23rd Apr 2008 12:00
GlaxoSmithKline PLC23 April 2008 Issued: Wednesday, 23rd April 2008, London, U.K. Results Announcement for the first quarter 2008 GSK reports Q1 Business Performance* EPS of 25.6p GlaxoSmithKline plc (GSK) today announces its unaudited results for the firstquarter ended 31st March 2008. The full results are presented under 'IncomeStatement' on page 7 and are summarised below. BUSINESS PERFORMANCE RESULTS* Q1 2008 Q1 2007 Growth £m £m CER% £%Turnover 5,686 5,592 (3) 2Operating profit 2,048 2,166 (9) (5)Earnings per share 25.6p 27.0p (9) (5) STATUTORY RESULTS* Q1 2008 Q1 2007 Growth £m £m CER% £%Turnover 5,686 5,592 (3) 2Restructuring charges 85 - - -Operating profit 1,963 2,166 (13) (9)Earnings per share 24.4p 27.0p (14) (10) BUSINESS PERFORMANCE SUMMARY* • GSK on track to meet financial guidance for 2008 • Pharmaceutical turnover down 4% to £4.8 billion, with growth from key products offset by generic competition to products in the USA and declines in Avandia sales • Seretide/Advair sales up 10% to £954 million; Vaccine sales up 10% to £436 million • Sustained product flow with US regulatory approvals for Rotarix and Treximet, and positive EU opinions for Volibris and Prepandrix • GSK has 157 projects in clinical development of which 75% involve new molecules or new vaccines • Continued strong performance of Consumer Healthcare with sales up 8% to £893 million • Q1 dividend of 13p, up 8%; approximately £1 billion of shares repurchased in the quarter; total cash return of £1.7 billion • Sterling EPS benefited by 4 percentage points due to currency movements * Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding restructuring charges relating to the new Operational Excellence programme, which commenced in October 2007, and significant acquisitions. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed and gives a more useful indication of the underlying performance of the Group. In order to illustrate underlying performance, it is the Group's practice to discuss its results in terms of constant exchange rate (CER) growth. All commentaries are presented in terms of CER growth and compare 2008 business performance results with 2007 statutory results, unless otherwise stated. See 'Accounting Presentation and Policies' on page 17. Commenting on GSK's performance for the quarter, JP Garnier, Chief ExecutiveOfficer, said: "Our performance this quarter was in line with our expectations. We continue tosee sustained growth from key areas of our business such as Seretide/Advair,vaccines and consumer. However, sales were impacted by generic competition anddeclines in Avandia sales. We are also making good progress in strengthening our product portfolio, withapprovals and regulatory progress on 4 key products already this year. Theseproducts are at the forefront of a substantive pipeline of projects in clinicaldevelopment - with 96 NCEs and 24 new vaccines this pipeline is testament toGSK's innovation and gives the company a very strong foundation for the future." PHARMACEUTICAL UPDATE Total pharmaceutical turnover for the first quarter declined 4% to £4.8 billion, with growth from key products offset by significant generic competition to products in the USA and declines in Avandia sales in all regions. In the United States, turnover was £2,138 million, down 10%, in Europe turnover was £1,526 million, down 1%, and in International markets sales were £1,129 million, up 6%. Seretide/Advair sales up 10% with strong performance in all regions Sales of Seretide/Advair, for asthma and COPD, rose 10% to £954 million, with sales in the USA also growing 10% to £499 million. In Europe, sales grew 9% to £351 million and in International sales grew by 16% to £104 million. GSK continues to see increased use of Seretide/Advair in the treatment of COPD and is in ongoing discussions with the FDA to further expand the indication for use in this patient group. GSK expects a decision from the FDA during the second quarter. Vaccine sales of £436 million up 10% driven by strong US performance US vaccine sales grew 34% for the quarter to £109 million, driven by continued strong performances of hepatitis vaccines, up 66% to £53 million, and Infanrix/Pediarix, up 21% to £51 million. In Europe, sales of vaccines were up 5% to £202 million. In International markets sales rose 2% to £125 million, adversely impacted in part by the timing of shipments. GSK expects stronger growth in this region in the rest of this year. GSK expects to submit a response to the FDA's Complete Response letter regarding Cervarix in the second quarter and will continue discussions with the agency regarding the application. Cervarix has now been approved in more than 60 countries with discussions regarding reimbursement and tender orders on-going. Sales for Cervarix in the quarter were £12 million. In April, GSK received FDA approval for Rotarix, a new two-dose vaccine to prevent rotavirus gastroenteritis, with launch expected in the second half of the year. Sales of Rotarix in markets outside of the USA grew 79% to £27 million. In February, GSK received a positive opinion from the EMEA regarding Prepandrix, its pre-pandemic flu vaccine. Prepandrix will be the first vaccine approved for pre-pandemic use in Europe. In March a supply contract was signed by the Finnish Government for 5.2 million doses of Prepandrix for use in advance of a pandemic flu outbreak. Shipments will commence in the second half of 2008. New growth drivers Arixtra, for deep vein thrombosis and pulmonary embolism, delivered strong growth with sales up 70% to £35 million. Sales grew in Europe (up 33% to £14 million) following approval last year for the treatment of specific acute coronary syndromes (ACS). In the USA, GSK