial instruments and hedging

Derivative ﬁnancial instruments are used to manage exposure to

market risks. The principal derivative instruments used by GSK are

foreign currency swaps, interest rate swaps, foreign exchange

forward contracts and options. The Group does not hold or issue

derivative ﬁnancial instruments for trading or speculative purposes.

Derivative ﬁnancial instruments are classiﬁed as held-for-trading and

are carried in the balance sheet at fair value. Derivatives designated

as hedging instruments are classiﬁed on inception as cash ﬂow

hedges, net investment hedges or fair value hedges.

Changes in the fair value of derivatives designated as cash ﬂow

hedges are recognised in other comprehensive income to the extent

that the hedges are effective. Ineffective portions are recognised in

proﬁt or loss immediately. Amounts deferred in other comprehensive

income are reclassiﬁed to the income statement when the hedged

item affects proﬁt or loss.

Net investment hedges are accounted for in a similar way to cash

ﬂow hedges.

Changes in the fair value of derivatives designated as fair value

hedges are recorded in the income statement, together with the

changes in the fair value of the hedged asset or liability.

Changes in the fair value of any derivative instruments that do not

qualify for hedge accounting are recognised immediately in the

income statement.

Notes to the ﬁnancial statements continued

2. Accounting principles and policies continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

151

In preparing the ﬁnancial statements, management is required to

make judgements about when or how items should be recognised in

the ﬁnancial statements and estimates and assumptions that affect

the amounts of assets, liabilities, revenue and expenses reported in

the ﬁnancial statements. Actual amounts and results could differ from

those estimates. The following are considered to be the critical

accounting judgements and key sources of estimation uncertainty.

Turnover

Reported Group turnover for 2018 was £30,821 million (2017 –

£30,186 million).

Estimates

Gross turnover is reduced by rebates, discounts, allowances

and product returns given or expected to be given, which vary by

product arrangements and buying groups. These arrangements with

purchasing organisations are dependent upon the submission of

claims some time after the initial recognition of the sale. Accruals

are made at the time of sale for the estimated rebates, discounts or

allowances payable or returns to be made, based on available market

information and historical experience.

Because the amounts are estimated they may not fully reﬂect the

ﬁnal outcome, and the amounts are subject to change dependent

upon, amongst other things, the types of buying group and product

sales mix.

The level of accrual for rebates and returns is reviewed and adjusted

regularly in the light of contractual and legal obligations, historical

trends, past experience and projected market conditions. Market

conditions are evaluated using wholesaler and other third-party

analyses, market research data and internally generated information.

Revenue is not recognised in full until it is highly probable that a

signiﬁcant reversal in the amount of cumulative revenue recognised

will not occur. The amount of turnover recognised in the year from

performance obligations satisﬁed in previous periods is set out in

Note 6, ‘Turnover and segment information’.

Future events could cause the assumptions on which the accruals

are based to change, which could affect the future results of the

Group.

Taxation

The tax charge for the year was £754 million (2017 – £1,356 million).

At December 2018, current tax payable was £965 million (2017 –

£995 million), non-current corporation tax payable was £272 million

(2017 – £411 million) and current tax recoverable was £229 million

(2017 – £258 million).

Judgement

The Group has open tax issues with a number of revenue authorities.

Management makes a judgement of whether there is sufﬁcient

information to be able to make a reliable estimate of the outcome

of the dispute. If insufﬁcient information is available, no provision

is made.

Estimates

If sufﬁcient information is available, in estimating a potential tax

liability GSK applies a risk-based approach which takes into account,

as appropriate, the probability that the Group would be able to obtain

compensatory adjustments under international tax treaties. These

estimates take into account the speciﬁc circumstances of each

dispute and relevant external advice, are inherently judgemental and

could change substantially over time as each dispute progresses and

new facts emerge.

At 31 December 2018, the Group had recognised provisions

of £1,082 million in respect of uncertain tax positions (2017 –

£1,175 million). Because of the nature of these uncertain positions,

it is not practicable to give meaningful sensitivity estimates.

Factors affecting the tax charge in future years are set out in Note 14,

‘Taxation’. GSK continues to believe that it has made adequate

provision for the liabilities likely to arise from open assessments.

Where open issues exist the ultimate liability for such matters may

vary from the amounts provided and is dependent upon the outcome

of negotiations with the relevant tax authorities or, if necessary,

litigation proceedings.

Legal and other disputes

Legal costs for the year were £117 million (2017 – £166 million).

At 31 December 2018 provisions for legal and other disputes

amounted to £219 million (2017 – £186 million).

Judgement

Management makes a judgement of whether there is sufﬁcient

information to be able to make a reliable estimate of the likely

outcome of the dispute and legal and other expenses arising from

claims against the Group. If insufﬁcient information is available,

no provision is made and disclosure of the claim is given.

Estimates

The estimated provisions take into account the speciﬁc

circumstances of each dispute and relevant external advice, are

inherently judgemental and could change substantially over time

as each dispute progresses and new facts emerge. Details of the

status and various uncertainties involved in the signiﬁcant unresolved

disputes are set out in Note 45, ‘Legal proceedings’.

The company’s Directors, having taken legal advice, have

established provisions after taking into account the relevant facts

and circumstances of each matter and in accordance with

accounting requirements. In respect of product liability claims related

to certain products there is sufﬁcient history of claims made and

settlements to enable management to make a reliable estimate of

the provision required to cover unasserted claims. The Group may

become involved in legal proceedings, in respect of which it is not

possible to make a reliable estimate of the expected ﬁnancial effect,

if any, that could result from ultimate resolution of the proceedings.

In these cases, appropriate disclosure about such cases would be

provided, but no provision would be made and no contingent liability

can be quantiﬁed.

The ultimate liability for legal claims may vary from the amounts

provided and is dependent upon the outcome of litigation

proceedings, investigations and possible settlement negotiations.

The position could change over time and, therefore, there can be no

assurance that any losses that result from the outcome of any legal

proceedings will not exceed the amount of the provisions reported

in the Group’s ﬁnancial statements by a material amount.

3. Key accounting judgements and estimates

GSK Annual Report 2018

152

Notes to the ﬁnancial statements continued

The following new and amended accounting standards have been

issued by the IASB and are likely to affect future Annual Reports.

IFRS 16 ‘Leases’ was issued in January 2016 and will be

implemented by the Group from 1 January 2019. The Standard will

replace IAS 17 ‘Leases’ and will require lease liabilities and ‘right of

use’ assets to be recognised on the balance sheet for almost all

leases. This is expected to result in a signiﬁcant increase in both

assets and liabilities recognised. The costs of operating leases

currently included within operating costs will be split and the

ﬁnancing element of the charge will be reported within ﬁnance

expense. The overall impact on earnings is not expected to be

material. Finance lease obligations at 31 December 2018 are set

out in Note 31, ‘Net debt’ and the undiscounted commitments

under non-cancellable operating leases are set out in Note 41,

‘Commitments’.

GSK will implement IFRS 16 applying the modiﬁed retrospective

approach. For larger leases, the right of use asset at 1 January 2019

will be calculated based on the original lease inception date and for

smaller leases the right of use asset will be set equal to the lease

liability, adjusted for any prepaid or accrued lease payments, onerous

lease provisions and business combination fair value adjustments.

On the transition date of 1 January 2019, the Group expects to

recognise right of use assets of £1.1 billion and a lease liability of

£1.3 billion, including existing ﬁnance leases. The implementation

is expected to reduce net assets and total equity by £0.1 billion.

4. New accounting requirements

Contingent consideration and put option liabilities

The 2018 income statement charge for contingent consideration

and put option liabilities was £1,851 million (2017 – £2,134 million).

At 31 December 2018, the liability for contingent consideration

amounted to £6,286 million (2017 – £6,172 million). Of this amount,

£5,937 million (2017 – £5,542 million) related to the acquisition

of the former Shionogi-ViiV Healthcare joint venture in 2012 and

£296 million (2017 – £584 million) related to the acquisition of the

Vaccines business from Novartis in 2015.

Estimates

Any contingent consideration included in the consideration payable

for a business combination is recorded at fair value at the date of

acquisition. These fair values are generally based on risk-adjusted

future cash ﬂows discounted using appropriate post-tax discount

rates. The fair values are reviewed on a regular basis, at least

annually, and any changes are reﬂected in the income statement.

See Note 39, ‘Contingent consideration liabilities’.

In June 2018, GSK acquired Novartis’ shareholding in the Consumer

Healthcare Joint Venture for $13 billion. This resulted in a net charge

in the period of £658 million to remeasure the Consumer Healthcare

Joint Venture put option to the agreed valuation.

Pﬁzer may request an IPO of ViiV Healthcare at any time and if either

GSK does not consent to such IPO or an offering is not completed

within nine months, Pﬁzer could require GSK to acquire its

shareholding. The liability for the Pﬁzer put option, which is derived

from an internal valuation of the ViiV Healthcare business, utilising

both discounted forecast future cash ﬂow and multiples-based

methodologies amounted to £1,240 million at 31 December 2018

(2017 – £1,304 million). Sensitivity analysis is given in Note 27,

‘Trade and other payables’.

Pensions and other post-employment beneﬁts

Judgement

Where a surplus on a deﬁned beneﬁt scheme arises, or there is

potential for a surplus to arise from committed future contributions,

the rights of the Trustees to prevent the Group obtaining a refund of

that surplus in the future are considered in determining whether it is

necessary to restrict the amount of the surplus that is recognised.

Four UK schemes are in surplus, with a combined surplus of £711

million at 31 December 2018 (2017 – £470 million). GSK has made

the judgement that these amounts meet the requirements of

recoverability.

Estimates

The costs of providing pensions and other post-employment beneﬁts

are assessed on the basis of assumptions selected by management.

These assumptions include future earnings and pension increases,

discount rates, expected long-term rates of return on assets and

mortality rates, and are disclosed in Note 28, ‘Pensions and other

post-employment beneﬁts’.

Discount rates are derived from AA rated corporate bond yields

except in countries where there is no deep market in corporate

bonds where government bond yields are used. A sensitivity analysis

is provided in Note 28, ‘Pensions and other post-employment

beneﬁts’, but a 0.25% reduction in the discount rate would lead to an

increase in the net pension deﬁcit of approximately £707 million and

an increase in the annual pension cost of approximately £28 million.

The selection of different assumptions could affect the future results

of the Group.

3. Key accounting judgements and estimates continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

153

6. Turnover and segment information

Operating segments are reported based on the ﬁnancial information provided to the Chief Executive Ofﬁcer and the responsibilities of the

Corporate Executive Team (CET). GSK reports results under four segments: Pharmaceuticals; Pharmaceuticals R&D; Vaccines and

Consumer Healthcare, and individual members of the CET are responsible for each segment.

The Group’s management reporting process allocates intra-Group proﬁt on a product sale to the market in which that sale is recorded,

and the proﬁt analyses below have been presented on that basis.

Corporate and other unallocated costs included the costs of corporate functions.

Revenue recognised in the year from performance obligations satisﬁed in previous periods totalled £426 million and included £122 million

reported in turnover arising from changes to prior year estimates of RAR accruals and £299 million of royalty income.

Turnover by segment

2018

£m

2017

£m

2016

£m

Pharmaceuticals 17,269 17,276 16,104

Vaccines 5,894 5,160 4,592

Consumer Healthcare 7,658 7,7 5 0 7,193

30,821 30,186 27,889

Pharmaceuticals turnover by therapeutic area

2018

£m

2017

£m

2016

£m

Respiratory 6,928 6,991 6,510

HIV 4,722 4,350 3,556

Immuno-inﬂammation 472 377 340

Established Pharmaceuticals 5,147 5,558 5,698

17,269 17,276 16,104

Vaccines turnover by category

2018

£m

2017

£m

2016

£m

Meningitis 881 890 662

Inﬂuenza 523 488 414

Shingles 784 22 –

Established Vaccines 3,706 3,760 3,516

5,894 5,160 4,592

During 2018, the US operations of the Pharmaceuticals and Vaccines businesses made sales to three wholesalers of approximately

£2,709 million (2017 – £2,449 million; 2016 – £2,139 million), £2,962 million (2017 – £3,043 million; 2016 – £2,691 million) and

£2,656 million (2017 – £2,356 million; 2016 – £2,129 million) respectively, after allocating ﬁnal-customer discounts to the wholesalers.

Consumer Healthcare turnover by category

2018

£m

2017

£m

2016

£m

Wellness 3,940 4,001 3,726

Oral care 2,496 2,466 2,223

Nutrition 643 680 674

Skin health 579 603 570

7,658 7,7 5 0 7,193

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:

5. Exchange rates

2018 2017 2016

Average rates:

US$/£ 1.33 1.30 1.36

Euro/£ 1.13 1.15 1.23

Yen/£ 147 145 149

2018 2017 2016

Period end rates:

US$/£ 1.27 1.35 1.24

Euro/£ 1.11 1.13 1.17

Yen/£ 140 152 144

GSK Annual Report 2018

154

Notes to the ﬁnancial statements continued

6. Turnover and segment information continued

Segment proﬁt

2018

£m

2017

£m

2016

£m

Pharmaceuticals 8,420 8,667 7,976

Pharmaceuticals R&D (2,676) (2,740) (2,488)

Pharmaceuticals, including R&D 5,744 5,927 5,488

Vaccines 1,943 1,644 1,429

Consumer Healthcare 1,517 1,373 1,116

Segment proﬁt 9,204 8,944 8,033

Corporate and other unallocated costs (459) (376) (362)

Other reconciling items between segment proﬁt and operating proﬁt (3,262) (4,481) (5,073)

Operating proﬁt 5,483 4,087 2,598

Finance income 81 65 72

Finance costs (798) (734) (736)

Proﬁt on disposal of interest in associates 3 94 –

Share of after tax proﬁts of associates and joint ventures 31 13 5

Proﬁt before taxation 4,800 3,525 1,939

Taxation (754) (1,356) (877)

Proﬁt after taxation for the year 4,046 2,169 1,062

Other reconciling items between segment proﬁt and operating proﬁt comprise items not speciﬁcally allocated to segment proﬁt. These

include impairment and amortisation of intangible assets; major restructuring costs, which include impairments of tangible assets and

computer software; transaction-related adjustments related to signiﬁcant acquisitions; proceeds and costs of disposals of associates,

products and businesses, signiﬁcant legal charges and expenses on the settlement of litigation and government investigations, other

operating income other than royalty income and other items, and the pre-tax impact of the enactment of the US Tax Cuts and Jobs Act.

Depreciation and amortisation by segment

2018

£m

2017

£m

2016

£m

Pharmaceuticals 506 551 440

Pharmaceuticals R&D 123 96 211

Pharmaceuticals, including R&D 629 647 651

Vaccines 395 405 315

Consumer Healthcare 146 135 126

Segment depreciation and amortisation 1,170 1,187 1,092

Corporate and other unallocated depreciation and amortisation 106 144 94

Other reconciling items between segment depreciation and amortisation and

total depreciation and amortisation 580 591 588

Total depreciation and amortisation 1,856 1,922 1,774

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

155

6. Turnover and segment information continued

PP&E, intangible asset and goodwill impairment by segment

2018

£m

2017

£m

2016

£m

Pharmaceuticals 51 38 29

Pharmaceuticals R&D 15 10 88

Pharmaceuticals, including R&D 66 48 117

Vaccines 5 13 34

Consumer Healthcare 4 10 46

Segment impairment 75 71 197

Corporate and other unallocated impairment 14 3 24

Other reconciling items between segment impairment and total impairment 261 995 68

Total impairment 350 1,069 289

PP&E and intangible asset impairment reversals by segment

Pharmaceuticals (4) (13) (15)

Pharmaceuticals R&D (1) (2) (10)

Pharmaceuticals, including R&D (5) (15) (25)

Vaccines – – (19)

Consumer Healthcare – (1) (8)

Segment impairment reversals (5) (16) (52)

Corporate and other unallocated impairment reversals – – (26)

Other reconciling items between segment impairment reversals and total impairment reversals (8) (36) (9)

Total impairment reversals (13) (52) (87)

Net assets by segment

2018

£m

2017

£m

Pharmaceuticals 869 2,017

Pharmaceuticals R&D 502 522

Pharmaceuticals, including R&D 1,371 2,539

Vaccines 9,966 9,707

Consumer Healthcare 10,559 2,003

Segment net operating assets 21,896 14,249

Corporate and other unallocated net operating assets 1,141 868

Net operating assets 23,037 15,117

Net debt (21,621) (13,178)

Investments in associates and joint ventures 236 183

Derivative ﬁnancial instruments 129 2

Current and deferred taxation 1,723 1,252

Assets held for sale (excluding cash and cash equivalents) 168 113

Net assets 3,672 3,489

The Pharmaceuticals segment includes the Shionogi-ViiV Healthcare contingent consideration liability of £5,937 million (2017 –

£5,542 million) and the Pﬁzer put option of £1,240 million (2017 – £1,304 million). The put option liability (2017 – £8,606 million)

related to the Consumer Healthcare segment was extinguished during 2018.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

156

6. Turnover and segment information continued

Geographical information

The UK is regarded as being the Group’s country of domicile.

Turnover by location of customer

2018

£m

2017

£m

2016

£m

UK 923 940 1,056

US 11,982 11,263 10,197

Rest of World 17,916 17,983 16,636

External turnover 30,821 30,186 27,889

Non-current assets by location of subsidiary

2018

£m

2017

£m

UK 6,118 6,824

US 7,540 6,841

Rest of World 20,768 20,901

Non-current assets 34,426 34,566

Non-current assets by location excludes amounts relating to other investments, deferred tax assets, derivative ﬁnancial instruments, pension

assets, amounts receivable under insurance contracts and certain other non-current receivables.

7. Other operating income/(expense)

2018

£m

2017

£m

2016

£m

Fair value remeasurements of equity investments under IFRS 9 16

Disposal of businesses and assets 258 195 283

Fair value remeasurements on contingent consideration recognised in business combinations (1,252) (1,012) (2,205)

Remeasurement of ViiV Healthcare put option liabilities and preferential dividends 58 13 (577)

Remeasurement of Consumer Healthcare put option liability (658) (1,186) (1,133)

Fair value adjustments on derivative ﬁnancial instruments (3) 9 (3)

Other (expense)/income (7) 9 23

Impairment of available-for-sale equity investments under IAS 39 (30) (47)

Disposal of available-for-sale equity investments under IAS 39 37 254

(1,588) (1,965) (3,405)

Disposal of businesses and assets in 2018 included a proﬁt of £119 million on the disposal of tapinarof to Dermavant Sciences, a proﬁt of

£33 million on the disposal of Consumer Healthcare tail brands in the US and a gain arising from the increase in value of the shares in

Hindustan Unilever Limited to be received on the disposal of Horlicks and other Consumer Healthcare brands, which is expected to complete

by the end of 2019, net of disposal costs.

Fair value remeasurements on contingent consideration recognised in business combinations included £1,188 million related to the

acquisition of the former Shionogi-ViiV Healthcare joint venture and £56 million payable to Novartis related to the Vaccines acquisition and

fair value movements on derivatives hedging foreign exchange exposure.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

157

8. Operating proﬁt

The following items have been included in operating proﬁt:

2018

£m

2017

£m

2016

£m

Employee costs (Note 9) 9,440 9,122 8,212

Advertising 1,376 1,351 1,265

Distribution costs 389 405 395

Depreciation of property, plant and equipment 954 988 978

Impairment of property, plant and equipment, net of reversals 203 327 180

Amortisation of intangible assets 902 934 796

Impairment of intangible assets, net of reversals 134 690 22

Net foreign exchange losses 81 215 53

Inventories:

Cost of inventories included in cost of sales 8,713 8,526 8,093

Write-down of inventories 695 701 533

Reversal of prior year write-down of inventories (302) (352) (145)

Operating lease rentals:

Minimum lease payments 188 110 91

Contingent rents 12 4 4

Sub-lease payments 5 5 4

Fees payable to the company’s auditor and its associates in relation to the Group (see below) 29.8 29.2 29.7

The reversals of prior year write-downs of inventories principally arise from the reassessment of usage or demand expectations prior to

inventory expiration.

Net foreign exchange losses include a net loss of £nil (2017 – £109 million; 2016 – £nil) of exchange arising on the reclassiﬁcation

of exchange on liquidation or disposal of overseas subsidiaries.

Included within operating proﬁt are major restructuring charges of £809 million (2017 – £1,056 million; 2016 – £970 million), see Note 10,

‘Major restructuring costs’.

Fees payable to the company’s auditor and its associates:

2018

£m

2017

£m

2016

£m

Audit of parent company and consolidated ﬁnancial statements 6.7 7. 0 5.8

Audit of the company’s subsidiaries 12.9 16.2 16.4

Attestation under s.404 of Sarbanes-Oxley Act 2002 6.6 4.5 4.4

Audit and audit-related services 26.2 2 7.7 26.6

Taxation compliance 0.1 0.2 0.2

Taxation advice – 0.1 1.8

Other assurance services 3.0 1.0 0.3

All other services 0.5 0.2 0.8

29.8 29.2 29.7

The other assurance services provided by the auditor relate to agreed upon procedures and other assurance services outside of statutory

audit requirements. All other services provided by the auditor primarily related to advisory services for the year ended 31 December 2018.

In addition to the above, fees paid in respect of the GSK pension schemes were:

2018

£m

2017

£m

2016

£m

Audit 0.3 0.3 0.4

Other services – 0.1 –

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

158

9. Employee costs

2018

£m

2017

£m

2016

£m

Wages and salaries 7,203 7,116 6,391

Social security costs 795 802 733

Pension and other post-employment costs, including augmentations (Note 28) 586 616 541

Cost of share-based incentive plans 393 347 338

Severance and other costs from integration and restructuring activities 463 241 209

9,440 9,122 8,212

The increase in wages and salaries included the impact of movements in exchange rates. The Group provides beneﬁts to employees,

commensurate with local practice in individual countries, including, in some markets, healthcare insurance, subsidised car schemes and

personal life assurance.

The cost of share-based incentive plans is analysed as follows:

2018

£m

2017

£m

2016

£m

Share Value Plan 304 276 271

Performance Share Plan 49 47 39

Share option plans 4 4 4

Cash settled and other plans 36 20 24

393 347 338

The average monthly number of persons employed by the Group (including Directors) during the year was:

2018

Number

2017

Number

2016

Number

Manufacturing 37,296 38,632 38,611

Selling, general and administration 47,887 49,141 49,961

Research and development 11,668 11,576 11,255

96,851 99,349 99,827

The average monthly number of Group employees excludes temporary and contract staff. The numbers of Group employees at the end of

each ﬁnancial year are given in the ﬁnancial record on page 231. The monthly average number of persons employed by GlaxoSmithKline plc

in 2018 was nil (2017 – nil).

The compensation of the Directors and Senior Management (members of the CET) in aggregate, was as follows:

2018

£m

2017

£m

2016

£m

Wages and salaries 29 26 25

Social security costs 3 4 4

Pension and other post-employment costs 3 3 2

Cost of share-based incentive plans 20 22 15

55 55 46

Further information on the remuneration of the Directors is given in the Remuneration report on pages 96 to 124.

10. Major restructuring costs

Within the Pharmaceuticals sector, the highly regulated manufacturing operations and supply chains and long lifecycle of the business mean

that restructuring programmes, particularly those that involve the rationalisation or closure of manufacturing or R&D sites, are likely to take

several years to complete.

Major restructuring costs are those related to speciﬁc Board approved Major restructuring programmes, including integration costs following

material acquisitions, which are structural and are of a signiﬁcant scale where the costs of individual or related projects exceed £25 million.

The existing Combined restructuring and integration programme incorporates the previous Major Change programme, the Pharmaceuticals

restructuring programme and the restructuring and integration programme following the Novartis transaction in 2015. In July 2018, the Board

approved a new Major restructuring programme, which is designed to signiﬁcantly improve the competitiveness and efﬁciency of the Group’s

cost base with savings delivered primarily through supply chain optimisation and reductions in administrative costs.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

159

10. Major restructuring costs continued

The total restructuring costs of £809 million in 2018 were incurred in a number of areas, including the following:

– Restructuring of the commercial operating model, including staff reductions in the US, Europe and International Pharmaceutical commercial

operations and the US Respiratory ﬁeld sales force

– Manufacturing site restructuring, including the GSK steriles manufacturing facility at Ulverston, United Kingdom

– Vaccines transformation and remediation

– Restructuring of the Pharmaceutical and Consumer Healthcare supply chains leading to simpliﬁcation of the operating model and

improved resource allocation

– Transformation of central functions, including GSK technology platforms and interfaces, to deliver greater digital synergies, simpliﬁcation

of applications and staff reductions.

The analysis of the costs charged to operating proﬁt under these programmes was as follows:

2018

£m

2017

£m

2016

£m

Increase in provision for Major restructuring programmes (see Note 29) 450 259 163

Amount of provision reversed unused (see Note 29) (99) (43) (140)

Impairment losses recognised 130 278 158

Other non-cash charges 72 247 10 8

Other cash costs 256 315 681

809 1,056 970

Asset impairments and other non-cash charges principally comprise ﬁxed asset write-downs across support function, manufacturing and

research facilities and accelerated depreciation where asset lives in R&D and manufacturing have been shortened as a result of the major

restructuring programmes. All other charges have been or will be settled in cash and include the termination of leases, site closure costs

and consultancy and project management fees.

The analysis of Major restructuring charges by income statement line was as follows:

2018

£m

2017

£m

2016

£m

Cost of sales 443 545 297

Selling, general and administration 315 248 514

Research and development 49 263 159

Other operating income/(expense) 2 – –

809 1,056 970

11. Finance income

2018

£m

2017

£m

2016

£m

Year to 31 December 2018 under IFRS 9

Finance income arising from:

Financial assets measured at amortised cost 73

Financial assets measured at fair value through proﬁt or loss 1

Net gains arising from hedge ineffectiveness on net investment hedges 7

Years to 31 December 2017 and 31 December 2016 under IAS 39

Interest income arising from:

Cash and cash equivalents 60 67

Available-for-sale investments 2 1

Loans and receivables 1 2

Fair value adjustments on derivatives at fair value through proﬁt or loss 2 2

81 65 72

Interest income arising from ﬁnancial assets measured at amortised cost in 2018 includes interest income arising from assets which would

have been classiﬁed as available-for-sale investments and loans and receivables in prior years under IAS 39. This also includes interest

income arising from certain cash and cash equivalents. Interest income arising from ﬁnancial assets measured at fair value through proﬁt or

loss in 2018 includes interest income arising from other cash and cash equivalents.

