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GSK Delivers EPS of 104.7p Before Major Restructuring

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Chief Executive Officer’s Review

LONDON, Feb. 5, 2009--I am pleased with the response of the business to what we always knew would be a challenging year in 2008, due to the adverse impact of significant US patent expiries and declines in Avandia sales. As we forecasted, these factors led to a decline in earnings per share for the year, which was compounded by an unexpected legal charge in the fourth quarter.

2008 was a turning point for GSK and we are now in a pivotal period of change as we redefine our business model to increase sales growth, reduce risk and deliver long-term sustainable financial performance to shareholders.

The expansion of our restructuring programme, announced today, is a vital catalyst of this strategy. It will radically change GSK’s business model and savings from this programme will be used to support our strategic priorities.

Going forward, we are also making an important change to the way we communicate with shareholders and are no longer providing specific short-term numerical earnings guidance.

This change in approach is not connected to performance, rather it should be seen as a strong signal that we are focused on implementing our strategic priorities. Successful implementation of these priorities will enable us to deliver long-term, sustainable financial performance; and we believe that this is where our dialogue with investors and analysts should be based.

GSK’s strategic priorities are: • Grow a diversified global business • Deliver more products of value • Simplify GSK’s operational model We will regularly report our progress against these priorities and I look forward to doing so during 2009.

Grow a diversified global business The performance of our ‘core’ pharmaceuticals business and the increasing diversification of its sales base are important indicators of GSK’s progress.

In 2008, if we exclude genericised products, Avandia and pandemic products (which have significant sales volatility) the remaining pharmaceuticals business delivered £16.4 billion in sales and grew 10% in CER terms.

I was especially pleased to see the contribution to sales of new products, another important measure of progress.

Last year we supplemented the ‘class of 2007’ with the ‘class of 2008’ and launched 12 pharmaceutical products and vaccines. We are now starting to see good traction with all of these products and they contributed almost £800 million to 2008 sales.

It is also worth noting that GSK secured 17% of FDA approvals for new NCEs and vaccines, last year. In an environment where declining R&D productivity for pharmaceutical companies is of increasing concern, I believe that this level of innovation is very promising. This ‘share’ of FDA approvals is also more than double our share of the US market.

Over the course of the last 6 months, I have spent a lot of time in the USA. Clearly there are some very interesting dynamics at play in this market and, more than ever before, a real need to demonstrate value.

The US pharmaceuticals business remains a very important part of our future, and we have a strong base business on which to build, including Advair, which last year performed well and returned to volume growth in the second half.

Issued: Thursday, 5th February 2009, London, U.K. 3 Inside our US pharmaceuticals business we have initiated a major change programme. We are changing our historic salesforce structures, to resource key growth areas such as vaccines and oncology, and to rescale in primary care, where industry saturation of pharmaceutical representatives is now evident.

We are refocusing marketing to demonstrate value to payers by increasing communication of patient health outcomes and compliance benefits. We are also looking at new product offerings that focus on volume opportunities. ReliOn Ventolin, for example, which we are selling through Wal-Mart, is the lowest priced albuterol inhaler available in any retail pharmacy in the United States.

I am confident that we are making the necessary changes to be successful in this market. I also want GSK to develop a constructive working relationship with the new administration, to help improve access to medicines and demonstrate their value through better patient compliance and innovative pricing approaches.

In Emerging Markets, sales for 2008 grew 12% to £2.3 billion and we are moving fast to build critical mass. So far, we have executed 4 transactions to build a broader and more geographic diverse portfolio that is capable of accessing multiple price points and addressing patient needs.

When completed, acquisitions of multiple new brands from BMS and UCB will add more than £150 million of new sales to GSK’s Emerging Markets business and we have increased our market share leadership of the MENA region, notably in Egypt where we increased market share from 6% to 9% and Pakistan from 11% to 13%. As a result of our alliance with Aspen Pharmaceuticals, we have already selected the first products for regulatory review, with the first submission expected this quarter.

A key indicator of progress in these markets will be their contribution to GSK’s overall sales and growth.

Financial efficiency is also intrinsic to the investments we are making here. In essence, through the deals we have executed we have added new profit flows to our existing infrastructure by acquiring these brands with minimal additional fixed costs.

In Japan, we are now moving into a phase of converting our extensive pipeline into approved medicines. For example, with recent approvals for use of Adoair in COPD and paediatric patients with asthma we are building on our position as the market leader in respiratory; and we are set to gain share in neurological products with the recent launch of Lamictal, for epilepsy.