is in on-going discussions with the FDA regarding a potential ACS indication. Avodart, for benign prostatic hyperplasia (enlarged prostate), continued to perform strongly with sales up 30% to £85 million for the quarter. GSK has filed for a co-prescription indication in the USA, Europe and International markets for use of Avodart in combination with the alpha-blocker, tamsulosin. In April, GSK received its first regulatory approval for this indication in Europe under the mutual recognition procedure. GSK expects a response from the FDA in June for this application. GSK's co-promotion income for Boniva/Bonviva, the only once-monthly oral medicine for post-menopausal osteoporosis, was up 50% to £49 million. Sales of GSK's newly acquired Lovaza, an omega-3-acid product for adult patients with very high levels of triglycerides, contributed £50 million (+72% on a proforma basis). Tykerb/Tyverb, for breast cancer, achieved sales of £19 million for the quarter. An extensive development programme involving 10 phase III clinical trials is ongoing, including metastatic, first line and adjuvant breast cancer. Last week new data were presented at the European Breast Cancer Conference in Berlin which demonstrated the efficacy of Tykerb in shrinking tumours prior to surgery and reducing the number of chemotherapy-resistant cancer stem cells responsible for tumour regeneration. Enrolment was completed for TEACH in the quarter - a phase III study investigating whether adjuvant treatment with Tykerb will improve survival in early breast cancer by preventing the disease from recurring. Veramyst/Avamys, for allergic rhinitis, generated sales of £13 million across the USA and Europe for the quarter. Other key pharmaceutical products Sales of Avandia products, for the treatment of type 2 diabetes, fell 56% to £191 million. Sales in the USA for the quarter were £99 million, down 66%, with Avandia's share of total prescriptions in the US oral anti-diabetic market currently stable at around 4%. In Europe sales were £54 million, down 14%, and in International markets £38 million, down 44%. Sales of Coreg products, for heart disease, fell 77% to £48 million, following the introduction of generic competition to Coreg IR in September 2007. Sales of Coreg CR were £35 million with increasing share gains made in the US hypertension market. Total sales of HIV products were £358 million, down 5%. Competition to older products, Combivir (-13% to £105 million) and Epivir (-22% to £34 million), was partially offset by strong sales growth of Epzicom/Kivexa (+25% to £99 million). Sales of Lamictal, for the treatment of epilepsy and bipolar disorder, were £290 million driven by strong performance in the USA with sales up 22% to £240 million. Sales of Relenza, an antiviral treatment for flu, were £29 million (£92 million in Q1 2007), reflecting the variable timing of tender orders from governments stockpiling against a possible flu pandemic. Sales of Requip, for Parkinson's Disease/Restless Legs Syndrome, grew 15% to £94 million for the quarter. Requip XL, a new once-daily formulation for Parkinson's Disease, has now been launched in 12 European markets. In the USA, GSK expects a response from the FDA on its application for Requip XL during the second quarter of 2008. Sales of Valtrex, for herpes, rose 9% to £249 million, with US sales up 7% to £173 million, driven by increased use of the product for prevention of herpes transmission. Sales in Europe grew 18% to £37 million and in International sales grew 9% to £39 million. Product sales affected by generic competition were Wellbutrin (-3% to £126 million), Flixonase/Flonase (-33% to £46 million) and Zofran (-69% to £29 million). CONSUMER HEALTHCARE UPDATE Consumer Healthcare sales grew 8% to £893 million, driven by innovation andgeographic expansion In Europe, sales grew 7% to £413 million with strong performances in Central and Eastern Europe. In International, sales grew 18% to £285 million with strong performances from key markets, Latin America, India and the Middle East. Sales in North America declined 2% to £195 million due to strong competition to smoking cessation products from prescription medicines and retailers' own-label nicotine replacement products. Excluding the smoking cessation brands, North American consumer healthcare sales grew 6% to £157 million. Over-the-counter medicine sales grew 4% to £411 million. Following its successful launch in June 2007, alli contributed sales of £9 million which were impacted by normalisation of inventory levels after a year-end promotion. Demand for alli continues to be strong and, based on retail market data, underlying demand is estimated to have been £35 million during the quarter. Panadol sales grew 19% to £80 million. Sales of Breathe Right, recently acquired from CNS, grew 14% to £17 million. The product will be launched in European, Asian and Latin American markets this year. Oral healthcare sales were up 8% to £289 million for the quarter. Sales of Sensodyne grew 19% to £86 million, aided by the successful launch of Sensodyne Pronamel. Sales of Aquafresh grew 7% to £83 million, and sales of the denture care brands, Poligrip, Corega and Polident, grew 4% to £60 million. Nutritional healthcare sales for the quarter increased by 14% to £193 million. Lucozade continued its excellent performance, up 18% to £86 million. Horlicks sales grew 18% to £56 million, whilst sales of Ribena declined 5% to £37 million. PHARMACEUTICAL PIPELINE UPDATE In February, the company published an update of its R&D pipeline. GSK currently has 157 projects in clinical development comprising 96 NCEs, 37 PLEs and 24 Vaccines. GSK has 34 key assets currently in phase III development or registration. First major