Net gains arising from hedge ineffectiveness on net investment hedges were recorded in ‘Fair value adjustments on derivatives at fair value

through proﬁt or loss’ in 2017 and 2016. All derivatives accounted for at fair value through proﬁt or loss other than designated and effective

hedging instruments (see Note 42, ‘Financial instruments and related disclosures’) are classiﬁed as held-for-trading ﬁnancial instruments.

GSK Annual Report 2018

160

Notes to the ﬁnancial statements continued

12. Finance expense

2018

£m

2017

£m

2016

£m

Finance expense arising on:

Financial liabilities at amortised cost (677) (698) (671)

Derivatives at fair value through proﬁt or loss (38) (22) (30)

Net losses arising from:

Financial instruments mandatorily measured at fair value through proﬁt or loss 3 (4) (3)

Reclassiﬁcation of hedges from other comprehensive income (2) – (1)

Unwinding of discounts on provisions (15) (16) (16)

Other ﬁnance expense (69) 6 (15)

(798) (734) (736)

All derivatives accounted for at fair value through proﬁt or loss, other than designated and effective hedging instruments (see Note 42,

‘Financial instruments and related disclosures’), are classiﬁed as held-for-trading ﬁnancial instruments. Interest expense arising on

derivatives at fair value through proﬁt or loss relates to swap interest expense. Other ﬁnance expense in 2018 includes a £39 million charge

(2017 – £24 million credit) for interest relating to historical income tax settlements.

13. Associates and joint ventures

The Group’s share of after tax proﬁts and losses of associates and joint ventures is set out below:

2018

£m

2017

£m

2016

£m

Share of after tax proﬁts of associates 28 16 9

Share of after tax proﬁts/(losses) of joint ventures 3 (3) (4)

31 13 5

At 31 December 2018, the Group held one signiﬁcant associate, Innoviva, Inc.

Summarised income statement information in respect of Innoviva is set out below for the periods in which the Group accounted for its

investment in Innoviva as an associate. The Group’s 2018 share of after tax proﬁts of associates and other comprehensive income includes

a proﬁt of £33 million and other comprehensive income of £nil in respect of Innoviva.

2018

£m

2017

£m

2016

£m

Turnover 183 165 98

Proﬁt after taxation 134 103 44

Other comprehensive income – – –

Total comprehensive income 134 103 44

The results of Innoviva included in the summarised income statement information above represent the estimated earnings of Innoviva in the

relevant periods, based on publicly available information. Innoviva’s turnover is from royalty income from GSK in relation to Relvar/Breo Ellipta,

Anoro Ellipta and Trelegy Ellipta sales.

Aggregated ﬁnancial information in respect of GSK’s share of other associated undertakings and joint ventures is set out below:

2018

£m

2017

£m

2016

£m

Share of turnover 242 252 133

Share of after tax (losses)/proﬁts (2) (5) (1)

Share of other comprehensive income – – –

Share of total comprehensive (expense)/income (2) (5) (1)

The Group’s sales to associates and joint ventures were £43 million in 2018 (2017 – £41 million; 2016 – £43 million).

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

161

14. Taxation

The Group’s tax charge is the sum of the total current and deferred tax expense.

Taxation charge based on proﬁts for the year

2018

£m

2017

£m

2016

£m

UK current year charge 234 199 241

Rest of World current year charge 1,426 1,928 1,326

Credit in respect of prior periods (492) (508) (149)

Total current taxation 1,168 1,619 1,418

Total deferred taxation (414) (263) (541)

Total tax 754 1,356 877

In 2018, GSK made payments of £113 million in UK corporation tax to HMRC. These amounts are for UK corporation tax only, and do not

include the various other business taxes borne in the UK by GSK each year.

The deferred tax credit in 2018 reﬂected the origination of current year tax losses, where offset against taxable proﬁts in future periods is

probable, as well as an uplift in the tax carrying value of certain Consumer Healthcare brands as a result of the acquisition of Novartis’ interest

in the former Consumer Healthcare Joint Venture.

The deferred tax credit in 2017 reﬂected the revaluation of existing deferred tax liabilities to reﬂect a lower Swiss tax rate applicable following

Swiss tax reform, and an increase in deferred tax assets related to intra-Group proﬁt on inventory. The impact of these items was partly offset

by the revaluation of existing deferred tax assets to reﬂect the lower US tax rate applicable following the enactment of US tax reform. In 2016,

the net deferred tax credit was impacted to a greater extent by remeasurement of the contingent consideration in relation to the former

Shionogi-ViiV Healthcare Joint Venture.

The following table reconciles the tax charge calculated at the UK statutory rate on the Group proﬁt before tax with the actual tax charge for

the year.

Reconciliation of taxation on Group proﬁts

2018

£m

2018

2017

£m

2017

2016

£m

2016

Proﬁt before tax 4,800 3,525 1,939

UK statutory rate of taxation 912 19.0 679 19.25 388 20.0

Differences in overseas taxation rates 675 14.1 635 18.0 593 30.6

Beneﬁt of intellectual property incentives (522) (10.9) (458) (13.0) (321) (16.5)

R&D credits (73) (1.5) (75) (2.1) (93) (4.8)

FV remeasurement of non-taxable put options 221 4.6 227 6.4 340 17. 5

Tax losses where no beneﬁt is recognised 24 0.5 28 0.8 (15) (0.8)

Permanent differences on disposals and acquisitions (7) (0.1) 4 0.1 (21) (1.1)

Other permanent differences 85 1.7 196 5.6 122 6.3

Re-assessments of prior year estimates (436) (9.1) (475) (13.5) (116) (6.0)

US and Swiss Tax Reform (125) (2.6) 595 16.9

Tax charge/tax rate 754 15.7 1,356 38.5 877 45.2

GSK has a substantial business presence in many countries around the world. The impact of differences in overseas taxation rates arose from

proﬁts being earned in countries with tax rates higher than the UK statutory rate, the most signiﬁcant of which in 2018 were the US, Belgium,

India and Japan. The adverse impact was partly offset by the increased beneﬁt of intellectual property incentives such as the UK Patent box

and Belgian Patent income deduction regimes. Such regimes provide a reduced rate of corporate income tax on proﬁts earned from qualifying

patents.

The Group’s 2018 tax rate of 15.7% has been inﬂuenced by the reassessment of open issues with tax authorities in various jurisdictions,

together with the £125 million credit related to a reduced estimate of the 2017 impact of US Tax Reform following additional guidance being

released by the US tax authorities and the transaction related charges arising on the Group’s put option liabilities to ViiV Healthcare and the

former Consumer Healthcare Joint Venture with Novartis.

Future tax charges, and therefore the Group’s effective tax rate, may be affected by factors such as acquisitions, disposals, restructuring, the

location of research and development activity, tax regime reforms and resolution of open matters as tax affairs are brought up to date around

the world.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

162

14. Taxation continued

Tax on items charged to equity and statement of comprehensive income

2018

£m

2017

£m

2016

£m

Current taxation

Share-based payments – – 7

Deﬁned beneﬁt plans (2) 26 32

(2) 26 39

Deferred taxation

Share-based payments 2 (4) –

Deﬁned beneﬁt plans (144) (247) 94

Fair value movements on cash ﬂow hedges (2) – 2

Fair value movements on equity investments 10 29 51

(134) (222) 147

Total (charge)/credit to equity and statement of comprehensive income (136) (196) 186

All of the above items have been charged to the statement of comprehensive income except for tax on share-based payments.

Issues relating to taxation

The integrated nature of the Group’s worldwide operations involves signiﬁcant investment in research and strategic manufacture at a limited

number of locations, with consequential cross-border supply routes into numerous end-markets. In line with current OECD guidelines GSK

bases its transfer pricing policy on the ‘arm’s length’ principle. However, different tax authorities may seek to attribute further proﬁt to activities

being undertaken in their jurisdiction potentially resulting in double taxation. The Group also has open items in several jurisdictions concerning

such matters as the deductibility of particular expenses and the tax treatment of certain business transactions. GSK applies a risk-based

approach to determine the transactions most likely to be subject to challenge and the probability that the Group would be able to obtain

compensatory adjustments under international tax treaties.

The calculation of the Group’s total tax charge therefore necessarily involves a degree of estimation and judgement in respect of certain items

whose tax treatment cannot be ﬁnally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a

formal legal process. At 31 December 2018 the Group had recognised provisions of £1,082 million in respect of such uncertain tax positions

(2017 – £1,175 million). The decrease in recognised provisions during 2018 was driven by the reassessment of estimates and the utilisation

of provisions for uncertain tax positions following the settlement of a number of open issues with tax authorities in various jurisdictions. Whilst

the ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with the relevant

tax authorities, or litigation where appropriate, the Group continues to believe that it has made appropriate provision for periods which are

open and not yet agreed by the tax authorities. GSK does not currently anticipate any material changes to the amounts provided for transfer

pricing or tax contingencies during the next 12 months.

A provision for deferred tax liabilities of £185 million as at 31 December 2018 (2017 – £209 million) has been made in respect of withholding

taxation that would be payable on the remittance of proﬁts by certain overseas subsidiaries. Whilst the aggregate amount of unremitted proﬁts

at the balance sheet date was approximately £18 billion (2017 – £17 billion), the majority of these unremitted proﬁts would not be subject to

tax (including withholding tax) on repatriation, as UK legislation relating to company distributions provides for exemption from tax for most

overseas proﬁts, subject to certain exceptions. Deferred tax is not provided on temporary differences of £231 million (2017 – £nil) arising

on unremitted proﬁts as management has the ability to control any future reversal and does not consider such a reversal to be probable.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

163

14. Taxation continued

Movement in deferred tax assets and liabilities

Accelerated

capital

allowances

£m

Intangible

assets

£m

Contingent

consideration

£m

Intra-Group

proﬁt

£m

Pensions &

other post

employment

beneﬁts

£m

Tax

losses

£m

option

and award

schemes

£m

Other

net

temporary

differences

£m

Total

£m

At 1 January 2017 (377) (2,324) 1,138 1,054 1,262 227 110 1,350 2,440

Exchange adjustments (7) 75 – (58) (48) (5) (4) (18) (65)

Credit/(charge) to income statement 62 330 (52) 256 3 59 (1) (88) 569

Credit/(charge) to income statement

associated with US tax reform 5 116 (218) (235) (210) (20) (27) (216) (805)

Credit to income statement

associated with Swiss tax reform – 483 – – – – – – 483

(Charge)/credit to statement of

comprehensive income and equity – – – – (247) – (4) 29 (222)

At 1 January 2018 (317) (1,320) 868 1,017 760 261 74 1,057 2,400

Exchange adjustments (6) (4) – 43 38 2 2 9 84

Credit/(charge) to income statement (12) 365 (34) (31) 33 183 (7) (101) 396

Credit/(charge) to statement of

comprehensive income and equity – – – – (144) – 2 8 (134)

Reclassiﬁcation on disposal – – – – 7 1 – (23) (15)

At 31 December 2018 (335) (959) 834 1,029 694 447 71 950 2,731

The net credit to the income statement of £396 million included an £18 million charge related to R&D incentives recognised within Operating

proﬁt (and not the taxation charge) in the income statement.

Deferred tax liabilities provided in relation to intangible assets predominately relate to temporary differences arising on assets and liabilities

acquired as part of historic business combinations.

The Group continues to recognise deferred tax assets on future obligations in respect of contingent consideration amounts payable to

minority shareholders. These payments are tax deductible at the point in time at which payment is made.

A deferred tax asset is recognised on intra-Group proﬁts arising on inter-company inventory which are eliminated within the consolidated

accounts. As intra-Group proﬁts are not eliminated from the individual entities’ tax returns a temporary difference arises that will reverse at the

point in time inventory is sold externally.

The deferred tax asset recognised on tax losses of £447 million (2017 – £261 million) related to trading losses. Other net temporary

differences included accrued expenses for which a tax deduction is only available on a paid basis, such as for pensions.

Deferred tax asset and liabilities are recognised on the balance sheet as follows:

2018

£m

2017

£m

Deferred tax assets 3,887 3,796

Deferred tax liabilities (1,156) (1,396)

2,731 2,400

Deferred tax assets are recognised on US foreign tax credits only where it is probable that future taxable proﬁts will be available. The net

amount of foreign tax credits on which deferred tax has not been provided was £114 million at 31 December 2018 (2017 – £151 million).

2018 2017

Unrecognised tax losses

Tax losses

£m

Unrecognised

deferred tax

asset

£m

Tax losses

£m

Unrecognised

deferred tax

asset

£m

Trading losses expiring:

Within 10 years 678 148 802 187

More than 10 years 957 93 872 99

Available indeﬁnitely 89 15 86 14

At 31 December 1,724 256 1,760 300

Capital losses expiring:

Available indeﬁnitely 2,042 399 1,924 372

At 31 December 2,042 399 1,924 372

Deferred tax assets are only recognised where it is probable that future taxable proﬁt will be available to utilise losses.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

164

15. Earnings per share

2018

pence

2017

pence

2016

pence

Basic earnings per share 73.7 31.4 18.8

Diluted earnings per share 72.9 31.0 18.6

Basic earnings per share has been calculated by dividing the proﬁt attributable to shareholders by the weighted average number of shares

in issue during the period after deducting shares held by the ESOP Trusts and Treasury shares. The trustees have waived their rights to

dividends on the shares held by the ESOP Trusts.

Diluted earnings per share has been calculated after adjusting the weighted average number of shares used in the basic calculation to

assume the conversion of all potentially dilutive shares. A potentially dilutive share forms part of the employee share schemes where its

exercise price is below the average market price of GSK shares during the period and any performance conditions attaching to the scheme

have been met at the balance sheet date.

The numbers of shares used in calculating basic and diluted earnings per share are reconciled below.

Weighted average number of shares in issue

2018

millions

2017

millions

2016

millions

Basic 4,914 4,886 4,860

Dilution for share options and awards 57 55 49

Diluted 4,971 4,941 4,909

16. Dividends

2018 2017 2016

Paid/payable

Dividend

per share

(pence)

Total

dividend

£m

Paid

Dividend

per share

(pence)

Total

dividend

£m

Paid

Dividend

per share

(pence)

Total

dividend

£m

First interim 12 July 2018 19 934 13 July 2017 19 928 14 July 2016 19 923

Second interim 11 October 2018 19 934 12 October 2017 19 929 13 October 2016 19 925

Third interim 10 January 2019 19 935 11 January 2018 19 929 12 January 2017 19 925

Fourth interim 11 April 2019 23 1,132 12 April 2018 23 1,130 13 April 2017 23 1,124

Total 80 3,935 80 3,916 80 3,897

Under IFRS, interim dividends are only recognised in the ﬁnancial statements when paid and not when declared. GSK normally pays a

dividend two quarters after the quarter to which it relates and one quarter after it is declared. The 2018 ﬁnancial statements recognise those

dividends paid in 2018, namely the third and fourth interim dividends for 2017, and the ﬁrst and second interim dividends for 2018.

The amounts recognised in each year were as follows:

2018

£m

2017

£m

2016

£m

Dividends to shareholders 3,927 3,906 4,850

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

165

17. Property, plant and equipment

Land and

buildings

£m

Plant,

equipment

and vehicles

£m

Assets in

construction

£m

Total

£m

Cost at 1 January 2017 7,76 1 11,235 3,168 22,164

Exchange adjustments (127) (62) (45) (234)

Other additions 69 296 1,219 1,584

Capitalised borrowing costs – – 30 30

Disposals and write-offs (376) (685) (31) (1,092)

Reclassiﬁcations 602 1,186 (1,826) (38)

Transfer to assets held for sale (462) (219) (14) (695)

Cost at 31 December 2017 7, 4 67 11,751 2,501 21,719

Exchange adjustments 150 187 25 362

Other additions 33 190 1,135 1,358

Capitalised borrowing costs – – 21 21

Disposals and write-offs (90) (440) (53) (583)

Reclassiﬁcations 403 1,016 (1,486) (67)

Transfer to assets held for sale (152) (167) (3) (322)

Cost at 31 December 2018 7,811 12,537 2,140 22,488

Depreciation at 1 January 2017 (3,259) (7,410) – (10,669)

Exchange adjustments 50 110 – 160

Charge for the year (299) (689) – (988)

Disposals and write-offs 158 539 – 697

Transfer to assets held for sale 314 190 – 504

Depreciation at 31 December 2017 (3,036) (7,260) – (10,296)

Exchange adjustments (61) (111) – (172)

Charge for the year (268) (686) – (954)

Disposals and write-offs 77 401 – 478

Transfer to assets held for sale 55 122 – 177

Depreciation at 31 December 2018 (3,233) (7,534) – (10,767)

Impairment at 1 January 2017 (279) (344) (64) (687)

Exchange adjustments 8 2 (2) 8

Disposals and write-offs 210 104 28 342

Impairment losses (194) (138) (17) (349)

Reversal of impairments 7 9 1 17

Transfer to assets held for sale 87 8 11 106

Impairment at 31 December 2017 (161) (359) (43) (563)

Exchange adjustments (8) (4) (1) (13)

Disposals and write-offs 10 59 22 91

Impairment losses (16) (143) (46) (205)

Reversal of impairments 1 6 – 7

Transfer to assets held for sale – 20 – 20

Impairment at 31 December 2018 (174) (421) (68) (663)

Total depreciation and impairment at 31 December 2017 (3,197) (7,619) (43) (10,859)

Total depreciation and impairment at 31 December 2018 (3,407) (7,955) (68) (11,430)

Net book value at 1 January 2017 4,223 3,481 3,104 10,808

Net book value at 31 December 2017 4,270 4,132 2,458 10,860

Net book value at 31 December 2018

4,404 4,582 2,072 11,058

The weighted average interest rate for capitalised borrowing costs in the year was 3% (2017 – 4%). Disposals and write-offs in the year

included a number of assets with nil net book value that are no longer in use in the business.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

166

The net book value at 31 December 2018 of the Group’s land and buildings included £24 million (2017 – £27 million) held under ﬁnance

leases. In addition, the net book value of plant, equipment and vehicles held under ﬁnance lease at 31 December 2018 was £59 million

(2017 – £55 million).

The impairment losses principally arose from decisions to rationalise facilities and are calculated based on either fair value less costs

of disposal or value in use. The fair value less costs of disposal valuation methodology uses signiﬁcant inputs which are not based on

observable market data, and therefore this valuation technique is classiﬁed as level 3 of the fair value hierarchy. These calculations

determine the net present value of the projected risk-adjusted, post-tax cash ﬂows of the relevant asset or cash generating unit, applying

a discount rate of the Group post-tax weighted average cost of capital (WACC) of 7%, adjusted where appropriate for speciﬁc segment,

country and currency risk. For value in use calculations, where an impairment is indicated and a pre-tax cash ﬂow calculation is expected

to give a materially different result, the test would be reperformed using pre-tax cash ﬂows and a pre-tax discount rate. The Group WACC

is equivalent to a pre-tax discount rate of approximately 9%. The net impairment losses have been charged to cost of sales £142 million

(2017 – £198 million), R&D £9 million (2017 – £93 million) and SG&A £54 million (2017 – £36 million), and included £138 million

(2017 – £278 million) arising from the major restructuring programmes.

Reversals of impairment arose from subsequent reviews of the impaired assets where the conditions which gave rise to the original

impairments were deemed no longer to apply. All of the reversals have been credited to cost of sales.

The carrying value at 31 December 2018 of assets for which impairments have been charged or reversed in the year was £95 million

(2017 – £33 million).

During 2018, £67 million (2017 – £38 million) of computer software was reclassiﬁed from assets in construction to intangible assets

on becoming ready for use.

18. Goodwill

2018

£m

2017

£m

Cost at 1 January 5,734 5,965

Exchange adjustments 199 (228)

Transfer to assets held for sale (144) (3)

Cost at 31 December 5,789 5,734

Net book value at 1 January 5,734 5,965

Net book value at 31 December 5,789 5,734

Goodwill is allocated to the Group’s segments as follows:

2018

£m

2017

£m

Pharmaceuticals 3,273 3,172

Vaccines 1,342 1,302

Consumer Healthcare 1,174 1,260

Net book value at 31 December 5,789 5,734

17. Property, plant and equipment continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

167

The recoverable amounts of the cash generating units are assessed using a fair value less costs of disposal model. Fair value less costs of

disposal is calculated using a discounted cash ﬂow approach, with a post-tax discount rate applied to the projected risk-adjusted post-tax

cash ﬂows and terminal value.

The discount rate used is based on the Group WACC of 7%, as most cash generating units have integrated operations across large parts of

the Group. The discount rate is adjusted where appropriate for speciﬁc segment, country and currency risks. The valuation methodology uses

signiﬁcant inputs which are not based on observable market data, therefore this valuation technique is classiﬁed as level 3 in the fair value

hierarchy.

Details relating to the discounted cash ﬂow models used in the impairment tests of the Pharmaceuticals, Vaccines and Consumer Healthcare

cash generating units are as follows:

Valuation basis Fair value less costs of disposal

Key assumptions Sales growth rates

Profit margins

Terminal growth rate

Discount rate

Taxation rate

Determination of assumptions Growth rates are internal forecasts based on both internal and external market information.

Margins reflect past experience, adjusted for expected changes.

Terminal growth rates based on management’s estimate of future long-term average growth rates.

Discount rates based on Group WACC, adjusted where appropriate.

Taxation rates based on appropriate rates for each region.

Period of specific projected cash flows Five years

Terminal growth rate and discount rate Terminal growth rate Discount rate

Pharmaceuticals 1% p.a. 7.5%

Vaccines 1% p.a. 7.5%

Consumer Healthcare 2% p.a. 6%

The terminal growth rates do not exceed the long-term projected growth rates for the relevant markets, reﬂect the impact of future generic

competition and take account of new product launches.

In each case the valuations indicated sufﬁcient headroom such that a reasonably possible change to key assumptions is unlikely to result in

an impairment of the related goodwill. Goodwill is monitored at the segmental level.

The Pharmaceuticals cash generating unit comprises a collection of smaller cash generating units including assets with indeﬁnite lives with

a carrying value of £236 million (2017 – £228 million). The Consumer Healthcare cash generating unit also comprises a collection of smaller

cash generating units including brands with indeﬁnite lives with a carrying value of £8.5 billion (2017 – £8.5 billion).

Details of indeﬁnite life brands are given in Note 19, ‘Other intangible assets’.

18. Goodwill continued

GSK Annual Report 2018

168

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 2017 2,156 15,143 427 9,375 2 7, 10 1

Exchange adjustments (37) (215) (4) (272) (528)

Capitalised development costs – 251 – – 251

Capitalised borrowing costs 2 3 – – 5

Other additions 233 221 – – 454

Disposals and asset write-offs (217) (38) – – (255)

Transfer to assets held for sale (1) (90) – (44) (135)

Reclassiﬁcations 38 – 66 (66) 38

Cost at 31 December 2017 2,174 15,275 489 8,993 26,931

Exchange adjustments 32 235 29 63 359

Capitalised development costs – 203 – – 203

Capitalised borrowing costs 1 – – – 1

Other additions 173 154 – – 327

Disposals and asset write-offs (80) (129) – – (209)

Transfer to assets held for sale (2) (81) (9) – (92)

Reclassiﬁcations 67 – – – 67

Cost at 31 December 2018 2,365 15,657 509 9,056 27,587

Amortisation at 1 January 2017 (1,184) (4,983) (224) – (6,391)

Exchange adjustments 25 141 – – 166

Charge for the year (163) (761) (10) – (934)

Disposals and asset write-offs 210 25 – – 235

Transfer to assets held for sale 1 25 – – 26

Amortisation at 31 December 2017 (1,111) (5,553) (234) – (6,898)

Exchange adjustments (24) (104) (3) – (131)

Charge for the year (240) (645) (17) – (902)

Disposals and asset write-offs 67 124 – – 191

Transfer to assets held for sale 1 18 1 – 20

Amortisation at 31 December 2018 (1,307) (6,160) (253) – (7,720)

Impairment at 1 January 2017 (9) (1,652) (143) (130) (1,934)

Exchange adjustments – 110 – 3 113

Impairment losses (2) (546) – (132) (680)

Disposals and asset write-offs 2 5 – – 7

Transfer to assets held for sale – 19 – 4 23

Impairment at 31 December 2017 (9) (2,064) (143) (255) (2,471)

Exchange adjustments – (69) (20) – (89)

Impairment losses (17) (51) – (69) (137)

Reversal of impairments – 3 – – 3

Disposals and asset write-offs 14 4 – – 18

Transfer to assets held for sale – 11 – – 11

Impairment at 31 December 2018 (12) (2,166) (163) (324) (2,665)

Total amortisation and impairment at 31 December 2017 (1,120) (7,617) (377) (255) (9,369)

Total amortisation and impairment at 31 December 2018 (1,319) (8,326) (416) (324) (10,385)

Net book value at 1 January 2017 963 8,508 60 9,245 18,776

Net book value at 31 December 2017 1,054 7,658 112 8,738 17,562

Net book value at 31 December 2018 1,046 7,331 93 8,732 17,202

The weighted average interest rate for capitalised borrowing costs in the year was 3% (2017 – 4%).

The net book value of computer software included £578 million (2017 – £669 million) of internally generated costs.

The carrying value at 31 December 2018 of intangible assets, for which impairments have been charged or reversed in the year, following

those impairments or reversals, was £73 million (2017 – £300 million).

The patent expiry dates of the Group’s most signiﬁcant assets, where relevant, are set out on pages 238 and 239.

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169

Amortisation and impairment losses, net of reversals, have been charged in the income statement as follows:

Amortisation Net impairment losses

2018

£m

2017

£m

2018

£m

2017

£m

Cost of sales 593 578 69 400

Selling, general and administration 178 116 19 2

Research and development 131 240 46 278

902 934 134 680

Licences, patents, etc. includes a large number of acquired licences, patents, know-how agreements and marketing rights, which are either

marketed or in use, or still in development. Note 38, ‘Acquisitions and disposals’ gives details of additions through business combinations in

the year. The book values of the largest individual items are as follows:

2018

£m

2017

£m

Meningitis portfolio 2,363 2,450

Dolutegravir 1,319 1,389

Benlysta 905 965

Fluarix/FluLaval 274 321

HIV assets acquired from BMS 277 277

Selzentry 136 162

Okairos technology platform 205 202

Others 1,852 1,892

7,331 7,658

The Meningitis portfolio includes Menveo, Bexsero, Men ABCWY and Menjugate.

