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Excellent 2005 performance for GSK

for the year to 31st December 2005

Pharmaceuticals

GSK continues to be the global leader in respiratory pharmaceuticals with sales of its three key products, Seretide/Advair, Flixotide/Flovent and Serevent, amounting to £4.0 billion, up 15%. Sales of Seretide/Advair, the Group's largest product grew 22% to £3.0 billion.

In the USA, Advair sales rose 26% to £1.7 billion, with continued gains in market share throughout the year. Sales were strong in both European and International markets - both up 16% to £1 billion and £0.3 billion respectively.

Central nervous system (CNS) sales declined 8% to £3.2 billion. Total Paxil sales fell 42% to £615 million, due to generic competition and the interruption in supply to Paxil CR during the year. Partially mitigating this decline was the strong performance of the product in Japan, up 17% to £197 million.

Total Wellbutrin product sales fell 2% to £739 million. Wellbutrin IR and SR sales fell 68% to £92 million due to generic competition but this was largely offset by the very strong performance of Wellbutrin XL (up 38% to £647 million).

The strong growth of GSK's epilepsy and bi-polar disorder treatment Lamictal continued, with sales up 24% to £849 million, driven by the indication for the maintenance treatment of bi-polar disorder.

Requip sales rose 34% to £156 million following its launch in the USA for Restless Legs Syndrome (RLS) in Q2 2005. In Europe, final approval of Requip/Adartrel for RLS is expected in the first half of 2006.

Within Anti-virals, HIV product sales grew 5% to £1.6 billion, with sales from new products Epzicom/Kivexa and Lexiva (together more than doubling to £226 million) offsetting the performance of Trizivir (down 6% to £303 million) and Epivir (down 12% to £261 million). Sales of the herpes treatment Valtrex grew 21% to £695 million. Performance is being driven by the USA (up 26% to £470 million) where the product is the clear market leader in treatments for genital herpes.

Anti-bacterial/anti-malarial sales declined 3% worldwide and 27% in the USA reflecting generic competition.

In Metabolic, the diabetes treatments Avandia/Avandamet continue to perform very strongly, with overall sales of £1.3 billion (up 18%). In the USA, sales grew 14% to £977 million. Avandia/Avandamet is also establishing a strong position in Europe, with sales rising 52% to £157 million helped by the launch of Avandamet throughout the region. Sales in International markets rose 13% to £195 million.

Boniva/Bonviva, a new once-monthly oral bisphosphonate for the treatment of osteoporosis, which was developed with Roche, had a strong launch in the USA and now has a 10% share of new prescriptions for oral bisphosphonates. Boniva injection, the first-ever quarterly treatment for osteoporosis, was approved in the USA in January 2006 and received a positive opinion from the CHMP in Europe on 27th January 2006.

The vaccines business performed well with total sales rising 15% to £1.4 billion, led by Infanrix. Vaccine sales were particularly strong in the USA, where turnover rose 26% to £338 million, helped by the launch of two new products - Fluarix and Boostrix.

In Oncology and emesis, sales of Zofran grew 9% to £837 million, driven by the US performance, which was up 12% to £639 million.

In Cardiovascular and urogenital, Coreg (for heart disease) sales grew 32% to £573 million. Avodart for benign prostatic hyperplasia (enlarged prostate) had a very strong year with sales more than doubling to £129 million. By January 2006 the product accounted for 42% of new prescriptions in the US 5-Alpha Reductase Inhibitor market.

Product supply

Following FDA inspections in 2003 and 2004, which identified possible deficiencies in manufacturing practices at the Group's facility at Cidra in Puerto Rico, the FDA halted distribution of supplies of Paxil CR and Avandamet in March 2005. This site is engaged in tableting and packaging for a range of GSK products - primarily for the US market. In April 2005, the Group reached agreement with the FDA on a Consent Decree, which provides for an independent review of manufacturing at the site for compliance with FDA requirements. The Decree also allows for potential future penalties if GSK fails to meet its terms. In June 2005, the Group began re-supplying the US and other markets with both Paxil CR and Avandamet. The sales of these products were significantly impacted in 2005 by this interruption in supply. The impact upon Avandamet was mitigated by the switching of patients to Avandia. For further details see Note 41 to the financial statements, 'Legal proceedings', in the Annual Report 2005.

Consumer Healthcare sales

The growth in Consumer Healthcare sales of 2% to £2,999 million comprised an OTC medicines sales increase of 1% to £1,437 million, a Nutritional healthcare sales increase of 7% to £619 million and an Oral care sales increase of 2% to £943 million.

In OTC, growth from analgesics, up 6%, and respiratory tract, up 5%, helped offset the loss of sales from the dermatological products divested in 2004.

In Oral care, sales of Sensodyne and the denture care brands (Polident, Poligrip and Corega) grew by 12% and 6%, respectively, helping to offset lower sales of other toothpaste products.

Within Nutritional, Lucozade, up 11%, continued to grow strongly in Europe.

On 23rd January 2006, an FDA Advisory Committee recommended that Alli (orlistat) be approved for over-the-counter use in the USA to promote weight loss in overweight adults, when used along with a reduced calorie, low-fat diet. If approved, Alli will be the only FDA-approved weight-loss drug available over-the-counter.

Operating profit

The operating profit margin increased 2.9 percentage points as operating profit of £6,874 million increased 19% in sterling terms. At constant exchange rates operating profit increased 16% and the margin increased 2.5 percentage points.