market approvals and filings In April, GSK received FDA approval for Treximet, a new acute treatment of migraine. Treximet is the first and only migraine product designed to target multiple mechanisms of migraine by combining a triptan, a class of migraine-specific medicines pioneered by GSK, and an anti-inflammatory pain reliever in a single tablet. Treximet will be launched in the USA in May. In March, the FDA granted priority review for Promacta, an oral thrombopoeitin receptor agonist, for the short-term treatment of patients with chronic idiopathic thrombocytopenic purpura. The FDA's decision on Promacta is expected in the second quarter and, if approved, would be the first treatment of its type to be approved for this indication. In February, the EMEA granted a positive opinion for approval of Volibris (ambrisentan) to treat functional class II and III pulmonary arterial hypertension. Late-stage pipeline progress Following analysis of the full data set for darapladib, which includes the dose ranging study presented at the American College of Cardiology in March and the IBIS-2 imaging study, GSK intends to progress darapladib into Phase III development and will shortly start discussions with regulators regarding the structure of the Phase III programme. GSK expects data from IBIS-2 to be presented and published in the second half of the year. In March, positive phase III data were published demonstrating that Bosatria (mepolizumab) showed disease control with reduced corticosteroid use in treatment of hypereosinophilic syndrome. This is a group of rare disorders leading to significant respiratory, cardiac, skin and gastrointestinal problems and can be life-threatening in some people with advanced disease. Positive results from the third pivotal phase III study for GSK1838262 (XP13512) were also received in the quarter demonstrating its efficacy as a treatment of moderate-to-severe symptoms of primary restless legs syndrome. GSK expects to file '262 with the FDA for approval in the third quarter of 2008. Acquisitions On 22nd April GSK announced an agreement to acquire Sirtris Pharmaceuticals, a world leader in 'sirtuin' research and development. Sirtuins are a class of enzymes that could be used to develop new medicines to address diseases associated with metabolism and ageing such as diabetes, muscle wasting and neurodegeneration. Collaborations On 17th April, GSK announced a worldwide strategic alliance with Regulus Therapeutics to discover, develop and market novel microRNA-targeted therapeutics, a new approach for the treatment of a wide range of diseases, including inflammatory diseases such as rheumatoid arthritis and inflammatory bowel disease. FINANCIAL REVIEW Dividend The Board has declared a first interim dividend of 13 pence per share. This compares with a dividend of 12 pence per share for Q1 2007. The equivalent interim dividend receivable by ADR holders is 51.8570 cents per ADS based on an exchange rate of £1/$1.9945. The ex-dividend date will be 30th April 2008, with a record date of 2nd May 2008 and a payment date of 10th July 2008. Share buy-back programme GSK repurchased £986 million of shares in Q1 2008 which have been cancelled. Repurchases of £6 billion are expected in 2008. Operational Excellence In October 2007, GSK announced a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations. This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years of the programme, with approximately £350 million expected in 2008 and £550 million in 2009. One-off charges of £87 million before tax relating to the new Operational Excellence programme were recorded in Q1 2008. Operating profit and earnings per share Business performance operating profit of £2,048 million decreased by 9% in CER terms compared with Q1 2007. This was more than the fall in turnover of 3%, reflecting higher R&D costs and lower other operating income, partly offset by lower SG&A expenditure. Costs of sales increased to 22.8% of turnover (Q1 2007: 22.1%) reflecting the impact of generic competition to higher margin products and lower Avandia sales, partly offset by improvements in manufacturing efficiencies. In the quarter, gains from asset disposals and legal settlements were £54 million (Q1 2007: £102 million), costs for legal matters were £39 million (Q1 2007: £26 million), fair value movements on financial instruments resulted in income of £66 million (Q1 2007: £33 million) and charges related to previous restructuring programmes were £6 million (Q1 2007: £9 million). The business performance operating profit impact of these items was a £75 million credit in Q1 2008 (Q1 2007: £100 million credit). GSK's share of the results of associates was a £1 million loss (Q1 2007: £15 million profit) as a result of the recognition of a legal provision made by Quest Diagnostics Inc. Business performance profit after taxation decreased by 13% in CER terms, more than the decline in operating profit, reflecting higher net interest costs (primarily driven by increased borrowing to fund the share repurchase programme) and a higher tax rate. Business performance EPS of 25.6 pence decreased 9% in CER terms (5% in sterling terms) compared with Q1 2007. Statutory operating profit for the quarter, including restructuring costs of £85 million for the new Operational Excellence programme and significant acquisitions, was £1,963 million and statutory EPS was 24.4 pence. Currencies The Q1 2008 results are based on average exchange rates, principally £1/$1.99, £1/Euro 1.32 and £1/Yen 210. The period-end exchange rates were £1/$1.99, £1/Euro 1.26 and £1/Yen 198. If exchange rates were to hold at the average Q1 2008 levels for the rest of the year, the positive currency impact on business performance EPS growth for the full-year would be around 4 to 5 percentage points. 