Indeﬁnite life brands comprise a portfolio of Consumer Healthcare products primarily acquired with the acquisitions of Sterling Winthrop, Inc.

in 1994, Block Drug Company, Inc. in 2001, CNS, Inc. in 2006 and the Novartis Consumer Healthcare business in 2015, together with a

number of pharmaceutical brands from the acquisition of Stiefel Laboratories, Inc. in 2009. The book values of the major brands are as follows:

2018

£m

2017

£m

Voltaren 2,735 2,716

Otrivin 1,385 1,380

Fenistil 651 648

Theraﬂu 449 441

Panadol 388 386

Sensodyne 265 265

Lamisil 293 289

Breathe Right 262 236

Stiefel trade name 236 228

Excedrin 193 185

Physiogel 150 166

Polident 112 112

Others 1,613 1,686

8,732 8,738

Each of these brands is considered to have an indeﬁnite life, given the strength and durability of the brand and the level of marketing support.

The brands are in relatively similar stable and proﬁtable market sectors, with similar risk proﬁles, and their size, diversiﬁcation and market

shares mean that the risk of market-related factors causing a reduction in the lives of the brands is considered to be relatively low. The

Group is not aware of any material legal, regulatory, contractual, competitive, economic or other factors which could limit their useful lives.

Accordingly, they are not amortised.

Each brand is tested annually for impairment and other amortised intangible assets are tested when indicators of impairment arise. This

testing applies a fair value less costs of disposal methodology, generally using post-tax cash ﬂow forecasts with a terminal value calculation

and a discount rate equal to the Group post-tax WACC of 7%, adjusted where appropriate for speciﬁc segment, country and currency risks.

This valuation methodology uses signiﬁcant inputs which are not based on observable market data, and therefore this valuation technique is

classiﬁed as level 3 of the fair value hierarchy. The main assumptions include future sales price and volume growth, product contribution,

the future expenditure required to maintain the product’s marketability and registration in the relevant jurisdictions and exchange rates. These

assumptions are based on past experience and are reviewed as part of management’s budgeting and strategic planning cycle for changes

in market conditions and sales erosion through competition. The terminal growth rates applied of between nil% and 3% are management’s

estimates of future long-term average growth rates of the relevant markets. In each case the valuations indicate sufﬁcient headroom such

that a reasonably possible change to key assumptions is unlikely to result in an impairment of these intangible assets.

19. Other intangible assets continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

170

20. Investments in associates and joint ventures

Joint

ventures

£m

Associates

£m

2018

Total

£m

Joint

ventures

£m

Associates

£m

2017

Total

£m

At 1 January 13 170 183 19 244 263

Exchange adjustments 1 11 12 (2) (10) (12)

Additions 1 9 10 – 15 15

Disposals – – – – (92) (92)

Distributions received – (40) (40) (1) (1) (2)

Other movements 1 39 40 – (2) (2)

Proﬁt/(loss) after tax recognised in the consolidated income statement 3 28 31 (3) 16 13

At 31 December 19 217 236 13 170 183

The Group held one signiﬁcant associate at 31 December 2018, Innoviva, Inc. At 31 December 2018, the Group owned 32 million shares

or 31.7% of Innoviva, which is a biopharmaceutical company listed on NASDAQ. Innoviva partnered with GSK in the development of the long

acting beta agonist vilanterol and currently receives royalty income from sales of products that contain this component, namely Relvar/Breo

Ellipta and Anoro Ellipta. It also has a 15% economic interest in royalties paid by GSK on sales of Trelegy Ellipta. The remaining 85% of the

economic interest in these royalties is held by Theravance Biopharma Inc., in which the Group holds 17.4% of the common stock. The

investment in Innoviva had a market value of £440 million at 31 December 2018 (2017 – £336 million).

Summarised balance sheet information, based on published information, in respect of Innoviva is set out below:

At 31 December

2018

£m

At 31 December

2017

£m

Non-current assets 275 124

Current assets 157 148

Current liabilities (4) (26)

Non-current liabilities (302) (426)

Net assets/(liabilities) 126 (180)

2018

£m

2017

£m

Interest in associated undertaking 40 (57)

Goodwill 91 86

Fair value and other adjustments 58 118

Carrying value at 31 December 189 147

21. Other investments

Investments

designated as

measured at

FVTOCI

£m

Investments

measured at

FVTPL

£m

2018

£m

2017

£m

At 1 January 869 49 918 985

Exchange adjustments 48 4 52 (64)

Additions 363 9 372 80

Net fair value movements through Other comprehensive income 118 – 118 11

Net fair value movements through proﬁt or loss – 16 16 –

Impairment losses – – – (30)

Disposals and settlements (89) (6) (95) (64)

Transfers to Assets held for sale (59) – (59) –

At 31 December 1,250 72 1,322 918

Other investments comprise non-current equity investments which are recorded at fair value at each balance sheet date. For investments

traded in an active market, the fair value is determined by reference to the relevant stock exchange quoted bid price. For other investments, the

fair value is estimated by management with reference to relevant available information, including the current market value of similar instruments

and discounted cash ﬂows of the underlying net assets. Other investments include listed investments of £656 million (2017 – £535 million).

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21. Other investments continued

GSK has elected to designate the majority of its equity investments as measured at fair value through other comprehensive income (FVTOCI).

The most signiﬁcant of these investments held at 31 December 2018 were in Theravance Biopharma, Inc. in which the Group holds 17.4%

of the common stock, Orchard in which the group holds 14.5% and 23andMe in which the Group holds 14.5%. These investments had a

fair value at 31 December 2018 of £194 million (2017 – £199 million), £154 million and £229 million respectively. No other investment is

individually material. The other investments include equity stakes in companies with which GSK has research collaborations and in companies

which provide access to biotechnology developments of potential interest. Information on dividends received from investments measured at

FVTOCI is provided in Note 7 ‘Other operating income/(expense)’.

On disposal of equity investments measured at FVTOCI, the accumulated fair value movements are reclassiﬁed from the fair value reserve to

retained earnings. Investments with a fair value of £148 million were disposed of during the year. The cumulative gain on these investments

after tax was £56 million.

Certain other investments, such as investments in funds with limited lives, are measured at fair value through proﬁt or loss (FVTPL). The

cumulative gain/loss on investments measured at FVTPL which were disposed of during the year was £nil. The fair value of these investments

on derecognition was £nil.

In 2017, prior to the Group’s implementation of IFRS 9, the cumulative fair value movements, based on average cost for shares acquired at

different times, for all other investments disposed of during the period were reclassiﬁed from the fair value reserve to the income statement.

The impairment losses recorded above for the prior year were recognised in the income statement within Other operating income, together

with amounts reclassiﬁed from the fair value reserve on recognition of the impairments. These impairments resulted from prolonged or

signiﬁcant declines in the fair value of the equity investments below acquisition cost.

The carrying value at 31 December 2017 of Other investments which had been impaired was as follows:

2017

£m

Original cost 475

Cumulative impairments recognised in the income statement (283)

Subsequent fair value increases 210

Carrying value at 31 December 2017 402

Cumulative impairments on those Other investments designated as measured at FVTOCI under IFRS 9 were transferred from retained

earnings to the fair value reserve on 1 January 2018 on adoption of IFRS 9.

22. Other non-current assets

2018

£m

2017

£m

Amounts receivable under insurance contracts 675 648

Pension schemes in surplus 760 538

Other receivables 141 227

1,576 1,413

Amounts receivable under insurance contacts are held at fair value through proﬁt or loss.

In regards to the other receivables of £141 million, £89 million is classiﬁed as ﬁnancial assets of which £41 million is classiﬁed as fair value

through proﬁt or loss. Of the remaining balance of £48 million, the expected credit loss allowance was immaterial at 31 December 2018.

23. Inventories

2018

£m

2017

£m

Raw materials and consumables 1,122 1,193

Work in progress 2,286 2,381

Finished goods 2,068 1,983

5,476 5,557

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

172

24. Trade and other receivables

2018

£m

2017

£m

Trade receivables, net of loss allowance 5,176 4,672

Accrued income 9 21

Other prepayments 330 308

Interest receivable 4 10

Employee loans and advances 14 19

Other receivables 890 970

6,423 6,000

Trade receivables included £15 million (2017 – £11 million) due from associates and joint ventures. Other receivables included £nil

(2017 – £7 million) due from associates and joint ventures.

Loss allowance

2018

£m

2017

£m

At 1 January 140 207

Implementation of IFRS 9 15 –

At 1 January, as adjusted 155 –

Exchange adjustments – (4)

Charge for the year 7 31

Subsequent recoveries of amounts provided for (30) (79)

Utilised (4) (15)

At 31 December 128 140

Of the total trade receivables balance, £71 million was considered credit impaired, against which a £7 million expected credit loss allowance

has been applied. No amount was purchased or originated credit impaired.

Of the other receivables of £890 million, £376 million was classiﬁed as ﬁnancial assets of which £41 million was classiﬁed as at fair value

through proﬁt and loss. On the remaining balance of £335 million, an expected credit loss allowance of £5 million was recognised at

31 December 2018 with no charge reported in proﬁt or loss during the year.

For more discussion on credit risk practices, please refer to Note 42.

25. Cash and cash equivalents

2018

£m

2017

£m

Cash at bank and in hand 569 826

Short-term deposits 3,305 3,007

3,874 3,833

In addition, £485 million of cash and cash equivalents has been reported in Assets held for sale, see Note 26, ‘Assets held for sale’.

Cash and cash equivalents included £0.2 billion (2017 – £0.8 billion) not available for general use due to restrictions applying in the

subsidiaries where it is held. Restrictions include exchange controls and taxes on repatriation.

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173

26. Assets held for sale

2018

£m

2017

£m

Property, plant and equipment 109 57

Goodwill 144 –

Other intangibles 1 49

Inventory 50 7

Cash and cash equivalents 485 –

Other (136) –

653 113

Non-current assets and disposal groups are transferred to assets held for sale when it is expected that their carrying amounts will be

recovered principally through disposal and a sale is considered highly probable. They are held at the lower of carrying amount and fair

value less costs to sell.

Assets held for sale primarily reﬂect the disposal group arising from GSK’s agreement to divest Horlicks and other Consumer Healthcare

nutritional brands to Unilever plc announced in December 2018, and which is expected to complete by the end of 2019. See Note 38,

‘Acquisitions and disposals’.

Included within assets held for sale are assets which were written down to fair value less costs to sell of £51 million (2017 – £63 million).

The valuation methodology used signiﬁcant inputs which were not based on observable market data and therefore this valuation is classiﬁed

as level 3 in the fair value hierarchy.

27. Trade and other payables

2018

£m

2017

£m

Trade payables 3,645 3,528

Wages and salaries 1,355 1,228

Social security 139 166

Consumer Healthcare put option – 8,606

ViiV Healthcare put option 1,240 1,304

Other payables 401 363

Deferred income 216 240

Customer return and rebate accruals 5,064 3,463

Other accruals 1,977 2,072

14,037 20,970

Trade and other payables included £64 million (2017 – £53 million) due to associates and joint ventures. The Group provides limited supplier

ﬁnancing arrangements to certain customers. The amounts involved at 31 December 2018 were not material.

Revenue recognised in the year that was included in deferred income at 1 January 2018 was £66 million. Of the remaining balance, £64 million

related to proceeds from a site disposal in India, which was expected to complete in 2018, but is now expected to complete in 2019.

Customer return and rebate accruals are provided for by the Group at the point of sale in respect of the estimated rebates, discounts or

allowances payable to customers, and included £4,356 million (2017 – £2,837 million) in respect of US Pharmaceuticals and Vaccines, as

more fully described in the Group ﬁnancial review on page 63. Accruals are made at the time of sale but the actual amounts paid are based

on claims made some time after the initial recognition of the sale. As the amounts are estimated, they may not fully reﬂect the ﬁnal outcome

and are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of accrual is

reviewed and adjusted quarterly in light of historical experience of actual amounts paid and any changes in arrangements. Future events could

cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.

Pﬁzer’s put option over its shareholding in ViiV Healthcare is currently exercisable. The amount of the liability recognised is derived from

several valuation methodologies, including reference to market multiples of comparable companies. The table below shows on an indicative

basis the income statement and balance sheet sensitivity of the Pﬁzer put option to reasonably possible changes in key assumptions.

Increase/(decrease) in ﬁnancial liability and loss/(gain) in Income statement

2018

£m

10% increase in sales forecasts 140

10% decrease in sales forecasts (140)

10 cent appreciation of US Dollar 75

10 cent depreciation of US Dollar (64)

10 cent appreciation of Euro 44

10 cent depreciation of Euro (37)

An explanation of the accounting for ViiV Healthcare is set out on page 41.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

174

28. Pensions and other post-employment beneﬁts

Pension and other post-employment costs

2018

£m

2017

£m

2016

£m

UK pension schemes 246 198 205

US pension schemes 100 113 10 6

Other overseas pension schemes 190 218 140

Unfunded post-retirement healthcare schemes 50 87 90

586 616 541

Analysed as:

Funded deﬁned beneﬁt/hybrid pension schemes 369 335 304

Unfunded deﬁned beneﬁt pension schemes 43 55 43

Unfunded post-retirement healthcare schemes 50 87 90

Deﬁned beneﬁt schemes 462 477 437

Deﬁned contribution pension schemes 124 139 10 4

586 616 541

The costs of the deﬁned beneﬁt pension and post-retirement healthcare schemes are charged in the income statement as follows:

2018

£m

2017

£m

2016

£m

Cost of sales 160 162 135

Selling, general and administration 228 238 221

Research and development 74 77 81

462 477 437

GSK entities operate pension arrangements which cover the Group’s material obligations to provide pensions to retired employees. These

arrangements have been developed in accordance with local practices in the countries concerned. Pension beneﬁts can be provided by state

schemes; by deﬁned contribution schemes, whereby retirement beneﬁts are determined by the value of funds arising from contributions paid

in respect of each employee; or by deﬁned beneﬁt schemes, whereby retirement beneﬁts are based on employee pensionable remuneration

and length of service.

Pension costs of deﬁned beneﬁt schemes for accounting purposes have been calculated using the projected unit method. In certain countries

pension beneﬁts are provided on an unfunded basis, some administered by trustee companies. Formal, independent, actuarial valuations of

the Group’s main plans are undertaken regularly, normally at least every three years.

Actuarial movements in the year are recognised through the statement of comprehensive income. Discount rates are derived from AA

rated corporate bond yields except in countries where there is no deep market in corporate bonds where government bond yields are used.

Discount rates are selected to reﬂect the term of the expected beneﬁt payments. Projected inﬂation rate and pension increases are long-term

predictions based on the yield gap between long-term index-linked and ﬁxed interest Gilts. In the UK, mortality rates are determined by

adjusting the SAPS S2 standard mortality tables to reﬂect recent scheme experience. These rates are then projected to reﬂect improvements

in life expectancy in line with the CMI 2017 projections with a long-term rate of improvement of 1.25% per year for both males and females.

In the US, mortality rates are calculated using the RP2014 white collar table adjusted to reﬂect recent experience. These rates are projected

using MP-2017 to allow for future improvements in life expectancy.

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The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2038 for an individual then at the age of

60 is as follows:

UK US

Male

Years

Female

Years

Male

Years

Female

Years

Current 2 7. 5 29.1 2 7. 0 28.7

Projected for 2038 29.0 30.6 28.7 30.3

The assets of funded schemes are generally held in separately administered trusts, either as speciﬁc assets or as a proportion of a general

fund, or are insurance contracts. Assets are invested in different classes in order to maintain a balance between risk and return. Investments

are diversiﬁed to limit the ﬁnancial effect of the failure of any individual investment. The physical asset allocation strategy for three of the four

UK plans remains unchanged, with 55% in return-seeking assets and 45% in liability-matching assets. The remaining plan has materially

de-risked given its relative higher maturity as well as improved funding position. The asset allocation of the US plans is currently set at 55%

return-seeking assets and 45% liability-matching assets.

The pension plans are exposed to risk that arises because the estimated market value of the plans’ assets might decline, the investment

returns might reduce, or the estimated value of the plans’ liabilities might increase.

In line with the agreed mix of return-seeking assets to generate future returns and liability-matching assets to better match future pension

obligations, the Group has deﬁned an overall long-term investment strategy for the plans, with investments across a broad range of assets.

The main market risks within the asset and hedging portfolio are against credit risk, interest rates, long-term inﬂation, equities, property,

currency and bank counterparty risk.

The plan liabilities are a series of future cash ﬂows with relatively long duration. On an IAS 19 basis, these cash ﬂows are sensitive to

changes in the expected long-term inﬂation rate and the discount rate (AA corporate bond yield curve) where an increase in long-term

inﬂation corresponds with an increase in the liabilities, and an increase in the discount rate corresponds with a decrease in the liabilities.

The interest rate risk and credit rate risk in the US are partially hedged. The targets are based on an accounting measure of the plan liabilities.

For the UK plans, there is an interest rate and inﬂation hedging strategy in place. The targets are based on an economic measure of the plan

liabilities. Furthermore, the plans also currently hedge a portion of their equity exposure with a staggered maturity proﬁle.

In the UK, the deﬁned beneﬁt pension schemes operated for the beneﬁt of former Glaxo Wellcome employees and former SmithKline

Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled to

join a deﬁned contribution scheme. In addition, the Group operates a number of post-retirement healthcare schemes, the principal one of

which is in the US.

The Group has applied the following ﬁnancial assumptions in assessing the deﬁned beneﬁt liabilities:

UK US Rest of World

2018

% pa

2017

% pa

2016

% pa

2018

% pa

2017

% pa

2016

% pa

2018

% pa

2017

% pa

2016

% pa

Rate of increase of future earnings 2.00 2.00 2.00 4.00 4.00 4.00 2.70 2.80 2.70

Discount rate 2.90 2.50 2.70 4.20 3.60 3.90 1.80 1.60 1.60

Expected pension increases 3.20 3.20 3.20 n/a n/a n/a 2.10 2.20 2.10

Cash balance credit/conversion rate n/a n/a n/a 3.20 2.90 3.20 0.40 0.30 0.30

Inﬂation rate 3.20 3.20 3.20 2.25 2.25 2.25 1.50 1.70 1.50

Sensitivity analysis detailing the effect of changes in assumptions is provided on page 182. The analysis provided reﬂects the assumption

changes which have the most material impact on the results of the Group.

28. Pensions and other post-employment beneﬁts continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

176

The amounts recorded in the income statement and statement of comprehensive income for the three years ended 31 December 2018

in relation to the deﬁned beneﬁt pension and post-retirement healthcare schemes were as follows:

Pensions

Post-retirement

beneﬁts

2018

£m

Rest of World

£m

Group

£m

Group

£m

Amounts charged to operating proﬁt

Current service cost 75 72 134 281 29

Past service cost/(credit) 93 1 – 94 (27)

Net interest (income)/cost (3) 20 19 36 49

Gains from settlements – – (14) (14) (1)

Expenses 8 7 – 15 –

173 100 139 412 50

Remeasurement gains/(losses) recorded in the statement of

comprehensive income 495 (108) 196 583 145

Pensions

Post-retirement

beneﬁts

2017

£m

Rest of World

£m

Group

£m

Group

£m

Amounts charged to operating proﬁt

Current service cost 79 70 131 280 30

Past service cost/(credit) 37 – – 37 (2)

Net interest cost 7 31 16 54 59

Expenses 7 12 – 19 –

130 113 147 390 87

Remeasurement gains/(losses) recorded in the statement of

comprehensive income 259 240 (14) 485 64

Pensions

Post-retirement

beneﬁts

2016

£m

Rest of World

£m

Group

£m

Group

£m

Amounts charged to operating proﬁt

Current service cost 70 66 110 246 31

Past service cost 52 1 1 54 3

Net interest cost 9 27 20 56 56

Gains from settlements – – (28) (28) –

Expenses 7 12 – 19 –

138 106 103 347 90

Remeasurement losses recorded in the statement of

comprehensive income (165) (27) (224) (416) (59)

The amounts included within past service costs in the UK include a charge of £40 million in relation to the estimated impact of GMP

equalisation and £43 million (2017 – £37 million; 2016 – £52 million) of augmentation costs of which £21 million is arising from major

restructuring programmes (see Note 29, ‘Other provisions’).

28. Pensions and other post-employment beneﬁts continued

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GSK Annual Report 2018

177

A summarised balance sheet presentation of the Group deﬁned beneﬁt pension schemes and other post-retirement beneﬁts is set out in the

table below:

2018

£m

2017

£m

2016

£m

Recognised in Other non-current assets:

Pension schemes in surplus 760 538 313

Recognised in Assets held for sale:

Post-retirement beneﬁts (9) – –

Recognised in Pensions and other post-employment beneﬁts:

Pension schemes in deﬁcit (1,755) (2,043) (2,397)

Post-retirement beneﬁts (1,370) (1,496) (1,693)

(3,125) (3,539) (4,090)

In the event of a plan wind-up, GSK believes the UK pension scheme rules provide the company with the right to a refund of surplus assets

following the full settlement of plan liabilities. As a result, the net surplus in the UK deﬁned beneﬁt pension schemes is recognised in full.

The fair values of the assets and liabilities of the UK and US deﬁned beneﬁt pension schemes, together with aggregated data for other

deﬁned beneﬁt pension schemes in the Group are as follows:

At 31 December 2018

£m

Rest of World

£m

Group

£m

Equities: – listed 3,257 1,280 518 5,055

– unlisted – – 7 7

Multi-asset funds 2,997 – – 2,997

Property: – listed – – 33 33

– unlisted 423 231 4 658

Corporate bonds: – listed 404 783 111 1,298

– unlisted 306 – 25 331

Government bonds: – listed 3,835 286 795 4,916

Insurance contracts 770 – 831 1,601

Other assets 589 228 66 883

Fair value of assets 12,581 2,808 2,390 17,779

Present value of scheme obligations (12,087) (3,474) (3,213) (18,774)

Net surplus/(obligation) 494 (666) (823) (995)

Included in Other non-current assets 711 – 49 760

Included in Pensions and other post-employment beneﬁts (217) (666) (872) (1,755)

494 (666) (823) (995)

Actual return on plan assets (88) (123) 55 (156)

The multi-asset funds comprise investments in pooled investment vehicles that are invested across a range of asset classes, increasing

diversiﬁcation within the growth portfolio. The ‘Other assets’ category comprises cash and mark to market values of derivative positions.

In previous years, index-linked gilts held as part of a UK repo programme were included in government bonds. The related loan was

included within ‘Other assets’ at a value of £(773) million at 31 December 2017 (2016 – £(1,686) million). This programme was cancelled

during 2018.

28. Pensions and other post-employment beneﬁts continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

178

At 31 December 2017

£m

Rest of World

£m

Group

£m

Equities: – listed 4,902 1,448 544 6,894

– unlisted – – 13 13

Multi-asset funds 2,517 – – 2,517

Property: – unlisted 352 209 32 593

Corporate bonds: – listed 297 820 103 1,220

– unlisted 326 – 20 346

Government bonds: – listed 5,127 239 762 6,128

Insurance contracts 849 – 707 1,556

Other assets (1,216) 158 71 (987)

Fair value of assets 13,154 2,874 2,252 18,280

Present value of scheme obligations (13,101) (3,445) (3,239) (19,785)

Net surplus/(obligation) 53 (571) (987) (1,505)

Included in Other non-current assets 470 – 68 538

Included in Pensions and other post-employment beneﬁts (417) (571) (1,055) (2,043)

53 (571) (987) (1,505)

Actual return on plan assets 893 394 82 1,369

At 31 December 2016

£m

Rest of World

£m

Group

£m

Equities: – listed 5,357 1,358 486 7,201

– unlisted – – 14 14

Multi-asset funds 1,545 – – 1,545

Property: – unlisted 314 216 28 558

Corporate bonds: – listed 292 213 96 601

– unlisted 321 – 24 345

Government bonds: – listed 6,165 815 739 7,719

Insurance contracts 856 – 637 1,493

Other assets (2,267) 288 73 (1,906)

Fair value of assets 12,583 2,890 2,097 17,570

Present value of scheme obligations (12,884) (3,752) (3,018) (19,654)

Net obligation (301) (862) (921) (2,084)

Included in Other non-current assets 276 – 37 313

Included in Pensions and other post-employment beneﬁts (577) (862) (958) (2,397)

(301) (862) (921) (2,084)

Actual return on plan assets 2,473 153 99 2,725

28. Pensions and other post-employment beneﬁts continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

179

28. Pensions and other post-employment beneﬁts continued

Pensions

Post-retirement

beneﬁts

Movements in fair values of assets

£m

Rest of World

£m

Group

£m

Group

£m

Assets at 1 January 2016 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 –

Exchange adjustments – (244) 24 (220) –

Interest income 333 10 4 33 470 –

Expenses (7) (12) – (19) –

Settlements and curtailments – – (4) (4) –

Remeasurement 560 290 49 899 –

Employer contributions 225 103 116 444 101

Scheme participants’ contributions 4 – 17 21 17

Beneﬁts paid (544) (257) (80) (881) (118)

Assets at 31 December 2017 13,154 2,874 2,252 18,280 –

Exchange adjustments – 171 53 224 –

Interest income 323 102 29 454 –

Expenses (8) (7) – (15) –

Settlements and curtailments – – (14) (14) –

Remeasurement (411) (225) 26 (610) –

Employer contributions 119 150 117 386 93

Scheme participants’ contributions 4 – 16 20 16

Beneﬁts paid (600) (257) (89) (946) (109)

Assets at 31 December 2018 12,581 2,808 2,390 17,779 –

During 2018, the Group made no special funding contributions to the UK pension schemes (2017 – £136 million; 2016 – £191 million) but

£125 million (2017 – £78 million; 2016 – £nil) to the US scheme. In 2018, GSK reached a revised agreement with the trustees of the UK

pension schemes to make additional contributions to eliminate the pension deﬁcits identiﬁed within the schemes at the 31 December 2017

actuarial funding valuation. Based on these funding agreements, the additional contributions to eliminate the pension deﬁcit are expected to

be £75 million in 2019. Further payments have been agreed for the years 2020 to 2022 and these are included within Note 41, ‘Commitments’

on page 197. This funding commitment supersedes the previous agreement made in 2016. The contributions were based on a government

bond yield curve approach to selecting the discount rate; the rate chosen included an allowance for expected investment returns which

reﬂected the asset mix of the schemes.