In 2008, mandatory government price cuts adversely impacted our overall sales growth.

Nevertheless, representing close to 10% of pharmaceutical industry sales, and with around 40 new product opportunities in development, Japan is a key market for GSK investment and growth.

It is also important that we capitalise on our dynamic vaccines pipeline. Last year, GSK secured 2 FDA approvals for new vaccines. This demonstrated our innovation and heritage in biologics by delivering a new multi-component vaccine, Kinrix, and an entirely new vaccine, Rotarix, to prevent rotavirus. Worldwide, Rotarix sold £167 million and grew 71% in 2008.

A second wave of new vaccine opportunities is not far behind. In the USA, we are on track to submit new data for Cervarix to the FDA during the first half of this year. Whilst in Europe, I was very pleased to see last month a positive opinion granted for Synflorix, a new, highly competitive vaccine to protect infants against pneumococcal disease.

Synflorix, like Cervarix, is a strong new addition to our European vaccine portfolio, which last year grew more than 25% and contributed over £1 billion in sales. These two vaccines are at the vanguard of preventative healthcare.

Issued: Thursday, 5th February 2009, London, U.K. 4 In similar fashion, Prepandrix, our pre-pandemic vaccine was the first vaccine to be approved for this use in Europe. We continue to work with governments around the world to assist them in their preparations for managing a possible influenza pandemic.

Sales of pre-pandemic products were lower than 2007, reflecting the variable timings of tender orders from governments. In 2009, we expect to see further orders from governments, the most recent being from the UK government, which last week announced its intention to double and further diversify its anti-virals stockpile, by purchasing more than 10 million treatment courses of Relenza.

In Consumer Healthcare, we are starting to see the fruits of our investment into innovation, acquisitions and marketing excellence.

I continue to believe that the potential of this business is significant and we will be viewing gains in market share as key indicators of our strategic progress.

We have multiple new sales opportunities, including the launch of alli, across Europe this year.

This is the first time the European Commission has re-classified a medicine from a prescription only status to use as an OTC product, and I am particularly proud of the regulatory team at GSK who made this happen.

We have vital brand innovation capability, last year producing more than 10 new brand extensions to products such as Panadol, Aquafresh and Lucozade.

We have geographic scale to leverage both existing and newly acquired brands. In 2007, BreatheRight was available in 7 markets. It is now available in 57 and we expect to launch it in another 20 markets in 2009.

These are all sources of competitive advantage for GSK and we are investing across all areas of this business to grow sales. The acquisition of Biotene, for our oral care franchise, and proposed acquisition of Alvedon for our OTC pain management business, are some initial positive steps in this regard.

Of course, we are closely monitoring any potential impact to this business resulting from the economic downturn. Undoubtedly, many market categories are experiencing lower retail purchases. However, almost all of GSK’s brands were strengthened in 2008, with Sensodyne, Aquafresh, alli and Panadol all outperforming their respective categories in market share terms.

Our strategy is to maintain levels of A&P investment to drive growth in market share and innovate our brands and ensure our value for money proposition remains as strong as ever.

In the USA specifically, our Consumer Healthcare performance last year was not satisfactory, and this is largely attributable to our smoking cessation franchise. We have taken action to address this including a programme to reduce costs and refocus the business on delivering growth. We will also be increasing the use of global innovations and the marketing model that has proven successful in other markets around the world. I am confident that we will see better performance in 2009.

Deliver more products of value We currently have more than ten key new products filed with regulators in the USA, Europe and Japan, including two innovative oncology products: ofatumumab, filed last week and pazopanib, which we announced today.

These two assets will be clear examples of what I mean by delivering more products of value.

We expect they will offer meaningful improvements to patients in both tolerability and efficacy and we are committed to ensuring that we listen to payers to ensure that these medicines are successfully reimbursed.

Issued: Thursday, 5th February 2009, London, U.K. 5 It is clear to me that GSK’s R&D productivity has improved significantly. It is equally clear that we must relentlessly seek to neutralise the ‘cyclicality’ of R&D and produce a regular flow of assets. A key measure of our success will be the number of reimbursable filings and approvals secured by GSK.

We now have a late-stage pipeline of around 30 assets, and this is the sort of level we aim to sustain. This is also another key measure of our R&D progress.

In the last 12 months, we have added 6 new assets into our phase III pipeline, including most recently, darapladib for atherosclerosis. We have also announced today our intention to start phase III trials in the next few weeks for Syncria, a potential new treatment for type II diabetes.

