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Share prices in the sector haven't performed well, what is the outlook for GSK?

Summary

To ensure that we remain an industry leader, we are addressing the issues which face the pharmaceutical sector.

Sector challenges
After many years of sustained value creation for shareholders, the pharmaceutical sector has suffered a de-rating since the beginning of 2001. The main factor behind the de-rating is that R&D productivity, which is integral to the growth of the pharmaceutical industry, has declined. Share price valuations in the past also included more value for the longer-term potential of R&D pipelines than is currently the case.

At the same time, the level of generic competition has intensified. GSK has been able to withstand this pressure better than many of our peers because of the broad nature of our product line, a flow of new products from our pipeline and the greater protection we experience in our vaccines and Consumer Healthcare businesses.

In fact every year since the merger at the end of 2000 we have delivered increased sales, at CER, despite challenging market conditions. In financial terms, over the same period, total returns to shareholders for GSK's peer group were down 29 per cent. The total return to GSK shareholders over this period was down 15 per cent, above the performance of the peer group.

2007 - the Avandia factor
In 2007 GSK's share price fell by five per cent compared to an increase in the FTSE 100 index of four per cent. That was disappointing for our investors, a significant number of whom are also our employees.

We started 2007 strongly and achieved several important milestones including the launches of Tykerb and the FDA approval of alli. In the first quarter, we beat expectations and delivered EPS growth of 14 per cent. As the market received this positive news our share price outperformed most of our peers. Then, in May 2007, an article in the New England Journal of Medicine (NEJM) suggested that there may be cardiovascular risk associated with Avandia, our second largest product. This was followed by intense media coverage and despite our efforts to explain the entirety of the data, which did not confirm this risk, doctors were reluctant to prescribe Avandia for new patients without further FDA guidance.

Sales of Avandia dropped significantly and this had a negative impact on our share price. Following clarification from the FDA in October 2007, we now have a new approved label and can move ahead with more clarity.

Taking action to create long-term value
The Board and management continually review GSK's business strategy and the external environment with a view to achieving growth on a sustainable basis.

GSK share price performance 2007

Our industry has a long-term investment cycle, driven primarily by the time it takes to develop a new pharmaceutical product - at least 10 years. The decisions taken over the last seven years that have improved R&D productivity at GSK, will still take time to have a major impact on our revenues. However, as investors become more confident in our strategy, and key pipeline products make it to the market, this will begin to be factored into our share price.

At the same time, we are very focused on taking action to enhance returns for shareholders by accelerating our efficiency programmes and returning cash to shareholders through dividends and share buy-backs. The Board approved a 10 per cent increase in its dividend for 2007 and in July, the company announced the largest share buy-back programme in the industry.

After the third quarter, we announced a significant new £1.5 billion Operational Excellence programme to improve the efficiency and productivity of our operations. This is expected to deliver annual savings of up to £700 million by 2010.

Reducing costs does not mean cutting down on talent. GSK is respected worldwide as a company where the best people can do their best work, and we continue to attract, retain and reward the brightest employees, from sales teams on the front line to the scientists who are at the forefront of discovering new therapies.

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