• Home
• Investors
• Annual Review 2006
• Business operating review

Business operating review

GSK delivers strong 2006 performance

Pharmaceuticals

GSK’s ability to deliver continued Pharmaceutical turnover growth in 2006 was primarily due to an exceptionally broad product portfolio of high-value growth products coupled with sales and marketing excellence. These growth products include Seretide/Advair, the Avandia group of products, vaccines, Lamictal, Valtrex, Coreg, Requip, Avodart and Boniva/Bonviva.

GSK continues to be the global leader in Respiratory with sales of its three key products, Seretide/Advair, Flixotide/Flovent and Serevent, amounting to £4.3 billion, up 9 per cent on 2005. Total sales of Seretide/Advair, the Group’s largest product, rose 11 per cent to £3.3 billion. In the US, sales grew 13 per cent to £1.9 billion. In Europe, sales grew 10 per cent to £1.1 billion and in International markets, sales grew 9 per cent to over £300 million.

Market share by value in the anti-asthma and COPD therapy class was 29 per cent in Europe and 33 per cent in the US, an increase of 2 percentage points in Europe and a flat market share in the US (reflecting lower prescription volumes due to a label change in early 2006 that restricted GSK’s ability to promote the product, offset by favourable pricing changes).

In Central nervous system, sales increased 15 per cent to £3.6 billion. Total Seroxat/Paxil sales grew 4 per cent to £620 million, due to strong growth of Paxil CR in the US and Paxil IR in Japan partly offset by generic competition to Paxil IR in Europe.

Total Wellbutrin sales grew 24 per cent to £900 million due to the performance of Wellbutrin XL, a new once-daily product, which grew 25 per cent to £798 million. A generic competitor to the Wellbutrin XL 300mg tablet (approximately 60 per cent of Wellbutrin sales) entered the US market in December 2006.

Sales of Lamictal, for the treatment of epilepsy and bipolar disorder, grew 19 per cent to just under £1 billion, benefiting from its new indication to treat one of the most serious forms of epilepsy – primary generalised tonic-clonic seizures.

Market share by value

Sales of Requip, for Parkinson’s disease and restless legs syndrome (RLS), grew 74 per cent to £268 million and, in December, the FDA accepted GSK’s file for approval of the new formulation Requip CR.

Within Antivirals, sales of HIV products were £1.5 billion, down 1 per cent. Competition to older products, Combivir down 9 per cent to £528 million and Epivir down 21 per cent to £202 million, was mostly offset by strong sales growth of new products Epzicom/Kivexa which more than doubled to £241 million and Lexiva up 18 per cent to £131 million. Sales of Valtrex, for herpes, rose 24 per cent to £845 million, with US sales up 30 per cent to £600 million, driven by patients switching to suppression therapy.

In Metabolic, sales of the Avandia group of products grew 25 per cent to £1.6 billion. In the US, sales grew 24 per cent to £1.2 billion. In Europe, sales grew 39 per cent to £217 million driven by the increasing use of Avandamet. Sales in International markets rose 19 per cent to £234 million. The Avandia group of products achieved in 2006 a market share by value in oral antidiabetics of 37 per cent in the US and 19 per cent in Europe up 2 and 5 percentage points, respectively. In the US, prescription volume growth was adversely impacted by product supply issues during the year, which have now been resolved.

In its first full year, our share of co-promotion income for Boniva/Bonviva, a new once-monthly oral bisphosphonate for the treatment of postmenopausal osteoporosis, was £95 million. Boniva/Bonviva was developed with Roche and launched in 2005.

Vaccine sales increased 23 per cent to £1.7 billion, with good performances from all regions: US sales rose 40 per cent to £465 million, European sales grew 20 per cent to £709 million and sales in International were up 13 per cent to £518 million. Key contributors were Infanrix/Pediarix, GSK’s combination vaccines for children, and hepatitis vaccines. New vaccines also helped drive overall sales growth.

In Cardiovascular and urogenital, Coreg (for heart disease) grew 38 per cent to £779 million. Avodart for benign prostatic hyperplasia (enlarged prostate) had a very strong year, with sales increasing 69 per cent to £216 million.

Antibacterial sales declined 9 per cent worldwide to £1.4 billion, reflecting generic competition and a weaker flu season.

In Oncology and emesis, sales of Zofran grew 3 per cent to £847 million, driven by the US market, up 8 per cent to £679 million.