Employer contributions for 2019, including special funding contributions, are estimated to be approximately £420 million in respect of deﬁned

beneﬁt pension schemes and £100 million in respect of post-retirement beneﬁts.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

180

Pensions

Post-retirement

beneﬁts

Movements in deﬁned beneﬁt obligations

£m

Rest of World

£m

Group

£m

Group

£m

Obligations at 1 January 2016 (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)

Exchange adjustments – 305 (45) 260 119

Service cost (79) (70) (131) (280) (30)

Past service cost/(credit) (37) – – (37) 2

Interest cost (340) (135) (49) (524) (59)

Settlements and curtailments – – 4 4 –

Remeasurement (301) (50) (63) (414) 64

Scheme participants’ contributions (4) – (17) (21) (17)

Beneﬁts paid 544 257 80 881 118

Obligations at 31 December 2017 (13,101) (3,445) (3,239) (19,785) (1,496)

Exchange adjustments – (208) (63) (271) (71)

Service cost (75) (72) (134) (281) (29)

Past service cost (93) (1) – (94) 27

Interest cost (320) (122) (48) (490) (49)

Settlements and curtailments – – 28 28 1

Remeasurement 906 117 170 1,193 145

Scheme participants’ contributions (4) – (16) (20) (16)

Beneﬁts paid 600 257 89 946 109

Obligations at 31 December 2018 (12,087) (3,474) (3,213) (18,774) (1,379)

The deﬁned beneﬁt pension obligation is analysed as follows:

2018

£m

2017

£m

2016

£m

Funded (18,025) (19,052) (18,974)

Unfunded (749) (733) (680)

(18,774) (19,785) (19,654)

The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme,

together with the assumption for future medical inﬂation of 6.50% (2017 – 6.75%), grading down to 5.0% in 2025 and thereafter. At

31 December 2018, the US post-retirement healthcare scheme obligation was £1,179 million (2017 – £1,254 million; 2016 – £1,463 million).

Post-retirement beneﬁts are unfunded.

28. Pensions and other post-employment beneﬁts continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

181

The movement in the net deﬁned beneﬁt liability is as follows:

2018

£m

2017

£m

2016

£m

At 1 January (1,505) (2,084) (1,584)

Exchange adjustments (47) 40 (218)

Service cost (281) (280) (246)

Past service cost (94) (37) (54)

Interest cost (36) (54) (56)

Settlements and curtailments 14 – 28

Remeasurements:

Return on plan assets, excluding amounts included in interest (610) 899 2,195

Gain from change in demographic assumptions 131 209 85

Gain/(loss) from change in ﬁnancial assumptions 1,149 (555) (2,770)

Experience (losses)/gains (87) (68) 74

Employer contributions 386 444 481

Expenses (15) (19) (19)

At 31 December (995) (1,505) (2,084)

The remeasurements included within post-retirement beneﬁts are detailed below:

2018

£m

2017

£m

2016

£m

Gain from change in demographic assumptions 6 47 –

Gain/(loss) from change in ﬁnancial assumptions 100 (1) (81)

Experience gains 39 18 22

145 64 (59)

28. Pensions and other post-employment beneﬁts continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

182

The deﬁned beneﬁt pension obligation analysed by membership category is as follows:

2018

£m

2017

£m

2016

£m

Active 4,427 4,611 4,576

Retired 9,542 9,805 9,574

Deferred 4,805 5,369 5,504

18,774 19,785 19,654

The post-retirement beneﬁt obligation analysed by membership category is as follows:

2018

£m

2017

£m

2016

£m

Active 499 514 594

Retired 879 981 1,099

Deferred 1 1 –

1,379 1,496 1,693

The weighted average duration of the deﬁned beneﬁt obligation is as follows:

2018

years

2017

years

2016

years

Pension beneﬁts 15 16 16

Post-retirement beneﬁts 11 11 12

Sensitivity analysis

The effect of changes in assumptions used on the beneﬁt obligations and on the 2019 annual deﬁned beneﬁt pension and post-retirement

costs are detailed below. This information has been determined by taking into account the duration of the liabilities and the overall proﬁle of

the plan memberships.

£m

A 0.25% decrease in discount rate would have the following approximate effect:

Increase in annual pension cost 28

Decrease in annual post-retirement beneﬁts cost (1)

Increase in pension obligation 707

Increase in post-retirement beneﬁts obligation 34

A one-year increase in life expectancy would have the following approximate effect:

Increase in annual pension cost 21

Increase in annual post-retirement beneﬁts cost 2

Increase in pension obligation 592

Increase in post-retirement beneﬁts obligation 33

A 1% increase in the rate of future healthcare inﬂation would have the following approximate effect:

Increase in annual post-retirement beneﬁts cost 1

Increase in post-retirement beneﬁts obligation 38

A 0.25% increase in inﬂation would have the following approximate effect:

Increase in annual pension cost 18

Increase in pension obligation 447

28. Pensions and other post-employment beneﬁts continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

183

29. Other provisions

Legal

and other

disputes

£m

Major

restructuring

programmes

£m

Employee

-related

provisions

£m

Other

provisions

£m

Total

£m

At 1 January 2018 186 504 304 271 1,265

Exchange adjustments 13 17 9 5 44

Charge for the year 119 450 105 50 724

Reversed unused (2) (99) (25) (46) (172)

Unwinding of discount 2 4 – 9 15

Utilised (98) (226) (41) (79) (444)

Reclassiﬁcations and other movements (1) 12 (2) 3 12

Transfer to Pension obligations – (21) – – (21)

At 31 December 2018 219 641 350 213 1,423

To be settled within one year 156 362 145 69 732

To be settled after one year 63 279 205 144 691

At 31 December 2018 219 641 350 213 1,423

Legal and other disputes

The Group is involved in a substantial number of legal and other

disputes, including notiﬁcation of possible claims, as set out in

Note 45 ‘Legal proceedings’. Provisions for legal and other disputes

include amounts relating to product liability, anti-trust, government

investigations, contract terminations, self insurance and

environmental clean-up.

The charge for the year of £117 million (net of reversals and

estimated insurance recoveries) primarily related to provisions

for product liability cases, commercial disputes and various other

government investigations.

The discount on the provisions increased by £2 million in 2018

(2017 – increased by £2 million). The discount was calculated

using risk-adjusted projected cash ﬂows and risk-free rates of return.

In respect of product liability claims related to certain products,

there is sufﬁcient history of claims made and settlements to enable

management to make a reliable estimate of the provision required

to cover unasserted claims. The ultimate liability for such matters

may vary from the amounts provided and is dependent upon the

outcome of litigation proceedings, investigations and possible

settlement negotiations.

It is in the nature of the Group’s business that a number of these

matters may be the subject of negotiation and litigation over

many years. Litigation proceedings, including the various appeal

procedures, often take many years to reach resolution, and

out-of-court settlement discussions can also often be protracted.

Indemniﬁed disputes will recognise a provision charge and a

corresponding receivable.

The Group is in potential settlement discussions in a number of

the disputes for which amounts have been provided and, based

on its current assessment of the progress of these disputes,

estimates that £156 million of the amount provided at 31 December

2018 will be settled within one year. At 31 December 2018, it was

expected that £37 million (2017 – £nil) of the provision made for

legal and other disputes will be reimbursed by third parties. For

a discussion of legal issues, see Note 45, ‘Legal proceedings’.

Major restructuring programmes

The Group is undertaking two major restructuring programmes:

the Combined restructuring and integration programme and the

2018 major restructuring programme. The programmes are focused

primarily on simplifying supply chain processes, rationalising the

Group’s manufacturing network and restructuring the

Pharmaceuticals commercial operations.

Provisions for staff severance payments are made when management

has made a formal decision to eliminate certain positions and this

has been communicated to the groups of employees affected and

appropriate consultation procedures completed, where appropriate.

No provision is made for staff severance payments that are made

immediately.

Pension augmentations arising from staff redundancies of

£21 million (2017 – £18 million) have been charged during the

year and then transferred to the pension obligations provision as

shown in Note 28, ‘Pensions and other post-employment beneﬁts’.

Asset write-downs have been recognised as impairments of

property, plant and equipment in Note 17, ‘Property, plant and

equipment’. The majority of the amounts provided are expected

to be utilised in the next two years.

Employee-related provisions

Employee related provisions include obligations for certain medical

beneﬁts to disabled employees and their spouses in the US. At

31 December 2018, the provision for these beneﬁts amounted to

£87 million (2017 – £108 million). Other employee beneﬁts reﬂect

a variety of provisions for severance costs, jubilee awards and other

long-service beneﬁts. Given the nature of these provisions, the

amounts are likely to be settled over many years.

Other provisions

Included in other provisions are insurance provisions of £7 million

(2017 – £6 million), onerous property lease provisions of

£6 million (2017 – £38 million) and a number of other provisions

including vehicle insurance and regulatory matters.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

184

30. Other non-current liabilities

2018

£m

2017

£m

Accruals 71 82

Deferred Income 19 22

Other payables 848 877

938 981

Other payables includes acquisition accounting market value lease adjustments and a number of employee-related liabilities.

31. Net debt

Listing exchange

2018

£m

2017

£m

Current assets:

Liquid investments 84 78

Cash and cash equivalents 3,874 3,833

Cash and cash equivalents reported in Assets held for sale 485 –

4,443 3,911

Short-term borrowings:

Commercial paper (630) (529)

Bank loans and overdrafts (290) (236)

Obligations under ﬁnance leases (24) (23)

Drawn bank facility (3,500) –

5.650% US$ US Medium Term Note 2018 New York Stock Exchange – (2,037)

0.625% € European Medium Term Note 2019 London Stock Exchange (1,349) –

(5,793) (2,825)

Long-term borrowings:

0.625% € European Medium Term Note 2019 London Stock Exchange – (1,324)

EURIBOR +0.20% € European Medium Term Note 2020 London Stock Exchange (677) –

0.000% € European Medium Term Note 2020 London Stock Exchange (1,079) (1,060)

3.125% US$ US Medium Term Note 2021 New York Stock Exchange (980) –

LIBOR +0.35% US$ US Medium Term Note 2021 New York Stock Exchange (589) –

2.850% US$ US Medium Term Note 2022 New York Stock Exchange (1,568) (1,474)

2.800% US$ US Medium Term Note 2023 New York Stock Exchange (978) (919)

3.375% US$ US Medium Term Note 2023 New York Stock Exchange (977) –

1.375% € European Medium Term Note 2024 London Stock Exchange (893) (876)

4.000% € European Medium Term Note 2025 London Stock Exchange (670) (659)

3.625% US$ US Medium Term Note 2025 New York Stock Exchange (780) –

1.000% € European Medium Term Note 2026 London Stock Exchange (629) (617)

1.250% € European Medium Term Note 2026 London Stock Exchange (897) –

3.375% £ European Medium Term Note 2027 London Stock Exchange (593) (593)

3.875% US$ US Medium Term Note 2028 New York Stock Exchange (1,372) –

1.375% € European Medium Term Note 2029 London Stock Exchange (447) (439)

1.750% € European Medium Term Note 2030 London Stock Exchange (673) –

5.250% £ European Medium Term Note 2033 London Stock Exchange (982) (986)

5.375% US$ US Medium Term Note 2034 New York Stock Exchange (390) (368)

6.375% US$ US Medium Term Note 2038 New York Stock Exchange (2,143) (2,021)

6.375% £ European Medium Term Note 2039 London Stock Exchange (694) (695)

5.250% £ European Medium Term Note 2042 London Stock Exchange (986) (989)

4.200% US$ US Medium Term Note 2043 New York Stock Exchange (386) (363)

4.250% £ European Medium Term Note 2045 London Stock Exchange (788) (789)

Obligations under ﬁnance leases (44) (43)

Other long-term borrowings (56) (49)

(20,271) (14,264)

Net debt (21,621) (13,178)

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

185

Current assets

Liquid investments are classiﬁed as ﬁnancial assets at amortised cost (previously available-for-sale investments in prior years).

At 31 December 2018, they included US Treasury Notes and other government bonds. The effective interest rate on liquid investments

at 31 December 2018 was approximately 1.0% (2017 – approximately 1.0%). Liquid investment balances at 31 December 2018 earning

interest at ﬂoating rates amount to £84 million (2017 – £78 million). Liquid investment balances at 31 December 2018 earning interest

at ﬁxed rates amount to £nil (2017 – £nil).

The effective interest rate on cash and cash equivalents at 31 December 2018 was approximately 1.9% (2017 – approximately 1.3%).

Cash and cash equivalents at 31 December 2018 earning interest at ﬂoating and ﬁxed rates amount to £4,094 million and £2 million

respectively (2017 – £3,832 million and £1 million) and non-interest bearing holdings amount to £263 million.

GSK’s policy regarding the credit quality of cash and cash equivalents is referred to in Note 42, ‘Financial instruments and related

disclosures’.

Short-term borrowings

GSK has a $10 billion (£7.9 billion) US commercial paper programme, of which $0.8 billion (£0.6 billion) was in issue at 31 December 2018

(2017 – $0.7 billion (£0.5 billion)). GSK has a £1.9 billion ﬁve-year committed facility and $2.5 billion (£2.0 billion) under a 364 day

committed facility. The ﬁve-year committed facility was agreed in September 2015 and extended by one year to 2021 in September 2016.

The 364 day committed facility was agreed in September 2018. Additional bank facilities were agreed in 2018 to support transactions and

two remained active at 31 December 2018. In June 2018, £3.5 billion was drawn to support the acquisition from Novartis of the remaining

stake in the Consumer Healthcare Joint Venture. In addition, a $5.0 billion bank facility was agreed in December 2018 to support the

acquisition of Tesaro and was undrawn at 31 December 2018. Liquid investments, cash and cash equivalents were as shown in the table

on page 184.

The weighted average interest rate on commercial paper borrowings at 31 December 2018 was 2.5% (2017 – 1.5%).

The weighted average interest rate on current bank loans and overdrafts at 31 December 2018 was 12.0% (2017 – 4.7%). At 31 December

2018, short-term loan rates of 60% in Argentina had a disproportionate effect on the weighted average interest rate. Excluding this impact

the weighted average interest rate on current bank loans and overdrafts stands at 4.4%.

The average effective pre-swap interest rate of notes classiﬁed as short term at 31 December 2018 was 0.8% (2017 – 5.9%). The material

decrease in the rate largely reﬂects the maturity of a 5.65% coupon note in May 2018 and the upcoming maturity of a 0.625% coupon note

in December 2019.

Long-term borrowings

At the year-end, GSK had long-term borrowings of £20.3 billion (2017 – £14.3 billion), of which £13.3 billion (2017 – £10.3 billion) falls

due in more than ﬁve years. The average effective pre-swap interest rate of all notes in issue at 31 December 2018 was approximately 4.4%

(2017 – approximately 3.6%).

Long-term borrowings repayable after ﬁve years carry interest at effective rates between 1.1% and 6.4%, with repayment dates ranging from

2024 to 2045.

Pledged assets

The Group held pledged investments in US Treasury Notes with a par value of $50 million (£39 million), (2017 – $105 million (£78 million))

as security against irrevocable letters of credit issued on the Group’s behalf in respect of the Group’s self-insurance activity. Provisions

in respect of self-insurance are included within the provisions for legal and other disputes discussed in Note 29, ‘Other provisions’.

In addition, in 2017, £20 million of assets included in Note 22, ‘Other non-current assets’, which do not form part of Net debt, were pledged

as collateral against future rental payments under operating lease arrangements which were previously entered into by Human Genome

Sciences, Inc. prior to its acquisition by the Group, and terminated in 2018.

Finance lease obligations

2018

£m

2017

£m

Rental payments due within one year 29 25

Rental payments due between one and two years 20 29

Rental payments due between two and three years 13 9

Rental payments due between three and four years 7 3

Rental payments due between four and ﬁve years 4 2

Rental payments due after ﬁve years 11 10

Total future rental payments 84 78

Future ﬁnance charges (16) (12)

Total ﬁnance lease obligations 68 66

31. Net debt continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

186

32. Contingent liabilities

At 31 December 2018, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of business,

amounted to £93 million (2017 – £434 million). At 31 December 2018, £nil (2017 – £2 million) of ﬁnancial assets were pledged as collateral

for contingent liabilities. Provision is made for the outcome of tax, legal and other disputes where it is both probable that the Group will suffer

an outﬂow of funds and it is possible to make a reliable estimate of that outﬂow. At 31 December 2018, other than for those disputes where

provision has been made, it was not possible to make a reliable estimate of the potential outﬂow of funds that might be required to settle

disputes where the possibility of there being an outﬂow was more than remote. Descriptions of the signiﬁcant legal and other disputes to

which the Group is a party are set out in Note 45, ‘Legal proceedings’.

33. Share capital and share premium account

Ordinary Shares of 25p each

premium

Number £m £m

Share capital authorised

At 31 December 2016 10,000,000,000 2,500

At 31 December 2017 10,000,000,000 2,500

At 31 December 2018 10,000,000,000 2,500

Share capital issued and fully paid

At 1 January 2016 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

Issued under employee share schemes 4,237,758 1 55

Ordinary shares acquired by ESOP Trusts – – 10

At 31 December 2017 5,372,553,820 1,343 3,019

Issued under employee share schemes 6,513,804 2 72

At 31 December 2018 5,379,067,624 1,345 3,091

31 December 2018

000

31 December 2017

000

Number of shares issuable under employee share schemes 56,723 38,647

Number of unissued shares not under option 4,564,209 4,588,799

At 31 December 2018, of the issued share capital, 41,530,909 shares were held in the ESOP Trusts, 414,605,950 shares were held

as Treasury shares and 4,922,930,765 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values

of the shares held in the ESOP Trusts are disclosed in Note 43, ‘Employee share schemes’.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

187

34. Movements in equity

Retained losses and other reserves amounted to £76 million at 31 December 2018 (2017 – £4,430 million loss; 2016 – £3,172 million loss)

of which £337 million (2017 – £334 million; 2016 – £329 million) relates to joint ventures and associated undertakings. The cumulative

translation exchange in equity is as follows:

Net translation exchange included in:

Retained

earnings

£m

Fair value

reserve

£m

Non-

controlling

interests

£m

Total

translation

exchange

£m

At 1 January 2016 (761) 10 (109) (860)

Exchange movements on overseas net assets 633 13 603 1,249

At 31 December 2016 (128) 23 494 389

Exchange movements on overseas net assets 462 – (149) 313

Reclassiﬁcation of exchange on liquidation or disposal of overseas subsidiaries 109 – – 109

At 31 December 2017 443 23 345 811

Exchange movements on overseas net assets (458) (22) (1) (481)

At 31 December 2018 (15) 1 344 330

The analysis of other comprehensive income by equity category is as follows:

2018

Retained

earnings

£m

Other

reserves

£m

Non-

controlling

interests

£m

Total

£m

Items that may be subsequently reclassiﬁed to income statement:

Exchange movements on overseas net assets and net investment hedges (458) (22) – (480)

Fair value movements on cash ﬂow hedges – 140 – 140

Reclassiﬁcation of cash ﬂow hedges on income and expense – (175) – (175)

Deferred tax on fair value movements on cash ﬂow hedges – (22) – (22)

Deferred tax reversed on reclassiﬁcation of cash ﬂow hedges – 20 – 20

Items that will not be reclassiﬁed to income statement:

Exchange movements on overseas net assets of non-controlling interests – – (1) (1)

Fair value movements on equity investments – 180 – 180

Deferred tax on fair value movements on equity investments – 10 – 10

Remeasurement gains on deﬁned beneﬁt plans 728 – – 728

Tax on remeasurement gains in deﬁned beneﬁt plans (146) – – (146)

Other comprehensive income/(expense) for the year 124 131 (1) 254

2017

Retained

earnings

£m

Other

reserves

£m

Non-

controlling

interests

£m

Total

£m

Items that may be subsequently reclassiﬁed to income statement:

Exchange movements on overseas net assets and net investment hedges 462 – – 462

Reclassiﬁcation of exchange on liquidation or disposal of overseas subsidiaries 109 – – 109

Fair value movements on available-for-sale investments – (14) – (14)

Reclassiﬁcation of fair value movements on available-for-sale investments – (42) – (42)

Deferred tax on fair value movements on available-for-sale investments – 47 – 47

Deferred tax reversed on reclassiﬁcation of available-for-sale investments – (18) – (18)

Fair value movements on cash ﬂow hedges – (10) – (10)

Items that will not be reclassiﬁed to income statement:

Exchange movements on overseas net assets of non-controlling interests – – (149) (149)

Remeasurement gains on deﬁned beneﬁt plans 549 – – 549

Tax on remeasurement gains in deﬁned beneﬁt plans (221) – – (221)

Other comprehensive income/(expense) for the year 899 (37) (149) 713

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

188

2016

Retained

earnings

£m

Other

reserves

£m

Non-

controlling

interests

£m

Total

£m

Items that may be subsequently reclassiﬁed to income statement:

Exchange movements on overseas net assets and net investment hedges 633 13 – 646

Fair value movements on available-for-sale investments – 251 – 251

Reclassiﬁcation of fair value movements on available-for-sale investments – (245) – (245)

Deferred tax reversed on reclassiﬁcation of available-for-sale investments – 51 – 51

Reclassiﬁcation of cash ﬂow hedges to income statement – 1 – 1

Fair value movements on cash ﬂow hedges – 2 – 2

Deferred tax on fair value movements on cash ﬂow hedges – 2 – 2

Items that will not be reclassiﬁed to income statement:

Exchange movements on overseas net assets of non-controlling interests – – 603 603

Remeasurement losses on deﬁned beneﬁt plans (475) – – (475)

Tax on remeasurement losses in deﬁned beneﬁt plans 126 – – 126

Other comprehensive income for the year 284 75 603 962

The analysis of other reserves is as follows:

ESOP Trust

£m

Fair value

reserve

£m

Cash ﬂow

hedge reserve

£m

Other

reserves

£m

Total

£m

At 1 January 2016 (75) 295 (9) 2,129 2,340

Exchange adjustments (16) – – – (16)

Transferred to income and expense in the year on disposals – (268) – – (268)

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

Exchange adjustments 22 – – – 22

Transferred to income and expense in the year on disposals – (42) – – (42)

Net fair value movement in the year – (9) (8) – (17)

Ordinary shares acquired by ESOP Trusts (656) – – – (656)

Write-down of shares held by ESOP Trusts 520 – – – 520

At 31 December 2017 (400) 329 (11) 2,129 2,047

Implementation of IFRS 9 – (288) – – (288)

At 31 December, as adjusted (400) 41 (11) 2,129 1,759

Exchange adjustments (26) – – – (26)

Transferred to Retained earnings in the year on disposal of equity investments – (94) – – (94)

Net fair value movement in the year – 193 (36) – 157

Write-down of shares held by ESOP Trusts 265 – – – 265

At 31 December 2018 (161) 140 (47) 2,129 2,061

Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2018

(2017 – £1,849 million; 2016 – £1,849 million). Other reserves also include the capital redemption reserve created as a result of the

share buy-back programme amounting to £280 million at 31 December 2018 (2017 – £280 million; 2016 – £280 million).

34. Movements in equity continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

189

35. Related party transactions

At 31 December 2018, GSK owned 32 million shares or 31.7% of Innoviva Inc. which is a biopharmaceutical company listed on NASDAQ.

GSK began recognising Innoviva as an associate on 1 September 2015. The royalties due from GSK to Innoviva in the year were £209 million

(2017 – £173 million). At 31 December 2018, the balance payable by GSK to Innoviva was £64 million (2017 – £53 million).

At 31 December 2018, GSK held a 50% interest in Japan Vaccine Co. Ltd (JVC) through its subsidiary GlaxoSmithKline K.K. This joint

venture with Daiichi Sankyo Co., Ltd is primarily responsible for the development and marketing of certain prophylactic vaccines in Japan.

During 2018, GSK sold £43 million (2017 – £41 million) of its vaccine products into the joint venture. At 31 December 2018, the trading

balance due to GSK from JVC was £15 million (2017 – £11 million) and the balance payable by GSK to JVC was £nil (2017 – £nil).

Loans of £5 million to Medicxi Ventures I LP and £6 million to Index Ventures Life VI (Jersey) LP remained due to GSK at 31 December 2018.

In 2018, GSK increased the equity investment in Kurma Biofund II, FCPR by £3 million, Apollo Therapeutics LLP by £2 million and Longwood

Founders Fund LP by £0.2 million, and reduced a liability with Qura Therapeutics LLC by £3 million. As at 31 December 2018, the

outstanding liability to Qura was £4 million.

The aggregate compensation of the Directors and CET is given in Note 9, ‘Employee costs’.

36. Adjustments reconciling proﬁt after tax to operating cash ﬂows

2018

£m

2017

£m

2016

£m

Proﬁt after tax 4,046 2,169 1,062

Tax on proﬁts 754 1,356 877

Share of after tax proﬁts of associates and joint ventures (31) (13) (5)

Finance expense net of ﬁnance income 717 669 664

Depreciation 954 988 978

Amortisation of intangible assets 902 934 796

Impairment and assets written off 350 1,061 226

Proﬁt on sale of businesses (63) (157) (5)

Proﬁt on sale of intangible assets (201) (46) (178)

Proﬁt on sale of investments in associates (3) (94) –

Proﬁt on sale of equity investments (4) (37) (254)

Gain on Consumer Healthcare Joint Venture put hedging (513) – –

Business acquisition costs 47 – –

Changes in working capital:

Decrease/(increase) in inventories 51 (461) 70

Increase in trade receivables (429) (287) (188)

Increase in trade payables 131 11 96

Decrease in other receivables 18 74 381

Contingent consideration paid (see Note •) (984) (594) (358)

Other non-cash increase in contingent consideration liabilities 1,250 961 2,281

Increase in other payables 2,362 1,741 1,989

Increase/(decrease) in pension and other provisions 102 (255) (621)

Share-based incentive plans 360 333 319

Fair value adjustments (7) – (3)

Other (62) (95) (21)

5,701 6,089 7,044

Cash generated from operations 9,747 8,258 8,106

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

190

37. Reconciliation of net cash ﬂow to movement in net debt

2018

£m

2017

£m

2016

£m

Net debt at beginning of year (13,178) (13,804) (10,727)

Increase/(decrease) in cash and bank overdrafts 479 (905) (1,164)

Decrease in liquid investments – (4) –

Net increase in long-term loans (10,138) (2,233) –

Repayment of short-term Notes 2,067 2,636 865

(Increase in)/repayment of other short-term loans (81) 564 (1,013)

Net repayment of obligations under ﬁnance leases 28 23 18

Exchange adjustments (776) 585 (1,781)

Other non-cash movements (22) (40) (2)

Movement in net debt (8,443) 626 (3,077)

Net debt at end of year (21,621) (13,178) (13,804)

Analysis of changes in net debt

At 1 January

2018

£m

Exchange

£m

Other

£m

Proﬁt

and loss

£m

Reclass-

iﬁcations

£m

Cash ﬂow

£m

At 31 December

2018

£m

Liquid investments 78 5 1 – – – 84

Cash and cash equivalents 3,833 4 – – (485) 522 3,874

Cash and cash equivalents – AHFS – 485 485

Overdrafts (233) 4 – – – (43) (272)

3,600 8 – – – 479 4,087

Debt due within one year:

Commercial paper (529) (36) – – – (65) (630)

European/US Medium Term Notes and bank facilities (2,037) (55) – – (4,824) 2,067 (4,849)

Other (26) (1) (11) – (16) 12 (42)

(2,592) (92) (11) – (4,840) 2,014 (5,521)

Debt due after one year:

European/US Medium Term Notes and bank facilities (14,221) (696) – 4 4,824 (10,138) (20,227)

Other (43) (1) (16) – 16 – (44)

(14,264) (697) (16) 4 4,840 (10,138) (20,271)

Net debt (13,178) (776) (26) 4 – (7,645) (21,621)

Analysis of changes in liabilities from ﬁnancing activities

Debt due within one year (2,592) (92) (11) – (4,840) 2,014 (5,521)

Debt due after one year (14,264) (697) (16) 4 4,840 (10,138) (20,271)

Hedge of borrowings:

Derivative ﬁnancial instruments 2 1 130 (10) – 6 129

Other ﬁnancing items – (19) – – – 19 –

Interest payable (203) (2) 2 (802) – 766 (239)

Total liabilities from ﬁnancing activities (17,057) (809) 105 (808) – (7,333) (25,902)

For further information on signiﬁcant changes in net debt see Note 31, ‘Net debt’.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

191

38. Acquisitions and disposals

Details of the acquisition and disposal of signiﬁcant subsidiaries and associates, joint ventures and other businesses are given below:

2018

Business acquisitions

There were no business acquisitions during 2018.