This reflected lower charges relating to legal matters and share-based payments, higher product and asset disposals and increases in advertising, promotion and selling that were below the rate of turnover growth. Partially offsetting these items were higher costs related to programmes to deliver future cost savings and increased R&D expenditure.

Taxation

The charge for taxation on profit, amounting to £1,916 million, represents an effective tax rate of 28.5% (2004 – 30.4%). The tax rate in 2005 of 28.5% benefited from higher tax relief on actual or potential exercise of share options by employees, arising from the increase in the share price in the year.

Earnings per share

Full year earnings per share (EPS) of 82.6 pence increased 18%. At actual rates of exchange, earnings per share increased 21%. The favourable currency impact on EPS of three percentage points reflects a strengthening of the US dollar and Euro relative to 2004 and compares with a 1% favourable currency impact on turnover. This difference principally arises from a different mix of currencies in profits compared with turnover.

Dividend

The Board has declared a fourth interim dividend of 14 pence per share, resulting in a dividend for the year of 44 pence per share, a 2 pence increase over the dividend of 42 pence per share for 2004.

Cash flow

The net cash inflow from operating activities after taxation paid was £5,958 million, an increase of £1,014 million over 2004, arising principally due to higher operating profits.

The net cash outflow from investing activities was £1,660 million, an increase of £740 million which reflected the purchase of Corixa and ID Biomedical in 2005 for over £1 billion (purchases of businesses in 2004 were £0.3 billion).

Free cash flow was £4.7 billion, an increase of 26% over 2004. Free cash flow is the amount of cash generated by the business after meeting its obligations for interest, tax and dividends paid to minority interests, and after capital expenditure on non-current tangible and intangible assets.

Legal proceedings

The Group is involved in patent litigation with manufacturers seeking to market generic versions of many of the Group's most important products, including Wellbutrin, Seretide, Avandia, Imitrex, Valtrex, Lamictal and Zofran, prior to the expiration of the Group's patents. The Group is currently a defendant in a number of product liability lawsuits, including class actions, that involve substantial claims for damages related to the Group's pharmaceutical products. The Group is also a defendant in anti-trust actions filed following adverse outcomes in prosecution of patent infringement actions. Further, the Group is responding to federal and state governmental investigations in the USA into pricing, marketing and reimbursement of a number of prescription drug products. See Note 41 to the financial statements, 'Legal proceedings', in the Annual Report 2005 for a discussion of proceedings and governmental investigations in which the Group is currently involved.

Tax issues

The Group has open issues with the revenue authorities in the USA, UK, Japan and Canada; by far the largest relates to Glaxo heritage products, in respect of which the US Internal Revenue Service (IRS) and HM Revenue & Customs (HMRC) in the UK have made competing and contradictory claims.

GSK has attempted to settle the US dispute, first through direct discussion with the IRS and subsequently through discussions between the US and UK authorities under the terms of the double tax convention between the two countries; these discussions were terminated in July 2003. On 6th January 2004, the IRS issued a Notice of Deficiency for the years 1989-1996 claiming additional taxes of $2.7 billion.

On 2nd April 2004, the Group filed a petition in the US Tax Court disputing the IRS claim and seeking a refund of $1 billion in taxes. On 25th January 2005 the IRS issued a further Notice of Deficiency for the years 1997-2000 claiming additional federal taxes of $1.9 billion, which the Group contested by filing a petition in the US Tax Court on 12th April 2005, to which the IRS filed its statutory Answer on 7th June 2005. In September 2005, the Court agreed to consolidate the IRS claims for 1997-2000 with those for 1989-1996 into a single trial. The total claims for these periods amount to $4.6 billion of additional federal taxes and related interest to 31st December 2005 of $3.7 billion, net of federal tax relief, giving a total of $8.3 billion. The Group's petitions against the IRS claims include counter-claims for repayment of federal taxes totalling $1.8 billion, based partly by reference to an Advance Pricing Agreement (APA) between SmithKline Beecham and the IRS covering the transfer pricing of Tagamet between 1991 and 1993.

On 23rd December 2004, the IRS filed a motion for summary judgement to exclude any evidence relating to APAs from the court proceedings. On 31st March 2005, the trial judge denied the IRS motion and reserved ruling on the admissibility of APA evidence until full trial, which is scheduled to commence on 16th October 2006. A decision is expected by mid-2008.

As similar tax issues remain open for 2001 to date, GSK expects to receive further substantial claims by the IRS for these years. GSK continues to believe that the profits reported by its US subsidiaries for the period 1989 to date, on which it has paid taxes in the USA, are more than sufficient to reflect the activities of its US operations. However, the Group tax creditor balance at 31st December 2005 of £2.3 billion (2004 – £1.8 billion) includes a provision for the estimated amount at which the IRS dispute might ultimately be settled.

If the IRS were to follow the same methodology as applied previously in respect of these later years, GSK estimates that the potential unprovided exposure in respect of this dispute with the IRS for the years 1989-2005 amounted to approximately $11.5 billion at 31st December 2005 (2004 – $10.1 billion).

GSK is in continuing discussions with HMRC in respect of UK transfer pricing and other matters which are in dispute for the years 1995 to date. However, little progress has been made over the past year and consequently these matters may become subject to litigation in due course.