2008 earnings guidance GSK continues to expect a mid-single digit percentage decline in business performance EPS, at constant exchange rates. GlaxoSmithKline - one of the world's leading research-based pharmaceutical andhealthcare companies - is committed to improving the quality of human life byenabling people to do more, feel better and live longer. For company informationincluding a copy of this announcement and details of the company's updatedproduct development pipeline, visit GSK at www.gsk.com. Enquiries: UK Media Philip Thomson (020) 8047 5502 Alice Hunt (020) 8047 5502 Gwenan White (020) 8047 5502 US Media Nancy Pekarek (215) 751 7709 Mary Anne Rhyne (919) 483 2839 European Analyst / Investor David Mawdsley (020) 8047 5564 Sally Ferguson (020) 8047 5543 Gary Davies (020) 8047 5503 US Analyst / Investor Frank Murdolo (215) 751 7002 Tom Curry (215) 751 5419 Brand names appearing in italics throughout this document are trademarks of GSKor associated companies with the exception of Levitra, a trademark of Bayer,Bonviva/Boniva, a trademark of Roche, and Vesicare, a trademark of AstellasPharmaceuticals in many countries and of Yamanouchi Pharmaceuticals in certaincountries, all of which are used under licence by the Group. Cautionary statement regarding forward-looking statements Under the safe harbor provisions of the US Private Securities Litigation ReformAct of 1995, the company cautions investors that any forward-looking statementsor projections made by the company, including those made in this Announcement,are subject to risks and uncertainties that may cause actual results to differmaterially from those projected. Factors that may affect the Group's operationsare described under 'Risk Factors' in the 'Business Review' in the company'sAnnual Report 2007. INCOME STATEMENT Three months ended 31st March 2008 Business performance Restructuring Statutory Q1 2008 Growth Q1 2008 Q1 2008 Q1 2007 £m CER% £m £m £m ---------- ---------- ---------- ---------- ----------Turnover:Pharmaceuticals 4,793 (4) 4,793 4,806Consumer Healthcare 893 8 893 786 ---------- ---------- ---------- ---------- ----------TURNOVER 5,686 (3) 5,686 5,592 Cost of sales (1,299) 1 (60) (1,359) (1,234) ---------- ---------- ---------- ---------- ----------Gross profit 4,387 (4) (60) 4,327 4,358 Selling, general and administration (1,720) (2) (25) (1,745) (1,673)Research and development (780) 5 (780) (726)Other operating income 161 161 207 ---------- ---------- ---------- ---------- ---------- Operating profit:Pharmaceuticals 1,889 (10) (84) 1,805 2,028Consumer Healthcare 159 4 (1) 158 138 ---------- ---------- ---------- ---------- ----------OPERATING PROFIT 2,048 (9) (85) 1,963 2,166 Finance income 82 82 58Finance expense (168) (2) (170) (96)Share of after tax (losses)/profits of (1) (1) 15associates and joint ventures ---------- ---------- ---------- ---------- ---------- PROFIT BEFORE TAXATION 1,961 (13) (87) 1,874 2,143 Taxation (563) (12) 21 (542) (610)Tax rate % 28.7% 28.9% 28.5% ---------- ---------- ---------- ---------- ----------PROFIT AFTER TAXATION FOR THE PERIOD 1,398 (13) (66) 1,332 1,533 ---------- ---------- ---------- ---------- ---------- Profit attributable to minority interests 25 - 25 19Profit attributable to shareholders 1,373 (66) 1,307 1,514 ---------- ---------- ---------- ---------- ---------- 1,398 (66) 1,332 1,533 ---------- ---------- ---------- ---------- ---------- EARNINGS PER SHARE 25.6p (9) 24.4p 27.0p ---------- ---------- ---------- ---------- ---------- Diluted earnings per share 25.5p 24.2p 26.7p ---------- ---------- ---------- ---------- ---------- PHARMACEUTICAL TURNOVER Three months ended 31st March 2008 Total USA Europe International --------------- --------------- --------------- ------------- £m CER% £m CER% £m CER% £m CER% ------ ----- ------ ----- ----- ----- ---- -----RESPIRATORY 1,355 6 616 8 495 4 244 5Seretide/Advair 954 10 499 10 351 9 104 16Flixotide/Flovent 162 (1) 75 7 45 (7) 42 (7)Serevent 67 (5) 17 (11) 37 6 13 (21)Flixonase/Flonase 46 (33) 4 (84) 14 - 28 -Veramyst 13 - 12 - 1 - - - CENTRAL NERVOUS SYSTEM 829 3 594 7 131 (7) 104 (8)Seroxat/Paxil 121 (15) 31 (16) 29 (21) 61 (11) Paxil IR 88 (13) 2 - 29 (21) 57 (12) Paxil CR 33 (20) 29 (22) - - 4 -Wellbutrin 126 (3) 121 (4) 3 >100 2 (33) Wellbutrin IR, SR 13 (43) 11 (45) 1 - 1 (50) Wellbutrin XL 113 6 110 4 2 - 1 -Imigran/Imitrex 165 (1) 134 - 23 (5) 8 (11)Lamictal 290 16 240 22 34 (11) 16 -Requip 94 15 60 9 29 24 5 67 ANTI-VIRALS 739 (8) 347 (9) 213 (15) 179 6HIV 358 (5) 152 (6) 159 (6) 47 2Combivir 105 (13) 45 (8) 43 (20) 17 (6)Trizivir 54 (16) 27 (16) 24 (19) 3 -Epivir 34 (22) 11 (21) 15 (22) 8 (22)Ziagen 25 (8) 10 (9) 9 (11) 6 -Agenerase, Lexiva 35 (3) 18 (10) 15 8 2 -Epzicom/Kivexa 99 25 40 17 48 33 11 29 Herpes 274 6 174 7 45 11 55 2Valtrex 249 9 173 7 37 18 39 9Zovirax 25 (15) 1 (50) 8 (13) 16 (13) Zeffix 46 8 3 - 7 - 36 10Relenza 29 (71) 8 (82) - - 21 19 VACCINES 436 10 109 34 202 5 125 2Hepatitis 139 16 53 66 57 (5) 29 -Influenza 5 - - - 4 - 1 -Infanrix/Pediarix 153 6 51 21 82 (1) 20 -Boostrix 13 (8) 5 (29) 5 - 3 50Rotarix 27 79 - - 9 100 18 70Cervarix 12 - - - 10 - 2 - CARDIOVASCULAR AND UROGENITAL 398 (12) 232 (22) 119 6 47 19Coreg 48 (77) 48 (78) - - - (50) Coreg CR 35 >100 35 >100 - - - - Coreg IR 13 (94) 13 (94) - - - -Levitra 14 - 13 - 1 - - -Avodart 85 30 49 22 28 39 8 75Arixtra 35 70 19 73 14 33 2 -Fraxiparine 51 (4) - - 44 (7) 7 20Vesicare 14 36 14 36 - - - -Lovaza 50 - 50 - - - - - ANTI-BACTERIALS 365 (2) 45 (13) 181 (7) 139 10Augmentin 156 (1) 17 (29) 82 - 57 10Altabax 2 - 2 - - - - - METABOLIC 274 (45) 133 (57) 74 (6) 67 (30)Avandia products 191 (56) 99 (66) 54 (14) 38 (44) Avandia 