Business disposals

GSK made a number of small business disposals during the year for a net cash consideration of £2 million.

Cash ﬂows

Business

disposals

£m

Associates

and joint

venture

investments

£m

Associates

and joint

venture

disposals

£m

Cash consideration 2 (10) 3

Net deferred consideration received 24 – –

Cash and cash equivalents divested – – –

Cash inﬂow 26 (10) 3

Transactions signed but not yet completed

In December 2018, GSK agreed to divest Horlicks and other Consumer Healthcare nutrition brands to Unilever plc and to merge

GSK Consumer Healthcare Limited with Hindustan Unilever Limited for a total consideration valued at approximately £3.1 billion. GSK

Consumer Healthcare Limited is a public company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in

India, in which GSK holds a 72.5% stake. Hindustan Unilever Limited is a public company listed on the NSE and BSE. Following the merger,

GSK will own approximately 5.7% of Hindustan Unilever Limited. The transaction is expected to complete by the end of 2019, subject to

the fulﬁlment of certain conditions including the approval of the merger by the shareholders of GSK Consumer Healthcare Limited and

Hindustan Unilever Limited.

The Group has entered into forward foreign exchange contracts which have been designated as a cash ﬂow hedge of part of the foreign

exchange exposure arising on the transaction. In addition, the exposure to share price movements in the forward purchase of shares in

Hindustan Unilever Limited has been recognised as an embedded derivative. The embedded derivative was in an asset position and had

a fair value of £100 million at 31 December 2018.

In December 2018, GSK agreed to acquire 100% of Tesaro, Inc., an oncology-focused biopharmaceutical company, for $5.1 billion

(£4.0 billion) in cash. This transaction completed on 22nd January 2019. The exercise to determine the acquisition fair values of assets

and liabilities is not yet complete. Initial transaction costs were recognised in December 2018.

In December 2018, GSK agreed to form a new Consumer Healthcare Joint Venture by acquiring Pﬁzer’s consumer health business in

an all-share transaction. Pﬁzer will hold 32% of the combined business which will be controlled by GSK. The new Consumer Healthcare

Joint Venture is expected to be formed in the second half of 2019, subject to approvals. Initial transaction costs were recognised in

December 2018.

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

192

2017

Business acquisitions

There were no business acquisitions during 2017.

Business disposals

GSK made a number of small business disposals during the year for a net cash consideration of £342 million, including contingent

consideration receivable of £86 million. The proﬁt on disposal was determined as follows:

Total

£m

Consideration including currency forwards and purchase adjustments 342

Net assets sold:

Goodwill (16)

Intangible assets (21)

Property, plant and equipment (18)

Inventory (11)

Cash and cash equivalents (6)

Other net assets (5)

(77)

Transaction costs (8)

Reclassiﬁcation of exchange from other comprehensive income (100)

Proﬁt on disposal 157

Investment in associates and joint ventures

During the year, GSK made cash investments of £15 million into associates and joint ventures. In addition, GSK sold its holdings in two

associates for £198 million in cash.

Total

£m

Cash consideration 198

Net book value of shares (92)

Reclassiﬁcation of exchange from other comprehensive income (7)

Transaction costs (5)

Proﬁt on disposal 94

Cash ﬂows

Business

disposals

£m

Associates

and joint

venture

investments

£m

Associates

and joint

venture

disposals

£m

Cash consideration 256 (15) 198

Net deferred consideration received 39 – –

Cash and cash equivalents divested (6) – –

Transaction costs paid (7) – (2)

Cash inﬂow 282 (15) 196

38. Acquisitions and disposals continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

193

2016

Business acquisitions

GSK completed two small business acquisitions during 2016.

Cash consideration of £24 million was paid in the year to acquire the HIV R&D preclinical and discovery stage portfolio from Bristol Myers

Squibb. Further consideration, contingent on commercial milestones and future sales performance, may be due, and an initial estimate of

£40 million was recognised for this contingent consideration. Intangible assets acquired were valued at £57 million and goodwill of £7 million

was recognised.

GSK formed Galvani Bioelectronics Limited during the year and acquired intangible assets of £45 million and cash and cash equivalents

of £41 million from Verily Life Sciences LLC in return for a 45% shareholding in Galvani Bioelectronics. The fair value of this shareholding

was £47 million, and GSK also recognised a credit of £39 million in non-controlling interests representing Verily’s share of the net assets

it contributed.

Business disposals

GSK also made a number of small business disposals in the year for net cash consideration of £72 million. In addition, deferred consideration

receivable of £43 million was recognised.

Cash ﬂows

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.

38. Acquisitions and disposals continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

194

39. Contingent consideration liabilities

The consideration for certain acquisitions includes amounts contingent on future events such as development milestones or sales

performance. The Group has provided for the fair value of this contingent consideration as follows:

Shionogi-

ViiV

Healthcare

£m

Novartis

Vaccines

£m

Other

£m

Total

£m

At 1 January 2016 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: investing activities (66) (7) – (73)

Other movements (4) – 1 (3)

At 31 December 2016 5,304 545 47 5,896

Remeasurement through income statement 909 53 (1) 961

Cash payments: operating cash ﬂows (587) (7) – (594)

Cash payments: investing activities (84) (7) – (91)

At 31 December 2017 5,542 584 46 6,172

Remeasurement through income statement 1,188 56 7 1,251

Cash payments: operating cash ﬂows (703) (281) – (984)

Cash payments: investing activities (90) (63) – (153)

At 31 December 2018 5,937 296 53 6,286

Of the contingent consideration payable at 31 December 2018, £837 million (2017 – £1,076 million) is expected to be paid within one year.

The contingent consideration payable in respect of the Novartis Vaccines business included a sales milestone of $450 million which was

settled in January 2018.

The consideration payable for the acquisition of the Shionogi-ViiV Healthcare joint venture and the Novartis Vaccines business is

expected to be paid over a number of years. As a result, the total estimated liabilities are discounted to their present values, shown above.

The Shionogi-ViiV Healthcare contingent consideration liability is discounted at 8.5% and the Novartis Vaccines contingent consideration

liability is discounted partly at 8% and partly at 9%.

The Shionogi-ViiV Healthcare and Novartis Vaccines contingent consideration liabilities are calculated principally based on the forecast sales

performance of speciﬁed products over the lives of those products.

The table below shows on an indicative basis the income statement and balance sheet sensitivity to reasonably possible changes in key

inputs to the valuations of the contingent consideration liabilities.

Increase/(decrease) in ﬁnancial liability and loss/(gain) in Income statement

Shionogi-

ViiV Healthcare

£m

Novartis

Vaccines

£m

10% increase in sales forecasts 569 62

10% decrease in sales forecasts (569) (62)

1% increase in discount rate (238) (22)

1% decrease in discount rate 256 26

5% increase in probability of milestone success 7

5% decrease in probability of milestone success (7)

10 cent appreciation of US Dollar 367 (13)

10 cent depreciation of US Dollar (313) 11

10 cent appreciation of Euro 114 29

10 cent depreciation of Euro (95) (25)

An explanation of the accounting for ViiV Healthcare is set out on page 41.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

195

40. Non-controlling interests

ViiV Healthcare

The ViiV Healthcare subgroup has a material non-controlling interest. Summarised ﬁnancial information in respect of the ViiV Healthcare

group is as follows:

2018

£m

2017

£m

2016

£m

Turnover 4,665 4,269 3,527

Proﬁt/(loss) after taxation 560 825 (1,249)

Other comprehensive income 19 20 36

Total comprehensive income/(expense) 579 845 (1,213)

2018

£m

2017

£m

Non-current assets 2,787 2,736

Current assets 2,643 2,533

Total assets 5,430 5,269

Current liabilities (2,638) (2,409)

Non-current liabilities (8,895) (8,011)

Total liabilities (11,533) (10,420)

Net liabilities (6,103) (5,151)

2018

£m

2017

£m

2016

£m

Net cash inﬂow from operating activities 2,212 2,132 1,750

Net cash outﬂow from investing activities (237) (207) (326)

Net cash outﬂow from ﬁnancing activities (1,982) (1,820) (1,023)

(Decrease)/increase in cash and bank overdrafts in the year (7) 105 401

The above ﬁnancial information relates to the ViiV Healthcare group on a stand-alone basis, before the impact of Group-related adjustments,

primarily related to the recognition of preferential dividends. The proﬁt after taxation of £560 million (2017 – proﬁt after taxation of

£825 million; 2016 – loss after taxation of £1,249 million) is stated after charging preferential dividends payable to GSK, Shionogi and Pﬁzer

and after a charge of £1,194 million (2017 – £909 million; 2016 – £2,186 million) for remeasurement of the contingent consideration payable

for the acquisition of the former Shionogi-ViiV Healthcare joint venture. This consideration is expected to be paid over a number of years.

The following amounts attributable to the ViiV Healthcare group are included in GSK’s Consolidated statement of comprehensive income,

Consolidated statement of changes in equity and Consolidated balance sheet:

2018

£m

2017

£m

2016

£m

Total comprehensive income/(expense) for the year attributable to non-controlling interests 254 187 (83)

Dividends paid to non-controlling interests 332 316 152

Non-controlling interests in the Consolidated balance sheet (543) (476)

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

196

Consumer Healthcare Joint Venture

During 2018, the Group acquired Novartis’ interest in the Consumer Healthcare Joint Venture to obtain 100% ownership. The acquisition

became unconditional on 3 May 2018 and completed on 1 June 2018. Summarised ﬁnancial information in respect of the Consumer

Healthcare Joint Venture is as follows:

Period ended

3 May 2018

£m

2017

£m

2016

£m

Turnover 2,306 7,003 6,530

Proﬁt after taxation 7 1,211 660

Other comprehensive (expense)/income (79) (387) 1,640

Total comprehensive (expense)/income (72) 824 2,300

2017

£m

Non-current assets 12,771

Current assets 3,282

Total assets 16,053

Current liabilities (2,675)

Non-current liabilities (1,537)

Total liabilities (4,212)

Net assets 11,841

Period ended

3 May 2018

£m

2017

£m

2016

£m

Net cash inﬂow from operating activities 65 883 1,496

Net cash inﬂow/(outﬂow) from investing activities 442 270 (537)

Net cash outﬂow from ﬁnancing activities (504) (1,194) (980)

Increase/(decrease) in cash and bank overdrafts in the year 3 (41) (21)

The above ﬁnancial information relates to the Consumer Healthcare Joint Venture on a stand-alone basis, before the impact of Group-related

adjustments but after major restructuring charges.

The following amounts attributable to the Consumer Healthcare Joint Venture are included in GSK’s Consolidated statement of

comprehensive income, Consolidated statement of changes in equity and Consolidated balance sheet:

2018

£m

2017

£m

2016

£m

Total comprehensive income for the year attributable to non-controlling interests 111 296 730

Dividends paid to non-controlling interests 183 420 346

Non-controlling interests in the Consolidated balance sheet – 3,631

40. Non-controlling interests continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

197

41. Commitments

Contractual obligations and commitments

2018

£m

2017

£m

Contracted for but not provided in the ﬁnancial statements:

Intangible assets 4,762 5,254

Property, plant and equipment 665 584

Investments 82 107

Purchase commitments 561 346

Pensions 238 738

Other commitments – 38

Interest on loans 9,418 8,510

Finance lease charges 16 12

15,742 15,589

The commitments related to intangible assets include milestone payments, which are dependent on successful clinical development or

on meeting speciﬁed sales targets, and which represent the maximum that would be paid if all milestones, however unlikely, are achieved.

The amounts are not risk-adjusted or discounted. The decrease in intangible commitments in 2018 is mainly attributable to the reduction

in commitments to third parties such as Nkarta, Inc.

In 2018, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions to eliminate the pension

deﬁcit identiﬁed at the 31 December 2017 actuarial funding valuation. A payment of £75 million is due in both 2019 and 2020 and a payment

of £44 million is due in both 2021 and 2022. The table above includes this commitment, but excludes the normal ongoing annual funding

requirement in the UK of approximately £140 million.

The Group also has other commitments which principally relate to revenue payments to be made under licences and other alliances.

Commitments in respect of future interest payable on loans are disclosed before taking into account the effect of interest rate swaps.

Commitments under non-cancellable operating leases are disclosed below. £161 million (2017 – £117 million) is provided against these

commitments on the Group’s balance sheet.

Commitments under non-cancellable operating leases

2018

£m

2017

£m

Rental payments due within one year 223 186

Rental payments due between one and two years 173 149

Rental payments due between two and three years 143 122

Rental payments due between three and four years 123 107

Rental payments due between four and ﬁve years 105 94

Rental payments due after ﬁve years 371 387

Total commitments under non-cancellable operating leases 1,138 1,045

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

198

The objective of our Treasury activity is to minimise the post-tax

net cost of ﬁnancial operations and reduce its volatility to beneﬁt

earnings and cash ﬂows. GSK uses a variety of ﬁnancial instruments

to ﬁnance its operations and derivative ﬁnancial instruments to

manage market risks from these operations. Derivatives principally

comprise of foreign exchange forward contracts and swaps which

are used to swap borrowings and liquid assets into currencies

required for Group purposes as well as interest rate swaps which

are used to manage exposure to ﬁnancial risks from changes in

interest rates. These ﬁnancial instruments reduce the uncertainty

of foreign currency transactions and interest payments.

Derivatives are used exclusively for hedging purposes in relation

to underlying business activities and not as trading or speculative

instruments.

Capital management

GSK’s ﬁnancial strategy supports the Group’s strategic priorities

and is regularly reviewed by the Board. GSK manages the capital

structure of the Group through an appropriate mix of debt and equity.

The capital structure of the Group consists of net debt of

£21.6 billion (see Note 31, ‘Net debt’) and total equity, including

items related to non-controlling interests, of £3.7 billion (see

‘Consolidated statement of changes in equity’ on page 142).

Total capital, including that provided by non-controlling interests,

is £25.3 billion.

The Group continues to manage its ﬁnancial policies to a credit

proﬁle that particularly targets short-term credit ratings of A-1 and

P-1 while maintaining single A long-term ratings consistent with

those targets. The Group’s long-term credit rating with Standard and

Poor’s is A+ (negative outlook) and with Moody’s Investor Services

(‘Moody’s’) it is A2 (negative outlook). The Group’s short-term credit

ratings are A-1 and P-1 with Standard and Poor’s and Moody’s

respectively.

Liquidity risk management

GSK’s policy is to borrow centrally in order to meet anticipated

funding requirements. The strategy is to diversify liquidity sources

using a range of facilities and to maintain broad access to ﬁnancial

markets.

At 31 December 2018, GSK had £5.8 billion of borrowings

repayable within one year and held £4.5 billion of cash and cash

equivalents and liquid investments of which £2.9 billion was

held centrally. GSK has access to short-term ﬁnance under a

$10.0 billion (£7.9 billion) US commercial paper programme;

$0.8 billion (£0.6 billion) was in issue at 31 December 2018

(2017 – $0.7 billion). GSK has a £1.9 billion ﬁve-year committed

facility and a $2.5 billion (£2.0 billion) 364-day committed facility.

The ﬁve-year committed facility was agreed in September 2015 and

was extended by one year to 2021 in September 2016. The 364-day

committed facility was agreed in September 2018. These facilities

were undrawn at 31 December 2018. GSK considers this level of

committed facilities to be adequate, given current liquidity

requirements.

Additional bank facilities were agreed in 2018 to support

transactions and two remain active at 31 December 2018. In

June 2018, £3.5 billion was drawn to support the acquisition from

Novartis of the remaining stake in the Consumer Healthcare Joint

Venture. This facility, which is due to mature in December 2019

includes one extension option through to June 2020.

In addition a $5.0 billion bank facility was agreed in December 2018

to support the acquisition of Tesaro and was undrawn at 31

December 2018. This 12-month facility includes two six-month

extension options.

GSK has a £20.0 billion European Medium Term Note programme

and at 31 December 2018, £11.4 billion of notes were in issue under

this programme. The Group also had $12.9 billion (£10.2 billion) of

notes in issue at 31 December 2018 under a US shelf registration.

GSK’s borrowings mature at dates between 2019 and 2045.

The put option owned by Pﬁzer in ViiV Healthcare is exercisable.

In reviewing liquidity requirements GSK considers that sufﬁcient

ﬁnancing options are available should the put option be exercised.

Market risk

Interest rate risk management

The objective of GSK’s Treasury activity is to minimise the effective

net interest cost and to balance the mix of debt at ﬁxed and ﬂoating

rates over time.

The Group’s main interest rate risk arises from borrowings and

investments with ﬂoating rates and reﬁnancing of maturing ﬁxed rate

debt where any changes in interest rates will affect future cash ﬂows

or the fair values of ﬁnancial instruments. The policy on interest rate

risk management limits the net amount of ﬂoating rate debt to a

speciﬁc cap, reviewed and agreed no less than annually by the

Board.

The majority of debt is issued at ﬁxed interest rates and changes in

the ﬂoating rates of interest do not signiﬁcantly affect the Group’s

net interest charge. This includes some borrowings for which interest

rate swaps are in place which removes the impact of the associated

periodic repricing. Short-term borrowings including bank facilities

are exposed to the risk of future changes in market interest rate as

are the majority of cash and liquid investments.

Foreign exchange risk management

Foreign currency transaction exposures arising on external trade

ﬂows are not normally hedged. Foreign currency transaction

exposures arising on internal trade ﬂows are selectively hedged. The

Group’s objective is to minimise the exposure of overseas operating

subsidiaries to transaction risk by matching local currency income

with local currency costs where possible. GSK’s internal trading

transactions are matched centrally and inter-company payment

terms are managed to reduce foreign currency risk. Foreign currency

cash ﬂows can be hedged selectively including hedges of the

foreign exchange risk arising from acquisitions and disposals of

assets. Where possible, GSK manages the cash surpluses or

borrowing requirements of subsidiary companies centrally using

forward contracts to hedge future repayments back into the

originating currency.

In order to reduce foreign currency translation exposure, the Group

seeks to denominate borrowings in the currencies of our principal

assets and cash ﬂows. These are primarily denominated in US

Dollars, Euros and Sterling. Borrowings can be swapped into other

currencies as required.

Borrowings denominated in, or swapped into, foreign currencies

that match investments in overseas Group assets may be treated

as a hedge against the relevant assets. Forward contracts in major

currencies are also used to reduce exposure to the Group’s

investment in overseas assets (see ‘Net investment hedges’

section of this note for further details).

42. Financial instruments and related disclosures

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

199

2018

AAA/Aaa

£m

AA/Aa

£m

A/A

£m

BBB/Baa

£m

BB+/Ba1

and below

/unrated

£m

Total

£m

Bank balances and deposits – 662 1,275 381 20 2,338

US Treasury and Treasury repo only money market funds 449 – – – – 449

Liquidity funds 1,572 – – – – 1,572

Government securities – 83 – 1 – 84

3rd party ﬁnancial derivatives – 19 127 4 – 150

Total 2,021 764 1,402 386 20 4,593

2017

AAA/Aaa

£m

AA/Aa

£m

A/A

£m

BBB/Baa

£m

BB+/Ba1

and below

/unrated

£m

Total

£m

Bank balances and deposits – 423 1,167 80 45 1,715

US Treasury and Treasury repo only money market funds 1,715 – – – – 1,715

Liquidity funds 403 – – – – 403

Government securities – 77 – 1 – 78

3rd party ﬁnancial derivatives – 26 42 – – 68

Total 2,118 526 1,209 81 45 3,979

Credit ratings are assigned by Standard and Poor’s and Moody’s respectively. Where the opinions of the two rating agencies differ, GSK

assigns the lower rating of the two to the counterparty. Where local rating agency or Fitch data is the only source available, the ratings are

converted to global ratings equivalent to those of Standard and Poor’s or Moody’s using published conversion tables. These credit ratings

form the basis of the assessment of the expected credit loss on Treasury related balances held at amortised cost being bank balances and

deposits and Government securities.

Credit risk

Credit risk is the risk that a counterparty will default on its

contractual obligations resulting in ﬁnancial loss to the Group

and arises on cash and cash equivalents, favourable derivative

ﬁnancial instruments held with banks and ﬁnancial institutions

as well as credit exposures to wholesale and retail customers,

including outstanding receivables.

The Group considers its maximum credit risk at 31 December

2018 to be £11,080 million (31 December 2017 – £9,988 million)

which is the total of the Group’s ﬁnancial assets with the exception

of ’Other investments’ (comprising equity investments) which bear

equity risk rather than credit risk. See page 201 for details on the

Group’s total ﬁnancial assets. At 31 December 2018, GSK’s

greatest concentration of credit risk was £0.7 billion with Citibank

(A+/A1) (2017 – £0.5 billion with Citibank (A/A1) and £0.5 billion

with one US wholesaler (BBB+/Baa2)).

There has been no change in the estimation techniques or

signiﬁcant assumptions made during the current reporting period in

assessing the loss allowance for ﬁnancial assets at amortised cost

since the adoption of IFRS 9 at the start of the current reporting

period.

Treasury-related credit risk

GSK sets global counterparty limits for each of GSK’s banking

and investment counterparties based on long-term credit ratings

from Moody’s and Standard and Poor’s. Usage of these limits is

monitored daily.

GSK actively manages its exposure to credit risk, reducing surplus

cash balances wherever possible. This is part of GSK’s strategy to

regionalise cash management and to concentrate cash centrally as

much as possible. The table below sets out the credit exposure to

counterparties by rating for liquid investments, cash and cash

equivalents and derivatives.

The gross asset position on each derivative contract is considered

for the purpose of this table, although, under ISDA agreements, the

amount at risk is the net position with each counterparty. Table (e)

on page 208 sets out the Group’s ﬁnancial assets and liabilities on

an offset basis.

At 31 December 2018, £20 million of cash is categorised as held

with unrated or sub-investment grade rated counterparties (lower

than BBB-/Baa3) of which £1 million is cash in transit. The remaining

exposure is concentrated in overseas banks used for local cash

management or investment purposes, including £6 million in Nigeria

held with United Bank for Africa, Zenith Bank, Stanbic IBTC Bank and

First Bank of Nigeria, £3 million with BTV in Austria, £2 million with

Nacion Argentina bank, and £2 million with Banco de la Republica in

Uruguay. Of the £381 million of bank balances and deposits held

with BBB/Baa rated counterparties, £22 million was held with BBB-/

Baa3 rated counterparties, including balances or deposits of £20

million with HDFC Bank in India and £1 million with State Bank of

India. These banks are used for local investment purposes.

GSK measures expected credit losses over cash and cash

equivalents as a function of individual counterparty credit ratings

and associated 12 month default rates. Expected credit losses over

cash and cash equivalents and third-party ﬁnancial derivatives are

deemed to be immaterial and no such loss has been experienced

during 2018.

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

200

GSK’s centrally managed cash reserves amounted to £2.9 billion

at 31 December 2018, all available within three months. This

includes £1.7 billion of cash managed by the Group for ViiV

Healthcare, a 78.3% owned subsidiary. The Group has invested

centrally managed liquid assets in bank deposits, Aaa/AAA rated

US Treasury and Treasury repo only money market funds and Aaa/

AAA rated liquidity funds.

Wholesale and retail credit risk

Outside the US, no customer accounts for more than 5% of the

Group’s trade receivables balance.

In the US, in line with other pharmaceutical companies, the Group

sells its products through a small number of wholesalers in addition

to hospitals, pharmacies, physicians and other groups. Sales to the

three largest wholesalers amounted to approximately 82% of the

sales of the US Pharmaceuticals and Vaccines businesses in 2018.

At 31 December 2018, the Group had trade receivables due from

these three wholesalers totalling £2,134 million (2017 – £1,265

million). The Group is exposed to a concentration of credit risk in

respect of these wholesalers such that, if one or more of them

encounters ﬁnancial difﬁculty, it could materially and adversely

affect the Group’s ﬁnancial results.

The Group’s credit risk monitoring activities relating to these

wholesalers include a review of their quarterly ﬁnancial information

and Standard & Poor’s credit ratings, development of GSK internal

risk ratings, and establishment and periodic review of credit limits.

All new customers are subject to a credit vetting process and

existing customers will be subject to a review at least annually.

The vetting process and subsequent reviews involves obtaining

information including the customer’s status as a government or

private sector entity, audited ﬁnancial statements, credit bureau

reports, debt rating agency (e.g. Moody’s, Standard & Poor’s)

reports, payment performance history (from trade references,

industry credit groups) and bank references.

Trade receivables consist of a large number of customers, spread

across diverse industries and geographical areas. Ongoing credit

evaluation is performed on the ﬁnancial condition of accounts

receivable and, where appropriate, credit insurance is purchased

or factoring arrangements put in place.

The amount of information obtained is proportional to the level of

exposure being considered. The information is evaluated quantitatively

(i.e., credit score) and qualitatively (i.e. judgement) in conjunction with

the customer’s credit requirements to determine a credit limit.