We are increasing investment in multiple types of new vaccines, such as new paediatric vaccines to prevent meningitis, and a new generation flu vaccine for the elderly population.

Developing therapeutic vaccines is also a key priority for GSK. Our MAGE-3 vaccine, is making good progress and last year we signed an exclusive licensing deal with AFFiRiS to develop two Alzheimer’s disease vaccines, currently in phase I development.

As I have said before, disciplined allocation of our investment capital is a key element of our R&D strategy. The augmentation of our late-stage pipeline, over the last few years, has been accomplished without substantial increases in total R&D expenditure. Our goal is to sustain this activity and efficiency.

We must also be efficient in drug discovery. More than 35% of discovery projects have been terminated following our therapy area rebalancing exercise and reviews by the new Drug Discovery Investment Board. As part of the same process, all of our 35 Discovery Performance Units (DPUs) now have 3-year funding in place to develop their projects.

We are also balancing R&D risk and expenditure through increased externalisation. In the last year, we completed or expanded 21 transactions related to our drug discovery operations, including the recent acquisition of Genelabs.

Beyond corporations, I also see externalisation as a vital link to working more closely with academia. In 2008, for example we embedded GSK staff in the laboratories of the Harvard Stem Cell Institute; and handed over pipeline assets for development to the University of Cambridge.

Altogether, GSK has a significant mass of discovery capability, with around 70 different discovery engines working either inside or outside of the company. This is very important to our future as we further diversify our small molecule product portfolio.

Simplify GSK’s operating model We are making good progress to simplify our business and appropriately scale the company for the next few years.

Having conducted a series of business reviews, we have expanded our restructuring programme and now expect to realise pre-tax total annual savings of £1.7 billion by 2011, with related pre-tax charges of £3.6 billion. The charges are phased approximately 40% to 31st December 2008, 35% in 2009, 20% in 2010, with the balance mostly in 2011. In total, approximately 75% will be cash expenditures and 25% will be accounting write-downs.

This represents incremental pre-tax savings of £1 billion, phased with approximately £450 million expected in 2009, £700 million in 2010 and rising to £1 billion in 2011. Incremental pre-tax charges for the expanded programme are expected to be £2.1 billion, with the majority of costs incurred by 2011.

Issued: Thursday, 5th February 2009, London, U.K. 6 This cost versus annual savings ratio represents a good financial return on our investment.

The savings will help to improve the productivity and effectiveness of our operations. In 2009, savings from restructuring will mitigate the decline we expect to our gross margin due to product mix changes with a higher percentage of sales generated from vaccines, Consumer Healthcare and Emerging Markets, and support further investment behind our strategic priorities.

We are very conscious of the effect this programme will inevitably have on our employees and if options exist where we can achieve our financial goals and preserve jobs we will do everything we can to do so. Where no other option aside from redundancy exists, we will support those employees affected in every way we can.

In line with previous practice we will not be providing targets for job reductions and we will announce restructuring outcomes once employees, relevant works councils and trade unions have been consulted and informed.

We are also simplifying our organisation and improving alignment. This is becoming evident through many different programmes and initiatives, including a comprehensive programme to reduce our IT costs, through which we have established a new online service with Microsoft to integrate collaborative tools. This will produce financial savings and improve our collaboration and productivity.

We are also looking for financial efficiencies and in September started a programme to reduce our working capital. This has successfully delivered underlying cash flow benefits of more than £500 million, which we are using to invest in our strategic priorities.

Financial strategy Our financial strategy remains to maintain an efficient balance sheet, and use cash resources to invest in our strategic priorities and increase returns to shareholders through our progressive dividend policy.

The dividend for 2008 increased by 8% to 57p (53p in 2007).

In 2008, we completed share repurchases of £3.7 billion and we do not expect to make any significant repurchases in 2009.

Cash generation remains strong, with net cash inflow from operating activities of £7.3 billion for 2008, up 19% in sterling terms.

Outlook 2008 marked a turning point for GSK and those factors which impacted our performance, in particular declines in Avandia sales, are now starting to reduce. 2008 also saw the first steps towards a radical transformation of our business model. We enter 2009 with confidence and expect to make further good progress in implementing our strategic priorities that will enable us to meet our long-term objective of reducing risk and delivering sustainable growth to shareholders.

Finally, I would especially like to recognise the enormous contribution of our employees and our wide network of partners and suppliers. Their willingness, energy and enthusiasm for change are strong foundations on which to build GSK’s new future business model.

Andrew Witty Chief Executive Officer 

Posted: February 2009