122 (62) 71 (69) 22 (35) 29 (48) Avandamet 62 (29) 24 (49) 31 8 7 (30) Avandaryl 7 (63) 4 (73) 1 - 2 -Bonviva/Boniva 49 50 33 48 15 44 1 - ONCOLOGY AND EMESIS 113 (27) 58 (41) 38 6 17 -Zofran 29 (69) 3 (95) 16 (30) 10 (9)Hycamtin 30 (3) 17 (5) 11 11 2 (50)Tykerb 19 >100 10 >100 7 >100 2 - OTHER 284 13 4 (91) 73 20 207 32 -------------- -------------- -------------- -------------- 4,793 (4) 2,138 (10) 1,526 (1) 1,129 6 -------------- -------------- -------------- -------------- Pharmaceutical turnover includes co-promotion income. CONSUMER HEALTHCARE TURNOVER Three months ended 31st March 2008 Q1 2008 Growth £m CER% --------- ---------Over-the-counter medicines 411 4Analgesics 116 13Dermatological 46 8Gastrointestinal 68 -Respiratory tract 71 18Smoking control 58 (27)Natural wellness support 32 -Weight management 9 - Oral care 289 8Nutritional healthcare 193 14 --------- ---------Total 893 8 --------- --------- FINANCIAL REVIEW - INCOME STATEMENT Operating profit - business performance Q1 2008 Q1 2007 Growth --------------------- -------------------- ---------------- % of % of £m turnover £m turnover CER% £% -------- -------- -------- -------- ------- -------Turnover 5,686 100.0 5,592 100.0 (3) 2 Cost of sales (1,299) (22.8) (1,234) (22.1) 1 5Selling, general and administration (1,720) (30.3) (1,673) (29.9) (2) 3Research and development (780) (13.7) (726) (13.0) 5 7Other operating income 161 2.8 207 3.7 -------- -------- -------- -------- ------- -------Operating profit 2,048 36.0 2,166 38.7 (9) (5) -------- -------- -------- -------- ------- ------- Business performance operating margin decreased 2.7 percentage points, assterling operating profit decreased 5% while sterling turnover increased 2%. Cost of sales as a percentage of turnover increased by 0.7 percentage points. Atconstant exchange rates, cost of sales as a percentage of turnover increased by0.8 percentage points, reflecting the impact of generic competition to highermargin products and lower Avandia sales, partially offset by improvements inmanufacturing efficiencies. SG&A costs as a percentage of turnover increased 0.4 percentage points comparedwith Q1 2007. Pharmaceuticals SG&A fell by 4% and Consumer Healthcare SG&A grewby 9% as a result of higher advertising and promotion expenses. The combined 2%reduction in SG&A costs was less than the 3% fall in turnover. R&D expenditure increased 0.7 percentage points, and included significantincreased investment in vaccines R&D. Pharmaceuticals R&D expenditure in thequarter represented 15.8% (Q1 2007: 14.6%) of pharmaceutical turnover. Other operating income includes royalty income, equity investment disposals andimpairments, product disposals and fair value adjustments to financialinstruments. Other operating income was £161 million in Q1 2008 (Q1 2007: £207million). This reduction in other operating income added some 2 percentagepoints to the EPS decline in the quarter. Other operating income in Q1 2008included higher royalty and asset disposal income and favourable fair valuemovements on financial instruments compared with Q1 2007, partly offset by somewrite-downs of equity investments. Other operating income in Q1 2007 alsoincluded the Roche litigation settlement relating to carvedilol. Operating profit - statutory results Statutory operating profit for Q1 2008 was £1,963 million, down 13% CER and 9%in sterling terms compared with Q1 2007. This included £85 million ofrestructuring charges; £60 million was charged to cost of sales and £25 millionto SG&A. There were no such charges in Q1 2007. Taxation The charge for taxation on business performance profit, amounting to £563million, represents an effective tax rate of 28.7%. The charge for taxation onstatutory profit was £542 million. Transfer pricing and other issues are as previously described in the 'Taxation'note to the Financial Statements included in the Annual Report 2007. The Grouphas open issues with the revenue authorities in the UK, USA, Canada and Japan.There have been no further developments on these issues since the publication ofthe Annual Report 2007. GSK uses the best advice in determining its transfer pricing methodology and inseeking to manage transfer pricing and other issues to a satisfactory conclusionand, on the basis of external professional advice, continues to believe that ithas made adequate provision for the liabilities likely to arise from openassessments. The ultimate liability for such matters may vary from the amountsprovided and is dependent upon the outcome of litigation proceedings andnegotiations with the relevant tax authorities. Weighted average number of shares Q1 2008 Q1 2007 2007 millions millions millions -------- -------- --------Weighted average number of shares - basic 5,355 5,599 5,524Dilutive effect of share options and share awards 39 63 43 -------- -------- --------Weighted average number of shares - diluted 5,394 5,662 5,567 -------- -------- -------- The number of shares in issue, excluding those held by the ESOP Trusts and thoseheld as Treasury shares at 31st March 2008, was 5,289 million (31st March 2007:5,580 million). Dividends Paid/ Pence per payable share £m --------- --------- ---------2008First interim 10th July 2008 13 688 2007First interim 12th July 2007 12 670Second interim 11th October 2007 12 667Third interim 10th January 2008 13 708Fourth interim 10th April 2008 16 860 --------- ---- 53 2,905 --------- ---------The liability for an interim dividend is only recognised when it is paid, whichis usually after the accounting period to which it relates. The fourth interimdividend for 2007 and first interim dividend for 2008 have not been recognisedin these results. STATEMENT OF RECOGNISED INCOME AND EXPENSE Q1 2008 Q1 2007 £m £m ------- -------Exchange movements on overseas net assets 160 17Tax on exchange movements (6) -Fair value movements on available-for-sale investments (87) (19)Deferred tax on fair value movements on available-for-sale investments 15 (4)Exchange movements on goodwill in reserves (31) (1)Actuarial gains on defined benefit plans 219 330Deferred tax on actuarial movements in defined benefit plans (54) (94)Fair value movements on cash flow hedges - (3)Deferred tax on fair value movements on cash flow hedges - 1 ------- -------Net gains recognised directly in equity 216 227 Profit for the period 1,332 1,533 ------- -------Total recognised income and expense for the period 1,548 1,760 ------- ------- Total recognised income and expense for the period attributable to:Shareholders 1,527 1,739Minority interests 21 21 ------- ------- 1,548 1,760 ------- ------- BALANCE SHEET 31st March 31st March 31st December 2008 2007 2007 £m £m £mASSETS ---------- ---------- ----------Non-current assetsProperty, plant and equipment 8,026 7,051 7,821Goodwill 1,372 946 1,370Other intangible assets 4,492 3,702 4,456Investments in associates and joint ventures 328 305 329Other investments 424 581 517Deferred tax assets 2,262 2,199 2,196Derivative financial instruments 113 119 1Other non-current assets 806 616 687 ---------- ---------- ----------Total non-current assets 17,823 15,519 17,377 ---------- ---------- ----------Current assetsInventories 3,314 2,554 3,062Current tax recoverable 45 90 58Trade and other receivables 5,316 5,124 5,495Derivative financial instruments 483 92 475Liquid investments 1,225 1,009 1,153Cash and cash equivalents 2,147 1,981 3,379Assets held for sale 3 7 4 ---------- ---------- ----------Total current assets 12,533 10,857 13,626 ---------- ---------- ----------TOTAL ASSETS 30,356 26,376 31,003 ---------- ---------- ----------LIABILITIESCurrent liabilitiesShort-term borrowings (1,799) (1,205) (3,504)Trade and other payables (5,329) (4,534) (4,861)Derivative financial instruments (244) (49) (262)Current tax payable (1,056) (914) (826)Short-term provisions (851) (740) (892) ---------- ---------- ----------Total current liabilities (9,279) (7,442) (10,345) ---------- ---------- ----------Non-current liabilitiesLong-term borrowings (8,114) (4,786) (7,067)Deferred tax liabilities (989) (739) (887)Pensions and other post-employment benefits (1,326) (2,033) (1,383)Other provisions (1,084) (817) (1,035)Derivative financial instruments - (37) (8)Other non-current liabilities (354) (360) (368) ---------- ---------- ----------Total non-current liabilities (11,867) (8,772) (10,748) ---------- ---------- ----------TOTAL LIABILITIES (21,146) (16,214) (21,093) ---------- ---------- ----------NET ASSETS 9,210 10,162 9,910 ---------- ---------- ---------- EQUITYShare capital 1,476 1,503 1,503Share premium account 1,295 1,067 1,266Retained earnings 5,717 7,202 6,475Other reserves 428 163 359 ---------- ---------- ----------Shareholders' equity 8,916 9,935 9,603 Minority interests 294 227 307 ---------- ---------- ----------TOTAL EQUITY 9,210 10,162 9,910 ---------- ---------- ---------- RECONCILIATION OF MOVEMENTS IN EQUITY Q1 2008 Q1 2007 2007 £m £m £m ------- ------- -------Total equity at beginning of period 9,910 9,648 9,648Total recognised income and expense for the period 1,548 1,760 6,134Dividends to shareholders (708) (671) (2,793)Shares issued 30 214 417Shares purchased and held as Treasury shares - (828) (3,537)Shares purchased for cancellation (1,591) - (213)Consideration received for shares transferred by ESOP Trusts 6 41 116Shares acquired by ESOP Trusts (1) - (26)Share-based incentive plans 52 54 237Tax on share-based incentive plans (2) - 4Distributions to minority shareholders (34) (56) (77) ------- ------- -------Total equity at end of period 9,210 10,162 9,910 ------- ------- ------- FINANCIAL REVIEW - BALANCE SHEET Net assets The book value of net assets decreased by £700 million from £9,910 million at31st December 2007 to £9,210 million at 31st March 2008. This reflects anincrease in net debt arising from the funding of the share buy-back programmeand dividend payments, partly offset by the elimination of the pension deficit.The elimination of the pension deficit arose from an increase in the rate usedto discount UK pension liabilities from 5.75% to 6.75%, partially offset by areduction in asset values and by changes in the estimated long-term UK inflationrate. At 31st March 2008, the net surplus on the Group's pension plans was £13million. The carrying value of investments in associates and joint ventures at 31st March2008 was £328 million, with a market value of £864 million. Equity At 31st March 2008, total equity had decreased from £9,910 million at 31stDecember 2007 to £9,210 million. The decrease arose principally from furtherpurchases of shares for cancellation and dividend payments, partially offset byretained earnings and actuarial gains on defined benefit pension andpost-employment plans in the period. At 31st March 2008, the ESOP Trusts held 131.4 million GSK shares against thefuture exercise of share options and share awards. The carrying value of £1,507million has been deducted from other reserves. The market value of these shareswas £1,401 million. During the period, GSK purchased £986 million of shares for cancellation and inaddition an accrual of £605 million was provided to reflect the maximumpotential commitment under an irrevocable purchase agreement to acquire sharesfor cancellation during the period from 1st April to 23rd April 2008. At 31stMarch 2008, the company held 484.2 million Treasury shares at a cost of £6,418million, which has been deducted from retained earnings. CASH FLOW STATEMENT Three months ended 31st March 2008 Q1 2008 