Trade receivables are grouped into customer segments that have

similar loss patterns to assess credit risk while other receivables

other ﬁnancial assets are assessed individually. Historical and

forward-looking information is considered to determine the

appropriate expected credit loss allowance. The Group believes

there is no further credit risk provision required in excess of the

allowance for expected credit losses (see Note 24, ‘Trade and

other receivables’).

Credit enhancements

The Group uses credit enhancements including factoring and

credit insurance to minimise credit risk of the trade receivables in

the Group. During 2018, a new Global Insurance Programme was

launched in order to consolidate all locally negotiated programmes

and to expand the use of credit insurance to new markets. At

31 December 2018, £240 million of GSK trade receivables were

insured protecting GSK’s account receivables balance from loss

due to credit risks such as default, insolvency and bankruptcy.

Each Group entity assesses the credit risk of its private customers

to determine if credit insurance is required.

Factoring arrangements are managed locally by entities and are

used to mitigate risk arising from large credit risk concentrations.

All factoring arrangements are non-recourse.

Fair value of ﬁnancial assets and liabilities

The table on pages 201 and 202 presents the carrying amounts

and the fair values of the Group’s ﬁnancial assets and liabilities at

31 December 2018 and 31 December 2017.

The fair values of the ﬁnancial assets and liabilities are included at

the price that would be received to sell an asset or paid to transfer

a liability in an orderly transaction between market participants at

the measurement date.

The following methods and assumptions were used to estimate

the fair values:

– Cash and cash equivalents – approximates to the carrying amount

– Liquid investments – approximates to the carrying amount

– Other investments – equity investments traded in an active market

determined by reference to the relevant stock exchange quoted

bid price; other equity investments determined by reference to the

current market value of similar instruments or by reference to the

discounted cash ﬂows of the underlying net assets

– Short-term loans, overdrafts and commercial paper –

approximates to the carrying amount because of the short maturity

of these instruments

– Long-term loans – based on quoted market prices (a level 1 fair

value measurement) in the case of European and US Medium

Term Notes; approximates to the carrying amount in the case

of other ﬁxed rate borrowings and ﬂoating rate bank loans

– Contingent consideration for business acquisitions – based on

present values of expected future cash ﬂows

– Interest rate swaps, foreign exchange forward contracts, swaps

and options – based on the present value of contractual cash

ﬂows or option valuation models using market sourced data

(exchange rates or interest rates) at the balance sheet date

– Receivables and payables, including put options – approximates

to the carrying amount

– Company-owned life insurance policies – based on cash

surrender value, and

– Lease obligations – approximates to the carrying amount.

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

201

2018

Notes

Carrying

value

£m

Fair

value

£m

Financial assets measured at fair value through other comprehensive

income (FVTOCI):

Other investments designated at FVTOCI a 1,250 1,250

Trade and other receivables a,b 1,687 1,687

Financial assets measured at amortised cost:

Other non-current assets b 49 49

Trade and other receivables b 3,761 3,761

Liquid investments 84 84

Cash and cash equivalents 2,338 2,338

Other items in Assets held for sale b 47 47

Financial assets mandatorily measured at fair value through proﬁt or loss (FVTPL):

Other investments a 72 72

Other non-current assets a,b 716 716

Trade and other receiveables a,b 120 120

Derivatives designated and effective as hedging instruments a,d,e 69 69

Held for trading derivatives that are not in a designated and

effective hedging relationship a,d,e 188 188

Cash and cash equivalents a 2,021 2,021

Total ﬁnancial assets 12,402 12,402

Financial liabilities measured at amortised cost:

Borrowings excluding obligations under ﬁnance leases:

– bonds in a designated hedging relationship d (8,213) (8,279)

– other bonds (13,307) (15,475)

– bank loans and overdrafts (290) (290)

– commercial paper (630) (630)

– other borrowings (3,556) (3,556)

Total borrowings excluding obligations under ﬁnance leases f (25,996) (28,230)

Obligations under ﬁnance leases (68) (68)

Total borrowings (26,064) (28,298)

Trade and other payables c (13,338) (13,338)

Other provisions c (58) (58)

Other non-current liabilities c (149) (149)

Other items in Assets held for sale c (167) (167)

Financial liabilities mandatorily at fair value through proﬁt or loss (FVTPL):

Contingent consideration liabilities a,c (6,286) (6,286)

Derivatives designated and effective as hedging instruments a,d,e (105) (105)

Held for trading derivatives that are not in a designated and

effective hedging relationship a,d,e (23) (23)

Total ﬁnancial liabilities (46,190) (48,424)

Net ﬁnancial assets and ﬁnancial liabilities (33,788) (36,022)

The valuation methodology used to measure fair value in the above table and the table on page 202 is described and categorised on

page 200.

Trade and other receivables, Other non-current assets, Trade and other payables, Other provisions, Other non-current liabilities,

Contingent consideration liabilities and Other items in Assets held for sale are reconciled to the relevant Notes on pages 204 and 205.

Cash and cash equivalents in the table above include £485 million reported in Assets held for sale (see Note 26, ‘Assets held for sale’).

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

202

2017

Notes

Carrying

value

£m

Fair

value

£m

Available-for-sale investments:

Liquid investments (Government bonds) a 78 78

Other investments a 918 918

Loans and receivables:

Cash and cash equivalents 3,833 3,833

Trade and other receivables and Other non-current

assets in scope of IAS 39 b 5,495 5,495

Financial assets at fair value through proﬁt or loss:

Trade and other receivables and Other non-current

assets in scope of IAS 39 a,b 506 506

Derivatives designated as at fair value through proﬁt or loss a,d,e 5 5

Derivatives classiﬁed as held for trading under IAS 39 a,d,e 71 71

Total ﬁnancial assets 10,906 10,906

Financial liabilities measured at amortised cost:

Borrowings excluding obligations under ﬁnance leases:

– bonds in a designated hedging relationship d (4,315) (4,405)

– other bonds (11,894) (14,743)

– bank loans and overdrafts (236) (236)

– commercial paper (529) (529)

– other borrowings (49) (49)

Total borrowings excluding obligations under ﬁnance leases f (17,023) (19,962)

Obligations under ﬁnance leases (66) (66)

Total borrowings (17,089) (20,028)

Trade and other payables, Other provisions and certain

Other non-current liabilities in scope of IAS 39 c (20,325) (20,325)

Financial liabilities at fair value through proﬁt or loss:

Contingent consideration liabilities a,c (6,172) (6,172)

Derivatives designated as at fair value through proﬁt or loss a,d,e (26) (26)

Derivatives classiﬁed as held for trading under IAS 39 a,d,e (48) (48)

Total ﬁnancial liabilities (43,660) (46,599)

Net ﬁnancial assets and ﬁnancial liabilities (32,754) (35,693)

Fair value of investments in GSK shares

At 31 December 2018, the Employee Share Ownership Plan (ESOP) Trusts held GSK shares with a carrying value of £161 million

(2017 – £400 million) and a market value of £619 million (2017 – £882 million) based on quoted market price. The shares are held by the

ESOP Trusts to satisfy future exercises of options and awards under employee incentive schemes. In 2018, the carrying value, which is the

lower of cost or expected proceeds, of these shares has been recognised as a deduction from other reserves. At 31 December 2018,

GSK held Treasury shares at a cost of £5,800 million (2017 – £5,800 million) which has been deducted from retained earnings.

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

203

(a) Financial instruments held at fair value

The following tables categorise the Group’s ﬁnancial assets and liabilities held at fair value by the valuation methodology applied in

determining their fair value. Where possible, quoted prices in active markets are used (Level 1). Where such prices are not available, the asset

or liability is classiﬁed as Level 2, provided all signiﬁcant inputs to the valuation model used are based on observable market data. If one or

more of the signiﬁcant inputs to the valuation model is not based on observable market data, the instrument is classiﬁed as Level 3. Other

investments classiﬁed as Level 3 in the tables below comprise equity investments in unlisted entities with which the Group has entered into

research collaborations and also investments in emerging life science companies.

At 31 December 2018

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Financial assets at fair value

Financial assets at fair value through other comprehensive income (FVTOCI):

Other investments designated at FVTOCI 656 – 594 1,250

Trade and other receivables – 1,687 – 1,687

Financial assets mandatorily measured at fair value through proﬁt or loss (FVTPL):

Other investments – – 72 72

Other non-current assets – 675 41 716

Trade and other receivables – 79 41 120

Derivatives designated and effective as hedging instruments – 69 – 69

Held for trading derivatives that are not in a designated and effective hedging relationship – 182 6 188

Cash and cash equivalents 2,021 – – 2,021

2,677 2,692 754 6,123

Financial liabilities at fair value

Financial liabilities mandatorily at fair value through proﬁt or loss (FVTPL):

Contingent consideration liabilities – – (6,286) (6,286)

Derivatives designated and effective as hedging instruments – (105) – (105)

Held for trading derivatives that are not in a designated and effective hedging relationship – (23) – (23)

– (128) (6,286) (6,414)

At 31 December 2017

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Financial assets at fair value

Available-for-sale ﬁnancial assets:

Liquid investments 77 1 – 78

Other investments 535 – 383 918

Other non-current assets – – 38 38

Financial assets at fair value through proﬁt or loss:

Other non-current assets – 382 44 426

Trade and other receivables – – 42 42

Derivatives designated as at fair value through proﬁt or loss – 5 – 5

Derivatives classiﬁed as held for trading under IAS 39 – 62 9 71

612 450 516 1,578

Financial liabilities at fair value

Financial liabilities at fair value through proﬁt or loss:

Contingent consideration liabilities – – (6,172) (6,172)

Derivatives designated as at fair value through proﬁt or loss – (26) – (26)

Derivatives classiﬁed as held for trading under IAS 39 – (47) (1) (48)

– (73) (6,173) (6,246)

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

204

Movements in the year for ﬁnancial instruments measured using Level 3 valuation methods are presented below:

2018

£m

2017

£m

At 1 January (5,657) (5,486)

Net losses recognised in the income statement (1,233) (970)

Net gains recognised in other comprehensive income 123 22

Contingent consideration for businesses divested/acquired during the year – 80

Payment of contingent consideration liabilities 1,095 685

Additions 381 117

Disposals and settlements (27) (52)

Transfers from Level 3 (241) (24)

Exchange adjustments 27 (29)

At 31 December (5,532) (5,657)

The net losses of £1,233 million (2017 – £970 million) attributable to Level 3 ﬁnancial instruments which were recognised in the income

statement were all attributable to ﬁnancial instruments which were held at the end of the year. Losses of £1,233 million were reported in

Other operating income (2017 – £971 million losses in Other operating income and £1 million income in Finance income). £1,188 million

(2017 – £909 million) arose from remeasurement of the contingent consideration payable for the acquisition of the former Shionogi-ViiV

Healthcare joint venture and £56 million (2017 – £53 million) arose from remeasurement of the contingent consideration payable for the

acquisition of the Novartis Vaccines business. Net gains of £123 million (2017 – £22 million) attributable to Level 3 ﬁnancial instruments

reported in Other comprehensive income as Fair value movements on equity investments included net gains of £117 million (2017 – net

losses of £6 million) in respect of ﬁnancial instruments held at the end of the year, of which net gains of £98 million (2017 – net losses of

£6 million) arose prior to transfer from Level 3 on equity investments which transferred to a Level 1 valuation methodology as a result

of listing on a recognised stock exchange during the year.

Financial liabilities measured using Level 3 valuation methods at 31 December included £5,937 million (2017 – £5,542 million) in respect

of contingent consideration payable for the acquisition in 2012 of the former Shionogi-ViiV Healthcare joint venture. This consideration is

expected to be paid over a number of years and will vary in line with the future performance of speciﬁed products and movements in certain

foreign currencies. They also included £296 million (2017 – £584 million) in respect of contingent consideration for the acquisition in 2015

of the Novartis Vaccines business. This consideration is expected to be paid over a number of years and will vary in line with the future

performance of speciﬁed products, the achievement of certain milestone targets and movements in certain foreign currencies. Sensitivity

analysis on these balances is provided in Note 39, ‘Contingent consideration liabilities’.

(b) Trade and other receivables, Other non-current assets and other items in Assets held for sale in scope of

IFRS 9 (2017 – IAS 39)

The following table reconciles ﬁnancial instruments within Trade and other receivables, Other non-current assets and other items in Assets

held for sale which fall within the scope of IFRS 9 (2017 - IAS 39) to the relevant balance sheet amounts. The ﬁnancial assets are

predominantly non-interest earning. Financial instruments within the Other non-current assets balance include company-owned life insurance

policies. Non-ﬁnancial instruments include tax receivables, pension surplus balances and prepayments, which are outside the scope of

IFRS 9 (2017 – IAS 39).

2018 2017

At FVTPL

£m

At FVTOCI

£m

Amortised

cost

£m

Financial

instruments

£m

Non-

ﬁnancial

instruments

£m

Total

£m

At FVTPL

£m

Loans and

receivables

£m

Financial

instruments

£m

Non-

ﬁnancial

instruments

£m

Total

£m

Trade and other receivables

(Note 24)

120

1,687

3,761

5,568

855

6,423

5,148

5,190

810

6,000

Other non-current assets

(Note 22)

716

–

765

811

1,576

464

347

811

602

1,413

Other items in Assets held

for sale (Note 26) – – 47 47 37 84 – – – – –

836 1,687 3,857 6,380 1,703 8,083 506 5,495 6,001 1,412 7,413

The Group applied IFRS 9 ‘Financial Instruments’ with effect from 1 January 2018 and therefore now accounts for expected credit losses on

initial recognition of ﬁnancial assets. The following table shows the ageing of ﬁnancial assets which were past due at 31 December 2017 and

for which no provision for bad or doubtful debts had been made at that date under IAS 39:

2017

£m

Past due by 1–30 days 142

Past due by 31–90 days 70

Past due by 91–180 days 64

Past due by 181–365 days 27

Past due by more than 365 days 108

411

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

205

and other items in Assets held for sale in scope of IFRS 9 (2017 - IAS 39)

The following table reconciles ﬁnancial instruments within Trade and other payables, Other provisions, Other non-current liabilities,

Contingent consideration liabilities and other items in Assets held for sale which fall within the scope of IFRS 9/IAS 39 to the relevant

balance sheet amounts. The ﬁnancial liabilities are predominantly non-interest bearing. Accrued wages and salaries are included within

ﬁnancial liabilities. Non-ﬁnancial instruments includes payments on account, tax and social security payables and provisions which do not

arise from contractual obligations to deliver cash or another ﬁnancial asset, which are outside the scope of IFRS 9/IAS 39.

2018 2017

At FVTPL

£m

Amortised

cost

£m

Financial

instruments

£m

Non-

ﬁnancial

instruments

£m

Total

£m

At FVTPL

£m

Amortised

cost

£m

Financial

instruments

£m

Non-

ﬁnancial

instruments

£m

Total

£m

Trade and other payables

(Note 27)

–

(13,338)

(699)

(14,037)

–

(20,129)

(841)

(20,970)

Other provisions

(Note 29)

–

(58)

(1,365)

(1,423)

–

(117)

(1,148)

(1,265)

Other non-current liabilities

(Note 30)

–

(149)

(789)

(938)

–

(79)

(902)

(981)

Contingent consideration

liabilities (Note 39) (6,286) – (6,286) – (6,286) (6,172) – (6,172) – (6,172)

Other items in Assets held

for sale (Note 26) – (167) (167) (53) (220) – – – – –

(6,286) (13,712) (19,998) (2,906) (22,904) (6,172) (20,325) (26,497) (2,891) (29,388)

(d) Derivative ﬁnancial instruments and hedging programmes

Derivatives are only used for economic hedging purposes and not as speculative investments and are classiﬁed as ‘held for trading’, other

than designated and effective hedging instruments, and are presented as current assets or liabilities if they are expected to be settled within

12 months after the end of the reporting period, otherwise they are classiﬁed as non-current. The Group has the following derivative ﬁnancial

instruments:

2018

Fair value

2017

Fair value

Assets

£m

Liabilities

£m

Assets

£m

Liabilities

£m

Non-current

Cash ﬂow hedges – Interest rate swap contracts

(principal amount – £1,266 million (2017 – £nil)) – (1) – –

Net investment hedges – Cross currency swaps

(principal amount – £1,575 million (2017 – £nil)) 64 – – –

Current

Cash ﬂow hedges – Foreign exchange contracts

(principal amount – £1,809 million (2017 – £38 million)) 1 (56) – (1)

Net investment hedges – Foreign exchange contracts

(principal amount – £7,316 million (2017 – £6,333 million)) 4 (48) 5 (25)

Derivatives designated and effective as hedging instruments 69 (105) 5 (26)

Non-current

Embedded and other derivatives 4 – 8 –

Current

Foreign exchange contracts

(principal amount – £18,537 million (2017 – £14,449 million)) 82 (23) 62 (47)

Embedded and other derivatives 102 – 1 (1)

Derivatives classiﬁed as held for trading 188 (23) 71 (48)

Total derivative instruments 257 (128) 76 (74)

Fair value hedges

At 31 December 2018, the Group had no designated fair value hedges.

Net investment hedges

During the year, certain foreign exchange contracts were designated as net investment hedges in respect of the foreign currency translation

risk arising on consolidation of the Group’s net investment in its European (Euro) foreign operations as shown in the table above.

The carrying value of bonds on page 201 includes £8,213 million (2017 – £4,315 million) that are designated as hedging instruments in net

investment hedges.

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

206

Cash ﬂow hedges

During 2018, the Group entered into forward foreign exchange contracts which have been designated as cash ﬂow hedges. These were

entered into to hedge the foreign exchange exposure arising on cash ﬂows from Euro denominated coupon payments relating to notes issued

under the Group’s European Medium Term Note programme, on the buyout of Novartis’ non-controlling interest in the Consumer Healthcare

Joint Venture in 2018 and on the planned divestment of Horlicks and other nutrition brands in 2019.

The Group manages its cash ﬂow interest rate risk by using ﬂoating-to-ﬁxed interest rate swaps. In addition, the Group carries a balance

in reserves that arose from pre-hedging ﬂuctuations in long-term interest rates when pricing bonds issued in prior years. The balance is

reclassiﬁed to ﬁnance costs over the life of these bonds.

Foreign exchange forward contracts and swaps

In the current year, the Group has designated certain foreign exchange forward contracts and swaps as cash ﬂow and net investment

hedges. The following tables detail the foreign exchange forward contracts and swaps outstanding at the end of the reporting period,

as well as information on the related hedged items. Foreign exchange derivative ﬁnancial assets and liabilities are presented in the line

‘Derivative ﬁnancial instruments’ (either as assets or liabilities) on the Consolidated balance sheet. The notional value of foreign exchange

forward contracts and swaps is the absolute total of outstanding positions at the balance sheet date.

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments

to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group enters into hedge relationships

where the critical terms of the hedging instrument match exactly with the terms of the hedged item, and so a qualitative assessment of

effectiveness is performed. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match

exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness.

The main source of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group’s own credit risk

on the fair value of the foreign exchange forward contracts and swaps, which is not reﬂected in the fair value of the hedged item attributable

to changes in foreign exchange rates. No other sources of ineffectiveness emerged from these hedging relationships. Consequently, there

was no ineffectiveness to be recorded from cash ﬂow hedges and net investments in foreign entity hedges.

2018

Hedging instruments

Average

exchange rate

Foreign

currency

Notional

value

£m

Fair

value

£m

Cash ﬂow hedges

Foreign exchange contracts

Buy foreign currency:

Less than 3 months – – – –

3 to 6 months 1.13 Euro 26 1

Over 6 months – – – –

Sell foreign currency:

Less than 3 months – – – –

3 to 6 months – – – –

Over 6 months 96.40 Indian Rupee 1,783 (56)

1,809 (55)

Net investment hedges

Foreign exchange contracts

Sell foreign currency:

Less than 3 months 1.11 Euro 6,933 (40)

3 to 6 months – – – –

Over 6 months 1.11 Euro 383 (4)

7,316 (44)

2018

Hedged items

Change in value for calculating

hedge ineffectiveness

£m

Balance in cash ﬂow hedge

reserve/foreign currency

translation reserve for

continuing hedges

£m

Cash ﬂow hedges

Variability in cash ﬂows from a highly probable forecast transaction 56 (49)

Variability in cash ﬂows from foreign exchange exposure arising on

Euro denominated coupon payments relating to debt issued

(1)

Net investment hedges

Investment in European foreign operations 50 286

There are no balances in the cash ﬂow hedge reserve arising from hedging relationships for which hedge accounting is no longer applied.

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

207

42. Financial instruments and related disclosures continued

The following table details the effectiveness of the hedging relationships and the amounts reclassiﬁed from the hedging reserve to

proﬁt or loss:

2018

Amount reclassiﬁed to proﬁt or loss

Hedging

gains/(losses)

recognised in

reserves

£m

Amount

of hedge

ineffectiveness

recognised in

proﬁt or loss

£m

Line item

in proﬁt or

loss in

which hedge

ineffectiveness

is included

Hedged

future cash

ﬂows

no longer

expected to

occur

£m

As hedged

item affects

proﬁt or loss

£m

Line item

in which

reclassiﬁcation

adjustment

is included

Cash ﬂow hedges

Variability in cash ﬂows from a highly probable forecast transaction 127 – Other

operating

income/

(expense)

– (176) Other

operating

income/

(expense)

Variability in cash ﬂows from foreign exchange exposure arising on

Euro denominated coupon payments relating to debt issued

1 – Finance

income/

(expense)

– – Finance

income/

(expense)

Net investment hedges

Net investment in European foreign operations 286 7 Finance

income/

(expense)

– – Finance

income/

(expense)

Interest rate swap contracts

The Group manages its cash ﬂow interest rate risk by using ﬂoating-to-ﬁxed interest rate swaps, where at quarterly intervals the difference

between ﬁxed contract rates and ﬂoating rate interest amounts calculated by reference to the agreed notional principal amounts are exchanged.

The interest rate swap contracts, exchanging ﬂoating rate interest for ﬁxed interest, have been designated as cash ﬂow hedges to hedge the

variability of the interest cash ﬂows associated with ﬂoating rate debt relating to notes issued under the Group’s European Medium Term Note

programme. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount accumulated in equity is

reclassiﬁed to proﬁt or loss over the period that the ﬂoating rate interest payments affect proﬁt or loss.

The critical terms of the interest rate swap contracts and their corresponding hedged items are the same. A qualitative assessment of

effectiveness is performed and it is expected that the value of the interest rate swap contracts and the value of the corresponding hedged

items will systematically change in opposite directions in response to movements in the underlying interest rates. The main sources of

ineffectiveness in these hedge relationships are the effects of currency basis risk and the counterparty’s and the Group’s own credit risk on

the fair value of the interest rate swap contracts, which are not reﬂected in the fair value of the hedged item attributable to the change in

interest rates. No other sources of ineffectiveness emerged from these hedging relationships.

The following tables provide information regarding interest rate swap contracts outstanding and the related hedged items at 31 December

2018. Interest rate swap contract assets and liabilities are presented in the line ‘Derivative ﬁnancial instruments’ (either as assets or liabilities)

on the Consolidated balance sheet.

2018

Hedging instruments

Average

contracted ﬁxed

rate

Notional

principal

value

£m

Change in

fair value for

recognising

hedge

ineffectiveness

£m

Fair value

assets/

(liabilities)

£m

Less than 1 year – – – –

1 to 2 years 0.11 676 – (1)

2 to 5 years 0.16 591 – 23

Over 5 years – – – –

2018

Hedged items

Change in value

used for

calculating

hedge

ineffectiveness

£m

Balance in cash

ﬂow hedge

reserve for

continuing

hedges

£m

Variable rate borrowings 3 (3)

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

208

The following table details the effectiveness of the hedging relationships and the amounts reclassiﬁed from the hedging reserve to proﬁt or loss:

2018

Amount reclassiﬁed to proﬁt or loss

Hedging

gains/(losses)

recognised in

reserves

£m

Amount

of hedge

ineffectiveness

recognised in

proﬁt or loss

£m

Line item

in proﬁt or

loss in

which hedge

ineffectiveness

is included

Hedged

future cash

ﬂows

no longer

expected to

occur

£m

As hedged

item affects

proﬁt or loss

£m

Line item

in which

reclassiﬁcation

adjustment is

included

Cash ﬂow hedges

Variability in cash ﬂows (3) – Finance

income/

(expense)

– (2) Finance

income/

(expense)

Pre-hedging of long-term interest rates 15 – Finance

income/

(expense)

– 3 Finance

income/

(expense)

(e) Offsetting of ﬁnancial assets and liabilities

Financial assets and liabilities are offset and the net amount reported in the balance sheet where there is a legally enforceable right to offset

the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. There are

also arrangements that do not meet the criteria for offsetting but still allow for the related amounts to be offset in certain circumstances, such

as bankruptcy or the termination of a contract.

The following tables set out the ﬁnancial assets and liabilities that are offset, or subject to enforceable master netting arrangements and other

similar agreements but not offset, as at 31 December 2018 and 31 December 2017. The column ‘Net amount’ shows the impact on the

Group’s balance sheet if all offset rights were exercised.

At 31 December 2018

Gross

ﬁnancial

assets/

(liabilities)

£m

Financial

(liabilities)/

assets

offset

£m

Net ﬁnancial

assets/

(liabilities)

£m

amounts not

offset

£m

Net

amount

£m

Financial assets

Trade and other receivables 5,568 – 5,568 (37) 5,531

Derivative ﬁnancial instruments 257 – 257 (62) 195

Financial liabilities

Trade and other payables (13,338) – (13,338) 37 (13,301)

Derivative ﬁnancial instruments (128) – (128) 62 (66)

At 31 December 2017

Gross

ﬁnancial

assets/

(liabilities)

£m

Financial

(liabilities)/

assets

offset

£m

Net ﬁnancial

assets/

(liabilities)

£m

amounts not

offset

£m

Net

balance

£m

Financial assets

Trade and other receivables 5,191 (1) 5,190 (31) 5,159

Derivative ﬁnancial instruments 76 – 76 (64) 12

Financial liabilities

Trade and other payables (20,130) 1 (20,129) 31 (20,098)

Derivative ﬁnancial instruments (74) – (74) 64 (10)

Amounts which do not meet the criteria for offsetting on the balance sheet but could be settled net in certain circumstances principally relate

to derivative transactions under ISDA (International Swaps and Derivatives Association) agreements where each party has the option to settle

amounts on a net basis in the event of default of the other party. As there is presently not a legally enforceable right of offset, these amounts

have not been offset in the balance sheet, but have been presented separately in the table above.

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

209

(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.