Competition

The pharmaceutical industry is highly competitive. GSK’s principal competitors range from small to large pharmaceutical companies, often with substantial resources. Pharmaceuticals may be subject to competition from other products during the period of patent protection and, once off patent, from generic versions. Following the loss of patent protection, generic products rapidly capture a large share of the market. For further details, please see ‘Products and Competition’ on pages 27 to 30 in the Annual Report 2006.

Consumer Healthcare sales

The growth in Consumer Healthcare sales of 6 per cent to £3,147 million comprised an OTC medicines sales increase of 5 per cent to £1,496 million, an Oral care sales increase of 6 per cent to £993 million and a Nutritional healthcare sales increase of 7 per cent to £658 million.

In OTC, growth was driven by Panadol, up 6 per cent, and smoking control, up 7 per cent.

In Oral care, sales of Sensodyne grew strongly, up 19 per cent, although sales of Aquafresh were down 3 per cent.

Within Nutritional healthcare, Lucozade, grew 14 per cent and Horlicks, grew 6 per cent. Ribena sales were down 1 per cent.

Operating profit

The operating profit margin increased 1.9 percentage points as operating profit increased 14 per cent in sterling terms to £7,808 million. At constant exchange rates, operating profit increased 17 per cent and the margin increased 2.4 percentage points.

This reflected SG&A growth below the rate of turnover growth, partially offset by higher costs related to programmes to deliver future cost savings and lower other operating income.

Taxation

The charge for taxation on profit, amounting to £2,301 million, represents an effective tax rate of 29.5 per cent (2005 – 28.5 per cent).

As reported last year, GSK’s largest unresolved tax issues were with the US Internal Revenue Service (IRS) and UK HM Revenue and Customs (HMRC) in respect of transfer prices related to the Glaxo heritage products. GSK also has open issues in Japan and Canada.

On 11 September 2006, GSK and the IRS agreed to a resolution of their dispute involving final net cash cost to the Group of approximately $3.1 billion. The settlement resolved all transfer pricing issues for the period 1989 – 2005.

See Note 12 to the financial statements, ‘Taxation’, in the Annual Report 2006 for further details.

Earnings per share

Full year earnings per share (EPS) increased 19 per cent to 95.5 pence. At actual rates of exchange, earnings per share increased 16 per cent. The adverse currency impact of 3 per cent on EPS reflected the strength of sterling against other major currencies.

Dividend

The Board has declared a fourth interim dividend of 14 pence per share, resulting in a dividend for the year of 48 pence per share, a 4 pence increase over the dividend of 44 pence per share for 2005.

Cash flow

The net cash inflow from operating activities after taxation paid was £4,357 million, a decrease of £1,601 million from 2005, arising mainly from the gross taxation payment of $3.3 billion (£1.8 billion) under the US transfer pricing dispute settlement, partially offset by higher operating profits.

Free cash flow was £2.6 billion, a decrease of 44 per cent versus 2005. 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.

2007 outlook

Sales growth of existing products and launch of new products are key drivers of GSK’s business performance. The sales growth seen from key products such as Seretide/Advair, the Avandia group of products, vaccines, Lamictal, Valtrex, Coreg and the rising stars – Requip, Avodart and Boniva/Bonviva – is expected to continue in 2007 although this is likely to be offset by declines in Zofran, Flonase and Wellbutrin due to generic competition.

Five major new pharmaceutical product launches are expected in 2007. These include Tykerb, for breast cancer, Cervarix, for cervical cancer (in Europe), Allermist/Avamys, for allergic rhinitis, Coreg CR, for heart conditions, and Trexima, for migraine.

GSK’s consumer brand portfolio will be strengthened further in 2007, with the launch of 10 products, including alli, a new treatment for weight-loss in the US.

Several new products are expected to be filed for approval with the regulatory authorities in 2007, including vaccine opportunities: US filing of Cervarix, Rotarix, for rotavirus, and the European filing of Synflorix, a vaccine against meningitis, pneumonia and otitis. GSK continues to progress the development of vaccines for use before, and in the event of, a flu pandemic. In January 2007, GSK submitted its H5N1 vaccine to European regulators for approval for pre-pandemic use.

GSK now has 31 major product opportunities in phase III development or registration, comprising 13 new chemical entities (NCEs), 6 new vaccines and 12 product line extensions (PLEs).

GSK’s published earnings guidance for 2007 is that earnings per share growth is expected to be 8 per cent to 10 per cent in CER terms.

Legal proceedings

The Group is involved in significant legal and administrative proceedings, principally product liability, intellectual property, tax, antitrust and governmental investigations and related private litigation. See Note 43 to the financial statements, ‘Legal proceedings’, in the Annual Report 2006 for a discussion of proceedings and investigations in which the Group is involved.