Q1 2007 2007 £m £m £m ------- ------- -------Profit after tax 1,332 1,533 5,310Tax on profits 542 610 2,142Share of after tax losses/(profits) of associates and joint ventures 1 (15) (50)Net finance expense 88 38 191Depreciation and other non-cash items 310 274 1,333Decrease/(increase) in working capital 39 (31) (538)Decrease in other net liabilities (204) (603) (308) ------- ------- -------Cash generated from operations 2,108 1,806 8,080 Taxation paid (307) (256) (1,919) ------- ------- -------Net cash inflow from operating activities 1,801 1,550 6,161 ------- ------- -------Cash flow from investing activitiesPurchase of property, plant and equipment (254) (312) (1,516)Proceeds from sale of property, plant and equipment 2 19 35Purchase of intangible assets (61) (396) (627)Proceeds from sale of intangible assets - - 9Purchase of equity investments (12) (141) (186)Proceeds from sale of equity investments 2 14 45Purchase of businesses, net of cash acquired - (233) (1,027)Investment in associates and joint ventures (2) - (1)Interest received 87 59 247Dividends from associates and joint ventures 2 4 12 ------- ------- -------Net cash outflow from investing activities (236) (986) (3,009) ------- ------- -------Cash flow from financing activities(Increase)/decrease in liquid investments (14) 34 (39)Proceeds from own shares for employee share options 6 41 116Shares acquired by ESOP Trusts (1) - (26)Issue of share capital 30 214 417Purchase of own shares for cancellation (986) - (213)Purchase of Treasury shares - (575) (3,538)Increase in long-term loans 693 - 3,483Repayment of long-term loans - - (207)Net (repayment of)/increase in short-term loans (1,811) 440 1,632Net repayment of obligations under finance leases (12) (9) (39)Interest paid (42) (24) (378)Dividends paid to shareholders (708) (671) (2,793)Dividends paid to minority interests (34) (56) (77)Other financing cash flows 54 (38) (79) ------- ------- -------Net cash outflow from financing activities (2,825) (644) (1,741) ------- ------- ------- (Decrease)/increase in cash and bank overdrafts in the period (1,260) (80) 1,411 Exchange adjustments (5) 7 48Cash and bank overdrafts at beginning of period 3,221 1,762 1,762 ------- ------- -------Cash and bank overdrafts at end of period 1,956 1,689 3,221 ------- ------- ------- Cash and bank overdrafts at end of period comprise: Cash and cash equivalents 2,147 1,981 3,379 Overdrafts (191) (292) (158) ------- ------- ------- 1,956 1,689 3,221 ------- ------- ------- RECONCILIATION OF CASH FLOW TO MOVEMENTS IN NET DEBT Q1 2008 Q1 2007 2007 £m £m £m ------- ------- -------Net debt at beginning of the period (6,039) (2,450) (2,450) (Decrease)/increase in cash and bank overdrafts (1,260) (80) 1,411Cash outflow/(inflow) from liquid investments 14 (34) 39Net increase in long-term loans (693) - (3,276)Net repayment of/(increase in) short-term loans 1,811 (440) (1,632)Net repayment of obligations under finance leases 12 9 39Exchange adjustments (340) 9 (88)Other non-cash movements (46) (15) (82) ------- ------- -------Increase in net debt (502) (551) (3,589) ------- ------- -------Net debt at end of the period (6,541) (3,001) (6,039) ------- ------- ------- FINANCIAL REVIEW - CASH FLOW Cash generated from operations was £2,108 million in Q1 2008. This represents anincrease of £302 million compared with Q1 2007. The operating cash flow is inexcess of the funds needed for the routine cash flows of tax, capitalexpenditure on property, plant and equipment and dividend payments toshareholders, together amounting to £1,269 million. Receipts of £36 millionarose from the exercise of share options: £6 million from shares held by theESOP Trusts and £30 million from the issue of new shares. In addition, £986million was spent in the period on purchasing the company's shares forcancellation. The decreased cash position at 31st March 2008 also reflects thenet repayment of £1.8 billion of short-term loans in Q1 2008, partially offsetby a further issuance of £0.7 billion under the EMTN programme. EXCHANGE RATES The results and net assets of the Group, as reported in Sterling, are affectedby movements in exchange rates between Sterling and overseas currencies. GSKuses the average of exchange rates prevailing during the period to translate theresults and cash flows of overseas Group subsidiaries, associates and jointventures into Sterling and period-end rates to translate the net assets of thoseundertakings. The currencies which most influence these translations, and therelevant exchange rates, are: Q1 2008 Q1 2007 2007Average rates: ------- ------- ------ £/US$ 1.99 1.96 2.00 £/Euro 1.32 1.49 1.46 £/Yen 210 234 235Period-end rates: £/US$ 1.99 1.96 1.99 £/Euro 1.26 1.47 1.36 £/Yen 198 232 222 During Q1 2008, average sterling exchange rates were stronger against the USDollar but weaker against the Euro and the Yen compared with Q1 2007. ComparingQ1 2008 period-end rates with Q1 2007 period-end rates, Sterling was alsostronger against the US Dollar but weaker against the Euro and the Yen. LEGAL MATTERS The Group is involved in various legal and administrative proceedings;principally product liability, intellectual property, tax, anti-trust andgovernmental investigations and related private litigation concerning sales,marketing and pricing which are more fully described in the Legal proceedingsnote in the Annual Report. At 31st March 2008, the Group's aggregate provision for legal and other disputes(not including tax matters described under 'Taxation' on page 10 was £1.2billion. The ultimate liability for legal claims may vary from the amountsprovided and is dependent upon the outcome of litigation proceedings,investigations and possible settlement negotiations. Significant developments