2018 2017

Total

debt

£m

Total

£m

Floating and ﬁxed rate debt less than one year (5,769) (2,802)

Between one and two years (1,757) (1,340)

Between two and three years (1,570) (1,076)

Between three and four years (1,568) (16)

Between four and ﬁve years (2,010) (1,475)

Between ﬁve and ten years (5,833) (3,664)

Greater than ten years (7,489) (6,650)

Total (25,996) (17,023)

Original issuance proﬁle:

Fixed rate interest (20,322) (16,209)

Floating rate interest (5,635) (765)

Total interest bearing (25,957) (16,974)

Non-interest bearing (39) (49)

(25,996) (17,023)

(g) Sensitivity analysis

The tables below illustrate the estimated impact on the income statement and equity as a result of hypothetical market movements in foreign

exchange and interest rates in relation to the Group’s ﬁnancial instruments. The range of variables chosen for the sensitivity analysis reﬂects

management’s view of changes which are reasonably possible over a one-year period.

Foreign exchange sensitivity

The Group operates internationally and is primarily exposed to foreign exchange risk in relation to Sterling against movements in US Dollar,

Euro and Japanese Yen. Foreign exchange risk arises from the translation of ﬁnancial assets and liabilities which are not in the functional

currency of the entity that holds them. Based on the Group’s net ﬁnancial assets and liabilities as at 31 December, a weakening and

strengthening of Sterling against these currencies, with all other variables held constant, is illustrated in the tables below. The tables exclude

ﬁnancial instruments that expose the Group to foreign exchange risk where this risk is fully hedged with another ﬁnancial instrument.

2018 2017

Income statement impact of non-functional currency foreign exchange exposures

Increase/(decrease) in

income

£m

Increase/(decrease) in

income

£m

10 cent appreciation of the US Dollar 36 76

10 cent appreciation of the Euro (7) (5)

10 yen appreciation of the Yen 15 9

2018 2017

Income statement impact of non-functional currency foreign exchange exposures

Increase/(decrease) in

income

£m

Increase/(decrease) in

income

£m

10 cent depreciation of the US Dollar (30) (66)

10 cent depreciation of the Euro 6 4

10 yen depreciation of the Yen (13) (8)

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

210

The equity impact, shown below, for foreign exchange sensitivity relates to derivative and non-derivative ﬁnancial instruments hedging

the Group’s net investments in its European (Euro) foreign operations and cash ﬂow hedges of its foreign exchange exposure arising on

Euro denominated coupon payments relating to notes issued under the Group’s European Medium Term Note programme.

2018 2017

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

– 1

10 cent appreciation of the Euro (1,307) (1,028)

2018 2017

Equity impact of non-functional currency foreign exchange exposures

Increase/(decrease)

in equity

£m

Increase/(decrease)

in equity

£m

10 cent depreciation of the US Dollar

– (1)

10 cent depreciation of the Euro 1,091 861

The tables below present the Group’s sensitivity to a weakening and strengthening of Sterling against the relevant currency based on the

composition of net debt as shown in Note 31 adjusted for the effects of foreign exchange derivatives that are not part of net debt but affect

future foreign currency cash ﬂows.

2018 2017

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 (714) (637)

10 cent appreciation of the Euro (60) 197

10 yen appreciation of the Yen 15 (4)

2018 2017

Impact of foreign exchange movements on net debt

(Increase)/decrease

in net debt

£m

(Increase)/decrease

in net debt

£m

10 cent depreciation of the US Dollar 610 549

10 cent depreciation of the Euro 50 (165)

10 yen depreciation of the Yen (13) 4

Interest rate sensitivity

The Group is exposed to interest rate risk on its outstanding borrowings and investments where any changes in interest rates will affect future

cash ﬂows or the fair values of ﬁnancial instruments.

The majority of debt is issued at ﬁxed interest rates and changes in the ﬂoating rates of interest do not signiﬁcantly affect the Group’s net

interest charge, although the majority of cash and liquid investments earn ﬂoating rates of interest.

The table below hypothetically shows the Group’s sensitivity to changes in interest rates in relation to Sterling, US Dollar and Euro ﬂoating

rate ﬁnancial assets and liabilities. If the interest rates applicable to ﬂoating rate ﬁnancial assets and liabilities were to have increased by 1%

(100 basis points), and assuming other variables had remained constant, it is estimated that the Group’s ﬁnance income for 2018 would have

decreased by approximately £13 million (2017 – £5 million increase). A 1% (100 basis points) movement in interest rates is not deemed to

have a material effect on equity.

2018 2017

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 (2) 24

1% (100 basis points) increase in US Dollar interest rates 1 (24)

1% (100 basis points) increase in Euro interest rates (12) 5

42. Financial instruments and related disclosures continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

211

(h) Contractual cash ﬂows for non-derivative ﬁnancial liabilities and derivative instruments

The following tables provide an analysis of the anticipated contractual cash ﬂows including interest payable for the Group’s non-derivative

ﬁnancial liabilities on an undiscounted basis. For the purpose of this table, debt is deﬁned as all classes of borrowings except for obligations

under ﬁnance leases. Interest is calculated based on debt held at 31 December without taking account of future issuance. Floating rate

interest is estimated using the prevailing interest rate at the balance sheet date. Cash ﬂows in foreign currencies are translated using spot

rates at 31 December. Contractual cash ﬂows in respect of operating lease vacant space provisions are excluded from the table below as

they are included in the Commitments under non-cancellable operating leases table in Note 41, ‘Commitments’.

At 31 December 2018

Debt

£m

Interest

on debt

£m

Obligations

under ﬁnance

leases

£m

Finance charge

on obligations

under ﬁnance

leases

£m

Trade payables

and other

liabilities not

in net debt

£m

Total

£m

Due in less than one year (5,771) (714) (24) (5) (14,278) (20,792)

Between one and two years (1,775) (708) (18) (2) (1,107) (3,610)

Between two and three years (1,592) (675) (11) (2) (902) (3,182)

Between three and four years (1,592) (620) (6) (1) (851) (3,070)

Between four and ﬁve years (1,970) (567) (3) (1) (826) (3,367)

Between ﬁve and ten years (5,875) (2,370) (6) (5) (3,748) (12,004)

Greater than ten years (7,579) (3,764) – – (1,468) (12,811)

Gross contractual cash ﬂows (26,154) (9,418) (68) (16) (23,180) (58,836)

At 31 December 2017

Debt

£m

Interest

on debt

£m

Obligations

under ﬁnance

leases

£m

Finance charge

on obligations

under ﬁnance

leases

£m

Trade payables

and other

liabilities not

in net debt

£m

Total

£m

Due in less than one year (2,802) (555) (23) (2) (21,521) (24,903)

Between one and two years (1,344) (497) (27) (2) (853) (2,723)

Between two and three years (1,078) (488) (8) (1) (813) (2,388)

Between three and four years (16) (488) (2) (1) (784) (1,291)

Between four and ﬁve years (1,483) (468) (1) (1) (752) (2,705)

Between ﬁve and ten years (3,694) (2,018) (5) (5) (3,609) (9,331)

Greater than ten years (6,720) (3,996) – – (1,471) (12,187)

Gross contractual cash ﬂows (17,137) (8,510) (66) (12) (29,803) (55,528)

Anticipated contractual cash ﬂows for the repayment of debt and debt interest have increased by £9.9 billion over the year due to funding

of the buyout of Novartis’ 36.5% stake in the Consumer Healthcare Joint Venture, an increase in the issuance of commercial paper and

unfavourable exchange impacts from the translation of non-Sterling denominated debt.

The table below provides an analysis of the anticipated contractual cash ﬂows for the Group’s derivative instruments excluding equity options

which do not give rise to cash ﬂows, and other embedded derivatives, which are not material, using undiscounted cash ﬂows. Cash ﬂows in

foreign currencies are translated using spot rates at 31 December. The gross cash ﬂows of foreign exchange contracts are presented for the

purpose of this table although, in practice, the Group uses standard settlement arrangements to reduce its liquidity requirements on these

instruments.

2018 2017

Receivables Payables Receivables Payables

Interest

rate swaps

£m

Foreign

exchange

forward

contracts

and swaps

£m

Interest

rate swaps

£m

Foreign

exchange

forward

contracts

and swaps

£m

Interest

rate swaps

£m

Foreign

exchange

forward

contracts

and swaps

£m

Interest

rate swaps

£m

Foreign

exchange

forward

contracts

and swaps

£m

Due in less than one year 49 26,680 (3) (26,802) – 20,319 – (20,326)

Between one and two years 48 1,575 (3) (1,513) – – – –

Between two and three years 24 – (2) – – – – –

Gross contractual cash ﬂows 121 28,255 (8) (28,315) – 20,319 – (20,326)

The amounts receivable and payable in less than one year have increased compared with 31 December 2017 predominantly from hedging of the

buyout of Novartis’ 36.5% stake in the Consumer Healthcare Joint Venture and the divestment of Horlicks and other nutrition brands to Unilever.

42. Financial instruments and related disclosures continued

Notes to the ﬁnancial statements continued

GSK Annual Report 2018

212

43. Employee share schemes

GSK operates several employee share schemes, including the Share Value Plan, whereby awards are granted to employees to acquire shares

or ADS in GlaxoSmithKline plc at no cost after a three year vesting period and the Performance Share Plan, whereby awards are granted to

employees to acquire shares or ADS in GlaxoSmithKline plc at no cost, subject to the achievement by the Group of speciﬁed performance

targets. The granting of these restricted share awards has replaced the granting of options to employees as the cost of the schemes more

readily equates to the potential gain to be made by the employee. The Group also operates savings related share option schemes, whereby

options are granted to employees to acquire shares in GlaxoSmithKline plc at a discounted price.

Grants of restricted share awards are normally exercisable at the end of the three-year vesting or performance period. Awards are normally

granted to employees to acquire shares or ADS in GlaxoSmithKline plc but in some circumstances may be settled in cash. Grants under

savings-related share option schemes are normally exercisable after three years’ saving. In accordance with UK practice, the majority of

options under the savings-related share option schemes are granted at a price 20% below the market price ruling at the date of grant.

Options under historical share option schemes were granted at the market price ruling at the date of grant.

The total charge for share-based incentive plans in 2018 was £393 million (2017 – £347 million; 2016 – £338 million). Of this amount,

£304 million (2017 – £276 million; 2016 – £271 million) arose from the Share Value Plan. See Note 9, ‘Employee Costs’ for further details.

GlaxoSmithKline share award schemes

Share Value Plan

Under the Share Value Plan, share awards are granted to certain employees at no cost. The awards vest after two and a half to three years

and there are no performance criteria attached. The fair value of these awards is determined based on the closing share price on the day of

grant, after deducting the expected future dividend yield of 4.8% (2017 – 4.8%; 2016 – 4.5%) over the duration of the award.

Number of shares and ADS issuable

Number (000)

Weighted

fair value

ADS

Number (000)

Weighted

fair value

At 1 January 2016 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

Awards granted 13,018 £13.68 6,610 $35.63

Awards exercised (10,596) (5,674)

Awards cancelled (1,352) (627)

At 31 December 2017 33,925 17,392

Awards granted 12,751 £13.74 6,503 $35.28

Awards exercised (11,089) (5,583)

Awards cancelled (1,519) (925)

At 31 December 2018 34,068 17,387

Performance Share Plan

Under the Performance Share Plan, share awards are granted to Directors and senior executives at no cost. The percentage of each award

that vests is based upon the performance of the Group over a deﬁned measurement period with dividends reinvested during the same period.

For awards granted from 2015, the performance conditions are based on three equally weighted measures over a three-year performance

period. These are adjusted free cash ﬂow, TSR and R&D new product performance.

The fair value of the awards is determined based on the closing share price on the day of grant. For TSR performance elements, this is

adjusted by the likelihood of that condition being met, as assessed at the time of grant.

During 2018, awards were made of 4.7 million shares at a weighted fair value of £10.46 and 1.3 million ADS at a weighted fair value of

$29.43. At 31 December 2018, there were outstanding awards over 13.1 million shares and 3.4 million ADS.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

213

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:

2018 Grant 2017 Grant 2016 Grant

Risk-free interest rate 0.76% 0.54% 0.32%

Dividend yield 5.3% 5.9% 4.9%

Volatility 21% 23% 23%

Expected life 3 years 3 years 3 years

Savings-related options grant price (including 20% discount) £12.09 £10.86 £12.95

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 2018 1,79 6 £11.96 1,216 $36.19 5,929 £11.70

Range of exercise prices on options outstanding at year end £11.60 – £12.21 $33.42 – $38.14 £10.13 – £12.95

Weighted average market price on exercise during year £14.43 $39.77 £15.13

Weighted average remaining contractual life 0.9 years 0.9 years 2.6 years

Options over 2.9 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value

of £2.40. At 31 December 2018, 5.5 million of the savings-related share options were not exercisable. All of the other share options and ADS

options are currently exercisable and all will expire if not exercised on or before 22 July 2020.

There has been no change in the effective exercise price of any outstanding options during the year.

Employee Share Ownership Plan Trusts

The Group sponsors Employee Share Ownership Plan (ESOP) Trusts to acquire and hold shares in GlaxoSmithKline plc to satisfy awards

made under employee incentive plans and options granted under employee share option schemes. The trustees of the ESOP Trusts purchase

shares with ﬁnance provided by the Group by way of loans or contributions. The costs of running the ESOP Trusts are charged to the income

statement. Shares held by the ESOP Trusts are deducted from other reserves and amortised down to the value of proceeds, if any, receivable

from employees on exercise by a transfer to retained earnings. The trustees have waived their rights to dividends on the shares held by the

ESOP Trusts.

Shares held for share award schemes 2018 2017

Number of shares (000) 41,391 66,558

£m £m

Nominal value 10 17

Carrying value 160 399

Market value 617 880

Shares held for share option schemes

2018 2017

Number of shares (000) 139 139

£m £m

Nominal value – –

Carrying value 1 1

Market value 2 2

43. Employee share schemes continued

GSK Annual Report 2018

214

44. Principal Group companies

The following represent the principal subsidiaries and their countries of incorporation of the Group at 31 December 2018. The equity share

capital of these entities is wholly owned by the Group except where its percentage interest is shown otherwise. All companies are

incorporated in their principal country of operation except where stated.

England US

Glaxo Group Limited Block Drug Company, Inc.

Glaxo Operations UK Limited Corixa Corporation

GlaxoSmithKline Capital plc GlaxoSmithKline Capital Inc.

GlaxoSmithKline Consumer Healthcare Holdings Limited GlaxoSmithKline Consumer Healthcare Holdings (US) LLC

GlaxoSmithKline Consumer Healthcare (UK) Trading Limited GlaxoSmithKline Consumer Healthcare, L.P. (88%)

GlaxoSmithKline Consumer Trading Services Limited GlaxoSmithKline Holdings (Americas) Inc.

GlaxoSmithKline Export Limited GlaxoSmithKline LLC

GlaxoSmithKline Finance plc Human Genome Sciences, Inc.

GlaxoSmithKline Holdings Limited * GSK Consumer Health, Inc. (formerly Novartis Consumer Health, Inc.)

GlaxoSmithKline Research & Development Limited S.R. One, Limited

GlaxoSmithKline Services Unlimited * Stiefel Laboratories, Inc.

GlaxoSmithKline UK Limited ViiV Healthcare Company (78.3%)

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)

GlaxoSmithKline Sante Grand Public SAS (France) GlaxoSmithKline Brasil Limitada (Brazil)

Laboratoire GlaxoSmithKline (France) GlaxoSmithKline Consumer Healthcare Inc. (Canada)

ViiV Healthcare SAS (France) (78.3%) GlaxoSmithKline Inc. (Canada)

GlaxoSmithKline Consumer Healthcare GmbH & Co. KG (Germany) ID Biomedical Corporation of Quebec (Canada)

GlaxoSmithKline GmbH & Co. KG (Germany) GlaxoSmithKline Limited (China (Hong Kong))

GSK Vaccines GmbH (Germany) GlaxoSmithKline (Tianjin) Co. Ltd (China) (90%)

GlaxoSmithKline Consumer Healthcare S.p.A. (Italy) Sino-American Tianjin Smith Kline & French Laboratories Ltd (China) (55%)

GlaxoSmithKline S.p.A. (Italy) GlaxoSmithKline Consumer Healthcare Limited (India) (72.5%)

GSK Vaccines S.r.l. (Italy) GlaxoSmithKline Pharmaceuticals Limited (India) (75%)

GlaxoSmithKline B.V. (Netherlands) GlaxoSmithKline Consumer Healthcare Japan K.K. (Japan)

GlaxoSmithKline Consumer Healthcare Sp.z.o.o. (Poland) GlaxoSmithKline K.K. (Japan)

GSK Services Sp z o.o. (Poland) ViiV Healthcare Kabushiki Kaisha (Japan) (78.3%)

GlaxoSmithKline Trading Services Limited (Republic of Ireland) (i) GlaxoSmithKline Pakistan Limited (Pakistan) (82.6%)

GlaxoSmithKline Healthcare AO (Russia) Glaxo Wellcome Manufacturing Pte Ltd. (Singapore)

GlaxoSmithKline S.A. (Spain) GlaxoSmithKline Korea Limited (Republic of Korea)

Laboratorios ViiV Healthcare, S.L. (Spain) (78.3%) GlaxoSmithKline llaclari Sanayi ve Ticaret A.S. (Turkey)

GSK Consumer Healthcare S.A. (Switzerland)

(i) Exempt from the provisions of section 347 and 348 of the Companies Act 2014 (Ireland), in accordance with the exemptions noted

in Section 357 of that Act. Further subsidiaries, as disclosed on pages 260 to 270, are exempt from these provisions as they are also

consolidated in the group ﬁnancial statements.

* Directly held wholly owned subsidiary of GlaxoSmithKline plc.

The subsidiaries and associates listed above principally affect the ﬁgures in the Group’s ﬁnancial statements. Each of GlaxoSmithKline

Capital Inc., GlaxoSmithKline Capital plc and GlaxoSmithKline LLC, is a wholly-owned ﬁnance subsidiary of the company, and the company

has fully and unconditionally guaranteed the securities issued by each of GlaxoSmithKline Capital Inc., GlaxoSmithKline Capital plc and

GlaxoSmithKline LLC.

See pages 260 to 270 for a complete list of subsidiary undertakings, associates and joint ventures, which form part of these ﬁnancial

statements.

Notes to the ﬁnancial statements continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

215

The Group is involved in signiﬁcant legal and administrative

proceedings, principally product liability, intellectual property,

tax, anti-trust and governmental investigations, as well as related

private litigation. The most signiﬁcant of these matters, other than

tax matters, are described below. The Group makes provision for

these proceedings on a regular basis as summarised in Note 2,

‘Accounting principles and policies’ and Note 29, ‘Other provisions’.

The Group may become involved in signiﬁcant legal proceedings

in respect of which it is not possible to make a reliable estimate of

the expected ﬁnancial effect, if any, that could result from ultimate

resolution of the proceedings. In these cases, appropriate

disclosures about such cases would be included in this note,

but no provision would be made for the cases.

With respect to each of the legal proceedings described below,

other than those for which a provision has been made, the Group

is unable to make a reliable estimate of the expected ﬁnancial effect

at this stage. The Group does not believe that information about the

amount sought by the plaintiffs, if that is known, would be meaningful

with respect to those legal proceedings. This is due to a number of

factors, including, but not limited to, the stage of proceedings, the

entitlement of parties to appeal a decision and clarity as to theories

of liability, damages and governing law.

Legal expenses incurred and provisions related to legal claims are

charged to selling, general and administration costs. Provisions

are made, after taking appropriate legal and other specialist advice,

where an outﬂow of resources is considered probable and a

reliable estimate can be made of the likely outcome of the dispute.

For certain product liability claims, the Group will make a provision

where there is sufﬁcient history of claims made and settlements

to enable management to make a reliable estimate of the provision

required to cover unasserted claims. At 31 December 2018, the

Group’s aggregate provision for legal and other disputes (not

including tax matters described in Note 14, ‘Taxation’) was £219

million. However, this provision is offset by a related £37 million

receivable which means the net exposure to the Group is £182

million. The ultimate liability for legal claims may vary from the

amounts provided and is dependent upon the outcome of litigation

proceedings, investigations and possible settlement negotiations.

The Group’s position could change over time, and, therefore, there

can be no assurance that any losses that result from the outcome

of any legal proceedings will not exceed by a material amount the

amount of the provisions reported in the Group’s ﬁnancial

statements. If this were to happen, it could have a material adverse

impact on the results of operations of the Group in the reporting

period in which the judgements are incurred or the settlements

entered into.

Intellectual property

Intellectual property claims include challenges to the validity and

enforceability of the Group’s patents on various products or

processes as well as assertions of non-infringement of those

patents. A loss in any of these cases could result in loss of patent

protection for the product at issue. The consequences of any such

loss could be a signiﬁcant decrease in sales of that product and

could materially affect future results of operations for the Group.

Dolutegravir/Tivicay/Triumeq

In September and October 2017, ViiV Healthcare received

patent challenge letters under the Hatch-Waxman Act from Cipla,

Dr. Reddy’s Labs and Apotex for Triumeq and Tivicay, and from

Lupin and Mylan for Triumeq and from Sandoz for Tivicay. ViiV

Healthcare lists two patents for dolutegravir, the active ingredient

in Tivic ay and one of the active ingredients in Triumeq, in the FDA

Orange Book. One patent, covering the molecule dolutegravir,

expires on 5 October 2027. A second patent, claiming a certain

crystal forms of dolutegravir, expires on 8 December 2029. All the

letters challenged only the patent for the crystal form. Some generic

companies alleged that the crystal form patent is not valid. Others

challenged validity and asserted that their proposed product would

not infringe the crystal form patent.

On 7 February 2017, ViiV Healthcare ﬁled patent infringement suits

against all the generic companies in the US District Court for the

District of Delaware. Additionally, ViiV Healthcare also ﬁled suit

against certain of the generic companies in the US District Court for

the District of New Jersey, and the US District Court for the District

of West Virginia. The case against Mylan is now proceeding in the

Northern District of West Virginia. The court has set the case against

Mylan for trial in June 2020. The cases against the other defendants

are proceeding in the District of Delaware. The District of Delaware

has not yet set a trial date for the cases.

On 7 February 2018, ViiV Healthcare ﬁled patent infringement

litigation against Gilead Sciences Inc. (Gilead) over bictegravir in

the US District Court for the District of Delaware (U.S. Patent No.

8,129,385) and the Canadian Federal Court (Canadian patent No.

2,606,282). ViiV Healthcare alleges that Gilead’s triple combination

HIV drug containing the HIV integrase inhibitor bictegravir infringes

ViiV Healthcare’s patent covering dolutegravir and other compounds

that include dolutegravir’s unique chemical scaffold. In both the US

and Canada, ViiV Healthcare seeks ﬁnancial redress rather than

injunctive relief. The District of Delaware case is set for trial in

September 2020. The Canadian court has not set a trial date for

the Canadian action.

Kivexa

In 2018, ViiV Healthcare reached conﬁdential agreements with

each of DOC Generici, Farmoz and Kyowa Pharmaceuticals to settle

various challenges to the validity of the Supplementary Protection

Certiﬁcate (‘SPC’) for the patent covering the combination of

lamivudine and abacavir for Kivexa and certain counterclaims

brought by ViiV Healthcare for infringement of that SPC. These

settlements brought an end to litigation and arbitration proceedings

between ViiV Healthcare and DOC Generici in Italy, between ViiV

Healthcare and Farmoz in Portugal, and between ViiV Healthcare

and Kyowa Pharmaceuticals in Japan.

In June 2017, Biogaran commenced proceedings in France seeking

revocation of the French SPC covering K ivexa. No trial date has

been set for this action.

In Q2 2018, ViiV Healthcare commenced proceedings against

Sandoz in Switzerland. Sandoz countered challenging the validity

of the patent relating to Kivexa. No trial date has been set for

this action.

45. Legal proceedings

GSK Annual Report 2018

216

Product liability

Pre-clinical and clinical trials are conducted during the development

of potential products to determine the safety and efﬁcacy of

products for use by humans following approval by regulatory bodies.

Notwithstanding these efforts, when drugs and vaccines are

introduced into the marketplace, unanticipated safety issues may

become, or be claimed by some to be, evident. The Group is

currently a defendant in a number of product liability lawsuits related

to the Group’s Pharmaceutical, Vaccine and Consumer Healthcare

products. The Group has been able to make a reliable estimate of

the expected ﬁnancial effect of the matters discussed in this

category and has included a provision, as appropriate, for the

matters below in the provision for legal and other disputes. Matters

for which the Group has made a provision are also noted in Note 29,

‘Other provisions.’

Avandia

The Group has been named in product liability lawsuits on behalf

of individuals asserting personal injury claims arising out of the use

of Avandi a. Economic loss actions have also been ﬁled seeking

restitution and penalties under consumer protection and other laws.

As of February 2019, there are seven remaining US cases. Four are

personal injury actions subject to a settlement agreement and will

be dismissed once the settlement has been ﬁnalised. Two are class

actions, brought by third-party payers asserting claims under the

Racketeer Inﬂuenced and Corrupt Organizations Act (RICO) and

state consumer protection laws, and are on appeal from summary

judgements granted in favour of the Group. In the last of the seven,

the Santa Clara County (California) Action, summary judgement

was granted in favour of the Group on all issues except for the

civil penalty claims under California’s False Advertising Act.

Additionally, there are 13 class actions pending in Canada, but the

Group has reached an agreement, subject to court approval, to

settle all of them.

Seroxat/Paxil and Paxil CR

The Group has received numerous lawsuits and claims alleging that

use of Paxil (paroxetine) has caused a variety of injuries. Most of

these lawsuits contain one or more of the following allegations: (i)

that use of Paxil during pregnancy caused congenital malformations,

persistent pulmonary hypertension or autism; (ii) that Paxil treatment

caused patients to commit suicidal or violent acts; and (iii) that the

Group failed to warn that patients could experience certain

symptoms on discontinuing Paxil treatment.

– Pregnancy

The Group has reached agreements to settle the majority of the

US claims relating to the use of Paxil during pregnancy as of

February 2019, but 11 lawsuits related to use during pregnancy

are still pending in various courts in the US.

The Singh action in Alberta, Canada, a proposed national class

action, seeks to certify a class relating to birth defects generally.

The court, after hearing argument in January 2019, has plaintiffs’

class certiﬁcation motion under consideration.

Another Canadian class action, Jensen, alleging claims of Paxil

(and other SSRI) use and autism was ﬁled in Saskatchewan in

January 2017; however, there has been no activity in the case

since the ﬁling.

– Acts of violence

As of February 2019, there were six pending claims or cases

concerning allegations that patients who took paroxetine or Paxil

committed or attempted to commit suicide or acts of violence: ﬁve

claims or cases are in the US and one case is in Canada. One of the

US cases, Dolin, involving the suicide of a man who allegedly took

generic paroxetine manufactured by Mylan, resulted in a $3 million

verdict for the plaintiff; however, on 22 August 2018 the US Court

of Appeals for the Seventh Circuit reversed the jury verdict and

found in favour of the Group. Plaintiff has ﬁled a petition for writ of

certiorari asking the US Supreme Court to review the case. The

remaining US cases are largely dormant.

In the one pending Canadian action, Carmichael, the Group has ﬁled

a motion for summary judgement based on the statute of limitations.

– Discontinuation

In the UK, a long-pending group action alleges that Seroxat caused

severe discontinuation symptoms. In 2010, the Legal Services

Commission (“LSC”) withdrew public funding from hundreds of

claimants, causing termination of most claims. In 2015, the Legal Aid

Agency (formerly the LSC) discharged the public funding certiﬁcate

following a 2013 recommendation of its Special Cases Review

Panel that these cases have poor prospects of success.

However, more recently, Fortitude Law was engaged with the

purpose of resurrecting the Seroxat group action, and obtained

third-party funding for the experts and the 103 remaining claimants.

The Group asked the court to require the third-party funder to

provide security for the litigation costs in the event plaintiffs lose.

On 8 December 2017, the High Court ruled in favour of the Group

on its application for an order that the claimants’ litigation funder

give security for costs for a sum in excess of the total funding it had

committed to the case. The trial of the action is scheduled to

commence in April 2019.

Zofran

Plaintiffs allege that their children suffered birth defects as a result

of the mothers’ ingestion of Zofran and/or generic ondansetron for

pregnancy-related nausea and vomiting. Plaintiffs assert that the

Group sold Zofran knowing it was unsafe for pregnant women, failed

to warn of the risks, and illegally marketed Zofran “off-label” for use

by pregnant women.

As of February 2019, the Group is a defendant in 430 personal injury

lawsuits. All but two of the lawsuits are part of a multi-district

litigation proceeding (“MDL”) in the US District Court for the District

of Massachusetts.

In the MDL, the parties are in the process of completing case-

speciﬁc discovery and selecting cases for potential trials. While the

court recently denied the Group’s motion for summary judgment

based on a federal preemption argument, the Group continues to

seek the dismissal of individual cases on other grounds as

appropriate.

GSK is also a defendant in four proposed class actions in Canada.

There has been no signiﬁcant activity in these four matters; however,

the parties have recently agreed to a schedule for class certiﬁcation

proceedings in the matter pending in Ontario.

45. Legal proceedings continued

Notes to the ﬁnancial statements continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

217

Sales and marketing and regulation

The Group’s marketing and promotion of its Pharmaceutical

and Vaccine products are the subject of certain governmental

investigations and private lawsuits brought by litigants under various

theories of law. The Group has been able to make a reliable estimate

of the expected ﬁnancial effect of the matters discussed in this

category and has included a provision for such matters in the

provision for legal and other disputes, except as noted below.

Matters for which the Group has made a provision are also noted

in Note 29, ‘Other provisions’.

SFO and SEC/DOJ Anti-corruption enquiries

On 27 May 2014, the UK Serious Fraud Ofﬁce (SFO) began a

formal criminal investigation into the Group’s commercial operations

in a number of countries, including China. The SFO inquiry followed

investigations initiated by China’s Ministry of Public Security in June

2013 (the ‘China Investigations’), which resulted in a ruling in 2014

that, according to Chinese law, GSK China Investment Co. Ltd.

(‘GSKCI’) had offered money or property to non-government

personnel in order to obtain improper commercial gains and

GSKCI being found guilty of bribing non-government personnel.

On 30 September 2016, the Group reached a global resolution with

the US Securities and Exchange Commission (SEC) regarding the

SEC’s investigation under the US Foreign Corrupt Practices Act

(FCPA) into the Group’s commercial practices in countries outside

of the US, including China. As part of the resolution, the Group

agreed to pay a civil penalty of $20 million to the US Government.

The US Department of Justice (DOJ) conﬁrmed that it had

concluded its investigation into the Group’s commercial practices

and would take no action against the Group. As part of the resolution

with the SEC, the Group agreed to certain undertakings, including

a period of self-monitoring and reporting. The Group’s obligations

under that resolution continued through 30 September 2018 and

have now concluded.

In the course of its inquiry, the SFO had requested additional

information from the Group regarding third-party advisers engaged

by the company in the course of the China Investigations. The SEC

and DOJ are also investigating these matters following the Group’s

reporting of the SFO’s inquiries. The Group is co-operating and

responding to these requests. On 22 February 2019, the SFO

announced that it would be closing its investigation and conﬁrmed

that it would be taking no further action against the Group.

The SEC and DOJ investigations into these issues continue.

The Group is unable to make a reliable estimate of the expected

ﬁnancial effect of these investigations, and no provisions have

been made for them.

US Vaccines subpoena

On 25 February 2016, the Group received a subpoena from the US

Attorney’s Ofﬁce for the Southern District of New York requesting

documents relating to the Group’s Vaccines business. The Group

responded to the subpoena and was informed by the government

in 2018 that the government would be closing the matter without

further action.

Average wholesale price

The Attorney General in Illinois ﬁled suit against the Group and a

number of other pharmaceutical companies claiming damages and

restitution due to average wholesale price (AWP) and/or wholesale

acquisition cost (WAC) price reporting for pharmaceutical products

covered by the state’s Medicaid programmes. The case alleges that

the Group reported or caused to be reported false AWP and WAC

prices, which, in turn, allegedly caused the state Medicaid agency

to reimburse providers more money for covered medicines than the

agency intended. The state has sought recovery on behalf of itself as

payer and on behalf of in-state patients as consumers. The case is

ongoing, and no trial date has yet been set as to the Group.

Cidra third-party payer litigation

On 25 July 2013, a number of major US healthcare insurers ﬁled suit

against the Group in the Philadelphia, Pennsylvania County Court

of Common Pleas seeking compensation for reimbursements they

made for medicines manufactured at the Group’s former Cidra plant

in Puerto Rico. These insurers claim that the Group knowingly and

illegally marketed and sold adulterated drugs manufactured under

conditions non-compliant with cGMP (current good manufacturing

practices) and that they, as third-party insurers, were unlawfully

induced to pay for them. The suit alleges both US federal and various

state law causes of action. Discovery is complete, and the Group

has ﬁled a motion for summary judgement, which likely will be heard

in spring 2019. No trial date has yet been set.

Anti-trust/competition

Certain governmental actions and private lawsuits have been

brought against the Group alleging violation of competition or

anti-trust laws. The Group has been able to make a reliable estimate

of the expected ﬁnancial effect of the matters discussed in this

category and has included a provision for such matters in the

provision for legal and other disputes, except as noted below.

Matters for which the Group has made a provision are also noted

in Note 29, ‘Other provisions’.

UK Competition and Markets Authority investigation

On 12 February 2016, the UK Competition and Markets

Authority (CMA) issued a decision ﬁning the Group and two other

pharmaceutical companies for infringement of the Competition Act.

The CMA imposed a ﬁne of £37.6 million on the Group, as well as

ﬁnes totaling £7.4 million against the other companies. This relates

to agreements to settle patent disputes between the Group and

potential suppliers of generic paroxetine formulations, entered into

between 2001 and 2003. The Group terminated the agreements

at issue in 2004. The Group believes it has strong grounds for its

appeal of the CMA’s ﬁnding to the Competition Appeal Tribunal

(CAT) in order to overturn the ﬁne or substantially reduce it.

The appeal concluded in April 2017. The CAT delivered its initial

judgement on the appeal on 8 March 2018, referring all the principle

points at issue to the Court of Justice of the EU for a preliminary

ruling. The matter will then return to the CAT for ﬁnal judgement.

No provision has been made for this matter.

45. Legal proceedings continued

GSK Annual Report 2018

218

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 Lamict al, resulting in overcharges to the

purchasers, by entering into an allegedly anti-competitive reverse

payment settlement to resolve patent infringement litigation. A

separate count accuses the Group of monopolising the market.

On 26 June 2015, the Court of Appeals reversed the trial court’s

decision to dismiss the case and remanded the action back to

the trial court. On 18 May 2016, the trial court denied the indirect

purchaser class plaintiffs’ motion for reconsideration of the Court’s

dismissal of their claims. As a result, the indirect purchaser class

representatives agreed to a settlement to exit the case and resolve

their remaining claims. On 13 December 2018, the trial judge

granted plaintiffs’ class certiﬁcation motion, certifying a class of

direct purchasers in this action. The Group is pursuing an appeal

with the Court of Appeals regarding the class certiﬁcation.

Commercial and corporate

The Group is a defendant in certain cases which allege violation

of US federal securities and ERISA laws. The Group has been able

to make a reliable estimate of the expected ﬁnancial effect of the

matters discussed in this category and has included a provision for

such matters in the provision for legal and other disputes. Matters

for which the Group has made a provision are also noted in Note 29,

‘Other provisions”.

Securities/ERISA class actions – Stiefel

On 12 December 2011, the US Securities and Exchange

Commission (SEC) ﬁled a formal complaint against Stiefel

Laboratories, Inc., and Charles Stiefel in the US District Court for

the District of Florida alleging that Stiefel and its principals violated

federal securities laws by inducing Stiefel employees to sell their

shares in the employee stock plan back to the company at a greatly

undervalued price and without disclosing to employees that the

company was about to be sold to the Group. The case was stayed

while several private actions brought by former Stiefel employees

proceeded through the courts but was returned to active status in

early summer 2015. It is unclear when the case ultimately will be

scheduled for trial.

In addition to the SEC case, one private matter (the “Martinolich”

case) remains. It is also pending in federal district court in Florida but

has been stayed pending the trial of the SEC matter. The allegations

in the Martinolich case largely track those in the SEC matter: the

plaintiff, a former Stiefel employee, alleges that Stiefel and its ofﬁcers

and directors violated the US Employee Retirement Income Security

Act (ERISA) and federal and state securities laws by inducing Stiefel

employees to sell their shares in the employee stock plan back to

Stiefel at a greatly undervalued price and without disclosing to

employees that Stiefel was about to be sold to the Group.

Environmental matters

The Group has been notiﬁed of its potential responsibility relating

to past operations and its past waste disposal practices at certain

sites, primarily in the US. Some of these matters are the subject of

litigation, including proceedings initiated by the US federal or state

governments for waste disposal, site remediation costs and tort

actions brought by private parties.

The Group has been advised that it may be a responsible party at

approximately 16 sites, of which nine appear on the National Priority

List created by the Comprehensive Environmental Response

Compensation and Liability Act (Superfund). These proceedings

seek to require the operators of hazardous waste facilities,

transporters of waste to the sites and generators of hazardous

waste disposed of at the sites to clean up the sites or to reimburse

the US Government for cleanup costs. In most instances, the

Group is involved as an alleged generator of hazardous waste.

Although Superfund provides that the defendants are jointly and

severally liable for cleanup costs, these proceedings are frequently

resolved on the basis of the nature and quantity of waste disposed

of by the generator at the site. The Group’s proportionate liability for

cleanup costs has been substantially determined for 18 of the sites

referred to above.

The Group’s potential liability varies greatly from site to site. The cost

of investigation, study and remediation at such sites could, over time,

be signiﬁcant. The Group has made a provision for these matters, as

noted in Note 29, ‘Other provisions’.

45. Legal proceedings continued

Notes to the ﬁnancial statements continued

46. Post balance sheet events

The agreement to acquire Tesaro, Inc. for $5.1 billion in cash, which

was signed in December 2018, completed on 22 January 2019.

On 31 January 2019, Mylan N.V. announced that the US Food and

Drug Administration had approved their therapeutically equivalent

generic of Advair Diskus for certain patients with asthma or chronic

obstructive pulmonary disease.

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

219

Notes

2018

£m

2018

£m

2017

£m

2017

£m

Fixed assets – investments F 19,987 20,275

Current assets:

Trade and other receivables G 8,394 8,715

Cash at bank 12 15

Total current assets 8,406 8,730

Bank overdrafts (12) (15)

Short term borrowings H (3,500) –

Trade and other payables I (610) (837)

Total current liabilities (4,122) (852)

Net current assets 4,284 7,878

Total assets less current liabilities 24,271 28,153

Provisions for liabilities J (16) (27)

Other non-current liabilities K (282) (238)

Net assets 23,973 27,888

Capital and reserves

Share capital L 1,345 1,343

Share premium account L 3,091 3,019

Other reserves 1,420 1,420

Retained earnings:

At 1 January 22,106 15,538

(Loss)/proﬁt for the year (62) 9,893

Other changes in retained earnings (3,927) (3,325)

M 18,117 22,106

Equity shareholders’ funds 23,973 27,888

The ﬁnancial statements on pages 219 to 222 were approved by the Board on 11 March 2019 and signed on its behalf by

Philip Hampton

Chairman

GlaxoSmithKline plc

Registered number: 3888792

Company statement of changes in equity

for the year ended 31 December 2018

capital

£m

Share premium

account

£m

Other

reserves

£m

Retained

earnings

£m

Total

equity

£m

At 1 January 2017 1,342 2,954 1,420 15,538 21,254

Proﬁt and Total comprehensive income attributable to shareholders – – – 9,893 9,893

Dividends to shareholders – – – (3,906) (3,906)

Shares issued under employee share schemes 1 55 – – 56

Treasury shares transferred to the ESOP Trust – 10 – 581 591

At 31 December 2017 1,343 3,019 1,420 22,106 27,888

Loss and Total comprehensive expense attributable to shareholders – – – (62) (62)

Dividends to shareholders – – – (3,927) (3,927)

Shares issued under employee share schemes 2 72 – – 74

At 31 December 2018 1,345 3,091 1,420 18,117 23,973

Company balance sheet –

UK GAAP

(including FRS 101 ‘Reduced Disclosure Framework’) as at 31 December 2018

GSK Annual Report 2018

220

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 2018, with comparative

ﬁgures as at 31 December 2017.

As permitted by section 408 of the Companies Act 2006, the

income statement of the company is not presented in this Annual

Report.

The company is included in the Group ﬁnancial statements of

GlaxoSmithKline plc, which are publicly available.

The following exemptions from the requirements of IFRS have

been applied in the preparation of these ﬁnancial statements,

in accordance with FRS 101:

– Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’

– IFRS 7, ‘Financial Instruments - Disclosures’

– Paragraphs 91-99 of IFRS 13, ‘Fair value measurement’

– Paragraph 38 of IAS 1, ‘Presentation of ﬁnancial statements’

comparative information requirements in respect of

paragraph 79(a) (iv) of IAS 1

– Paragraphs 10(d), 10(f), 16, 38(A), 38 (B to D), 40 (A to D),

111 and 134 to 136 of IAS 1, ‘Presentation of ﬁnancial statements’

– IAS 7, ‘Statement of cash ﬂows’

– Paragraph 30 and 31 of IAS 8, ‘Accounting policies, changes

in accounting estimates and errors’

– Paragraph 17 of IAS 24, ‘Related party disclosures’ and the

further requirement in IAS 24 to disclose related party transactions

entered into between two or more members of

a Group.

Accounting convention and standards

The balance sheet has been prepared using the historical

cost convention and complies with applicable UK accounting

standards.

Accounting principles and policies

The preparation of the balance sheet in conformity with generally

accepted accounting principles requires management to make

estimates and assumptions that affect the reported amounts of

assets and liabilities and disclosure of contingent assets and

liabilities at the date of the balance sheet. Actual amounts could

differ from those estimates.

The balance sheet has been prepared in accordance with the

company’s accounting policies approved by the Board and

described in Note B. These policies have been consistently

applied, unless otherwise stated.

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 company’s shares, represents additional capital contributions

by the company in its subsidiaries. An additional investment in

subsidiaries results in a corresponding increase in shareholders’

equity. The additional capital contribution is based on the fair value of

the grant issued, allocated over the underlying grant’s vesting period.

Taxation

Current tax is provided at the amounts expected to be paid applying

tax rates that have been enacted or substantively enacted by the

balance sheet date.

Deferred tax is provided in full, using the liability method, on

temporary differences arising between the tax bases of assets

and liabilities and their carrying amounts in the ﬁnancial statements.

Deferred tax assets are only recognised to the extent that they are

considered recoverable against future taxable proﬁts.

Deferred tax is measured at the average tax rates that are expected

to apply in the periods in which the temporary differences are

expected to be realised or settled. Deferred tax liabilities and assets

are not discounted.

Financial guarantees

Liabilities relating to guarantees issued by the company on behalf

of its subsidiaries are initially recognised at fair value and amortised

over the life of the guarantee.

Notes to the company balance sheet – UK GAAP

(including FRS 101 ‘Reduced Disclosure Framework’)

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

221

F) Fixed assets – investments

2018

£m

2017

£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 296 584

19,987 20,275

G) Trade and other receivables

2018

£m

2017

£m

Amounts due within one year:

UK Corporation tax recoverable 10 31

Other receivables – 1

Amounts owed by Group undertakings 7,889 8,299

7,899 8,331

Amounts due after more than one year:

Amounts owed by Group undertakings 495 384

8,394 8,715

H) Short-term borrowings

The £3.5 billion borrowing relates to a facility taken out in June 2018 as part of the ﬁnancing of the buyout of the non-controlling interest in the

Consumer Healthcare Joint Venture held by Novartis. The facility has a maturity date of 1 December 2019.

I) Trade and other payables

2018

£m

2017

£m

Amounts due within one year:

Other creditors 567 438

Contingent consideration payable 14 346

Amounts owed to Group undertakings 29 53

610 837

The company has guaranteed debt issued by its subsidiary companies from two of which it receives fees. In aggregate, the company has

outstanding guarantees over £22.2 billion of debt instruments (2017 – £16.7 billion). The amounts due from the subsidiary company in relation

to these guarantee fees will be recovered over the life of the bonds and are disclosed within ‘Trade and other receivables’ (see Note G).

C) Key accounting judgements and estimates

Legal and other disputes

The company provides for anticipated settlement costs where

management makes a judgement that an outﬂow of resources is

probable and a reliable estimate can be made of the likely outcome

of the dispute and legal and other expenses arising from claims

against the company. The estimated provisions take into account the

speciﬁc circumstances of each dispute and relevant external advice,

are inherently judgemental and could change substantially over time

as each dispute progresses and new facts emerge.

The company’s Directors, having taken legal advice, have

established provisions after taking into account the relevant facts

and circumstances of each matter and in accordance with

accounting requirements. At 31 December 2018, provisions for legal

and other disputes amounted to £16 million (2017 – £27 million).

The ultimate liability for legal claims may vary from the amounts

provided and is dependent upon the outcome of litigation

proceedings, investigations and possible settlement negotiations.

The position could change over time and, therefore, there can be no

assurance that any losses that result from the outcome of any legal

proceedings will not exceed the amount of the provisions reported

in the company’s ﬁnancial statements by a material amount.

D) Operating proﬁt

A fee of £12,000 (2017 – £12,053) relating to the audit of the

company has been charged in operating proﬁt.

E) Dividends

The directors declared four interim dividends resulting in a dividend

for the year of 80 pence, in line with the dividend for 2017. For further

details, see Note 16 to the Group ﬁnancial statements, ‘Dividends’.

GSK Annual Report 2018

222

J) Provisions for liabilities

2018

£m

2017

£m

At 1 January 27 23

Exchange adjustments 2 (3)

Charge for the year 16 52

Utilised (29) (45)

At 31 December 16 27

The provisions relate to a number of legal and other disputes in which the company is currently involved.

K) Other non-current liabilities

2018

£m

2017

£m

Contingent consideration payable 282 238

282 238

The contingent consideration relates to the amount payable for the acquisition in 2015 of the Novartis Vaccines portfolio. The current year

liability is included within ‘Trade and other payables’.

L) Share capital and share premium account

Ordinary Shares of 25p each

premium

account

Number £m £m

Share capital authorised

At 31 December 2017 10,000,000,000 2,500

At 31 December 2018 10,000,000,000 2,500

Share capital issued and fully paid

At 1 January 2017 5,368,316,062 1,342 2,954

Issued under employee share schemes 4,237,758 1 55

Treasury shares transferred to the ESOP Trust – – 10

At 31 December 2017 5,372,553,820 1,343 3,019

Issued under employee share schemes 6,513,804 2 72

At 31 December 2018 5,379,067,624 1,345 3,091

31 December

2018

000

31 December

2017

000

Number of shares issuable under employee share schemes 56,723 38,647

Number of unissued shares not under option 4,564,209 4,588,799

At 31 December 2018, of the issued share capital, 41,530,909 shares were held in the ESOP Trusts, 414,605,950 shares were held as

Treasury shares and 4,922,930,765 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values of the

shares held in the ESOP Trusts are disclosed in Note 43, ‘Employee share schemes’.

M) Retained earnings

The loss of GlaxoSmithKline plc for the year was £62 million (2017 – £9,893 million proﬁt), which after dividends of £3,927 million

(2017 – £3,906 million), gave a retained loss of £3,989 million (2017 – proﬁt of £5,987 milion). After the effect of £nil Treasury shares

transferred to a subsidiary company (2017 – £581 million), retained earnings at 31 December 2018 stood at £18,117 million

(2017 – £22,106 million), of which £4,096 million was unrealised (2017 – £4,096 million).

N) Group companies

See pages 260 to 270 for a complete list of subsidiaries, associates and joint ventures, which forms part of these ﬁnancial statements.

Notes to the company balance sheet – UK GAAP

(including FRS 101 ‘Reduced Disclosure Framework’) continued

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

223

Investor

information

In this section

Quarterly trend 224

Pharmaceuticals turnover 226

Vaccines turnover 228

Five year record 229

Product development pipeline 235

Products, competition and intellectual property 238

Principal risks and uncertainties 241

Share capital and share price 251

Dividends 253

Financial calendar 253

Annual General Meeting 2019 254

Tax information for shareholders 254

Shareholder services and contacts 256

US law and regulation 258

Group companies 260

Glossary of terms 271

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

223

GSK Annual Report 2018

224

Quarterly trend

An unaudited analysis of the Group results is provided by quarter in Sterling for the ﬁnancial year 2018.

Income statement – Total

12 months 2018 Q4 2018 Q3 2018 Q2 2018 Q1 2018

£m

Reported

£m

Reported

£m

Reported

£m

Reported

£m

Reported

£% CER% £% CER% £% CER% £% CER% £% CER%

Turnover

Pharmaceuticals 17,269 – 2 4,810 6 4 4,221 1 3 4,229 (3) 1 4,009 (4) 2

Vaccines 5,894 14 16 1,479 22 18 1,924 14 17 1,253 13 16 1,238 7 13

Consumer Healthcare 7,658 (1) 2 1,908 1 1 1,947 (1) 3 1,828 (1) 3 1,975 (3) 2

Total turnover 30,821 2 5 8,197 7 5 8,092 3 6 7,310 – 4 7,222 (2) 4

Cost of sales (10,241) (1) – (2,904) 14 13 (2,636) (1) – (2,310) (12) (10) (2,391) (5) (3)

Selling, general and administration (9,915) 3 5 (2,620) 3 1 (2,527) 9 12 (2,457) 3 8 (2,311) (6) (2)

Research and development (3,893) (13) (12) (1,076) (11) (14) (988) (6) (5) (925) (27) (25) (904) (6) (1)

Royalty income 299 (16) (17) 79 14 6 94 (12) (13) 73 (26) (23) 53 (35) (34)

Other operating income/(expense) (1,588) (122) (125) (912) (429)

Operating proﬁt 5,483 34 43 1,554 >100 >100 1,910 2 7 779 >100 >100 1,240 (28) (15)

Net ﬁnance costs (717) (185) (223) (167) (142)

Proﬁt on disposal of associates 3 – 3 – –

Share of after tax proﬁts of associates

and joint ventures 31 5 15 2 9

Proﬁt before taxation 4,800 36 46 1,374 >100 >100 1,705 – 5 614 >100 >100 1,107 (29) (15)

Taxation (754) (74) (193) (139) (348)

Tax rate % 15.7% 5.4% 11.3% 22.6% 31.4%

Proﬁt after taxation for the period 4,046 87 100 1,300 >100 >100 1,512 8 14 475 >100 >100 759 (38) (24)

Proﬁt attributable to non-controlling interests 423 85 94 34 210

Proﬁt attributable to shareholders 3,623 1,215 1,418 441 549

Basic earnings per share (pence) 73.7p >100 >100 24.7p >100 >100 28.8p 16 23 9.0p >100 >100 11.2p (48) (33)

Diluted earnings per share (pence) 72.9p 24.4p 28.5p 8.9p 11.1p

Income statement – Adjusted

Total turnover 30,821 2 5 8,197 7 5 8,092 3 6 7,310 – 4 7,222 (2) 4

Cost of sales (9,178) 5 6 (2,532) 12 12 (2,388) 4 5 (2,079) 5 7 (2,179) (2) –

Selling, general and administration (9,462) 1 4 (2,529) 5 3 (2,313) 1 4 (2,334) 2 6 (2,286) (3) 2

Research and development (3,735) (3) (2) (1,019) 3 (1) (961) 7 8 (868) (18) (15) (887) (3) 2

Royalty income 299 (16) (17) 79 14 6 94 (12) (13) 73 (26) (23) 53 (35) (34)

Operating proﬁt 8,745 2 6 2,196 8 4 2,524 2 6 2,102 1 7 1,923 (3) 9

Net ﬁnance costs (698) (173) (221) (165) (139)

Share of after tax proﬁts of associates

and joint ventures 31 5 15 2 9

Proﬁt before taxation 8,078 2 6 2,028 6 2 2,318 1 5 1,939 2 8 1,793 (1) 11

Taxation (1,535) (355) (430) (388) (362)

Tax rate % 19.0% 17.5% 18.6% 20.0% 20.2%

Proﬁt after taxation for the period 6,543 5 9 1,673 10 6 1,888 4 8 1,551 3 10 1,431 1 13

Proﬁt attributable to non-controlling interests 674 139 141 170 224

Proﬁt attributable to shareholders 5,869 1,534 1,747 1,381 1,207

Adjusted earnings per share (pence) 119.4p 7 12 31.2p 14 10 35.5p 10 14 28.1p 3 10 24.6p (2) 11

The calculation of Adjusted results is described on page 40.

Financial record

Investor information

Financial statements

Governance and remuneration

Strategic report

GSK Annual Report 2018

225