since the date of the 2007 Annual Report are asfollows: With respect to Paxil CR, under the terms of the Group's settlement agreementwith Mylan, Mylan may be permitted to enter the market for all strengths ofPaxil CR sometime during the second or third quarter of 2008. Other terms of thesettlement remain confidential. In April 2008, an action was filed against Biovail and GSK by a purported classof direct purchasers in the US District Court for the District of Massachusettsalleging anti-trust violations related to the enforcement of Biovail'sWellbutrin XL patents. The action is in its early stages. Developments with respect to tax matters are described in 'Taxation' on page 10. ACCOUNTING PRESENTATION AND POLICIES This unaudited Results Announcement containing condensed financial informationfor the three months ended 31st March 2008 is prepared in accordance with theListing Rules of the UK Listing Authority, IAS 34 'Interim Financial Reporting'and the accounting policies set out in the Annual Report 2007. GSK utilises a 3-column approach to the income statement. 'Business Performance'shows GSK's underlying results excluding restructuring charges related to thenew Operational Excellence programme announced in October 2007 and significantacquisitions. The middle column shows restructuring costs and the 'Statutory'column shows the full IFRS statutory results. Business performance, which is a supplemental non-IFRS measure, is the primaryperformance measure used by management, and is presented after excludingrestructuring charges relating to the new Operational Excellence programme,which commenced in October 2007, and significant acquisitions. Managementbelieves that exclusion of these items provides a better reflection of the wayin which the business is managed and gives a more useful indication of theunderlying performance of the Group for the periods presented. Statutory resultsinclude these items. The Group reported only statutory results for Q1 2007. In order to illustrate underlying performance, it is the Group's practice todiscuss its results in terms of constant exchange rate (CER) growth. Thisrepresents growth calculated as if the exchange rates used to determine theresults of overseas companies in Sterling had remained unchanged from those usedin the previous year. All commentaries are presented in terms of CER growth andcompare 2008 business performance results with 2007 statutory results, unlessotherwise stated. This Results Announcement does not constitute statutory accounts of the Groupwithin the meaning of section 240 of the Companies Act 1985. The cash flow statement for the year ended, and the balance sheet at, 31stDecember 2007 have been derived from the full Group accounts published in theAnnual Report 2007, which have been delivered to the Registrar of Companies andon which the report of the independent auditors was unqualified and did notcontain a statement under either section 237(2) or section 237(3) of theCompanies Act 1985. Data for market share and market growth rates are GSK estimates based on themost recent data from independent external sources and, where appropriate, arevalued in Sterling at relevant exchange rates. Figures quoted for product marketshare reflect sales by GSK and licensees. INVESTOR INFORMATION Announcement of Q1 2008 results This Announcement was approved by the Board of Directors on Wednesday 23rd April2008. Financial calendar The company will announce second quarter 2008 results on 23rd July 2008. Thesecond interim dividend for 2008 will have an ex-dividend date of 30th July 2008and a record date of 1st August 2008. It will be paid on 9th October 2008. Internet This Announcement and other information about GSK are available on the company'swebsite at: http://www.gsk.com. INDEPENDENT REVIEW REPORT TO GLAXOSMITHKLINE PLC Introduction We have been engaged by the company to review the condensed set of financialstatements in the interim financial report for the three months ended 31st March2008, which comprise the consolidated Income Statement, the consolidated BalanceSheet, the consolidated Cash Flow Statement, the consolidated Statement ofRecognised Income and Expense and the related notes. We have read the otherinformation contained in the interim financial report and considered whether itcontains any apparent misstatements or material inconsistencies with theinformation in the condensed set of financial statements. Directors' responsibilities The interim financial report is the responsibility of, and has been approved by,the directors. The annual financial statements of the group are prepared in accordance withIFRSs as adopted by the European Union. The condensed set of financialstatements included in this financial report has been prepared in accordancewith International Accounting Standard 34, 'Interim Financial Reporting', asadopted by the European Union. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the interim financial report based on our review.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of this Results Announcement and for no other purpose.We do not, in producing this report, accept or assume responsibility for anyother purpose or to any other person to whom this report is shown or into whosehands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the interim financial reportfor the three months ended 31st March 2008 is not prepared, in all materialrespects, in accordance with International Accounting Standard 34 as adopted bythe European Union. PricewaterhouseCoopers LLPChartered AccountantsLondon23rd April 2008 Notes: (a) The maintenance and integrity of the GlaxoSmithKline plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. 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