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Glaxo Smithkline Pharmaceuticals Ltd. (glaxo)

Results & Dividend for the year ended 31st December 2006

Year ended Year ended 31st December 31st December 2006 2005 Rs. in Lakhs Rs. in Lakhs

Sales (Gross) 1677,56.57 1575,88.86 Less: Excise duty on Sales 124,64.54 90,58.63 Net Sales 1552,92.03 1485.30.23 Profit before taxation and exceptional items 555,95.40 477,90 85 Less : Provision for Taxation 194,23.04 171,6240 Profit after taxation and before Exceptional items 361,72.36 306.2845 Exceptional Items (Net of Tax) 183,78.97 195.79.85 Net profit after tax 545,51.33 502,0830 Add: Balance brought forward from the previous year 441,19.44 259,75.10 Amount available for disposal 986,70.77 761,83.40 APPROPRIATIONS : General Reserve 54,55.13 50,20.83 Equity Dividend (including special additional dividend) 262,57.94 237,16.84 Distribution Tax on Dividend 36,82.68 33,26.29 Balance carried forward 632,75.02 441.1944

The Company divested the Agrivet Farm Care (AFC) Business as a going concern to Virbac Animal Health India Private Limited, a 100% subsidiary of Virbac S. A. France, on 31st July 2006 for a consideration of Rs.207.10 crores. As provided under the Companies Act, 1956, approval of the Shareholders was obtained by postal ballot. The financial results for the year under review are therefore not comparable. After excluding the AFC Business, the financial results for 2005 and 2006 of the continuing businesses of the Company are as follows:

Year ended Year ended 31st December, 31st December 2006 2005 Rs. in Lakhs Rs. in Lakhs

Net Sales 1490,06.64 1363.8983 Profit before taxation and exceptional items 547,35.40 453,79.13

Dividend

The Directors recommend a Dividend of Rs. 17.00 per Equity Share for the year (previous year Rs. 14.00 per Equity Share). If approved by the Shareholders at the Annual General Meeting, the Dividend will absorb Rs. 144.00 crores. The Dividend Distribution Tax borne by the Company will amount to Rs.20.20 crores.

With the additional cash generation from the divestment of the AFC Business, the Directors are of the view that a portion of the surplus cash be returned to the shareholders. The Directors are therefore pleased to recommend a special additional Dividend of Rs.14 per Equity Share. If approved by the Shareholders at the Annual General Meeting, the special additional Dividend will absorb Rs. 118.58 crores. The Dividend Distribution Tax borne by the Company on this dividend will amount to Rs. 16.63 crores.

Management Discussion and Analysis

(a) The Company commands a 6.4% market share in the Indian Pharmaceuticals Market (Source: Stockist Audit [ORG IMS] IIPA MAT December 2006 - this audit is representative of the Company`s customer base covering stockists, sale to hospitals and vaccines purchases). Your Company enjoys a leadership position in the Hospital segment (Source: [ORG IMS] Hospital Audit MAT December 2006) and in segments in which its products are represented. Your Company had another satisfactory year, with Net Sales of the Company`s continuing businesses (excluding the AFC Business) registering a growth of 9.3%. Pharmaceuticals sales also grew by 9.2% during the year. The Qualigens Fine Chemicals business recorded a sales growth of 8.7% and Export sales grew by 10.4%.

Profit Before Tax and Exceptional Items of the Company`s continuing businesses (excluding the AFC Business) grew by 20.6%. A double-digit growth in the priority products range, procurement and manufacturing efficiencies and tight expense control helped improve profits. Higher income from treasury operations and clinical research operations also contributed to the profit improvement.

Cash generation from operations continued to be favourable during the year, driven by the strong business performance. Cash surpluses were deployed in safe instruments.

(b) The Pharmaceuticals Business

The Indian Pharmaceuticals Market grew by 13% (Source: Stockist Audit [ORG IMS] IIPA MAT December 2006).

Net sales of the Pharmaceuticals business segment was Rs.1373 crores constituting 92% of the Company`s total sales (excluding the AFC business).

The Pharmaceuticals growth of 9.2% was a result of the continued strategy focussed on Priority Products and their active promotion, and the shift from the acute to the chronic disease segments. New products were once again the major driver of growth in Pharmaceuticals. Sales of Augment in have crossed Rs.100 crores this year. The Company enjoys a leadership position in the segments in which its products are represented including Dermatologicals, Corticosteroids, Anti-infectives, Pain/Analgesics and Thyroid preparations. Calpol is the leader in the non-narcotic anti-pyretic segment and Neosporin is the leader in topical antibiotic preparations. Augmentin and Phexin continue to be amongst the top five brands in the anti-infective segment. Vozet and Cetzine are leaders in the anti-histamine segment. The Vaccines business has registered a negative growth mainly on account of the competitive pricing environment coupled with stock outs of key products. To some extent, sales were impacted since the accelerated demand for certain products in the anti-infective and pain segments could not be met due to capacity constraints and due to discontinuation of select products during the year. Your Company has taken steps for improvement of supply of key products and aggressive measures are being initiated to counter the competition.

Windia and Windamet for treatment of Diabetes, one of the fastest growing therapeutic areas and the in-licensed products, Parit and Ferronine, launched last year are all progressing well.

Business Development continues to be the major driver of growth for the Company since 2002. Products launched since 2002 have contributed to around 25% of the Company`s incremental sales in 2006. The key strategy for Business Development is to identify partners and introduce products in high growth therapeutic areas. Your Company is in talks with some leading Japanese and American companies for new products in therapeutic areas like serious infections, cardiovascular and trauma care. After making a major entry in diabetes with the introduction of Windia and Windamet, your Company is also developing four new products in the Windia family. Plans are in hand to introduce new products in therapeutic areas like anti- inflammatory/analgesic, oral antibiotics, cardiovascular and anti-coagulants in 2007.

Scientists at GlaxoSmithKline plc are working hard to discover new ways of treating illness and disease. Consequently, GlaxoSmithKline plc has one of the largest and most promising pipelines in the industry with nearly 95 new chemical entities (NCEs) with about 45 active Phase I studies, 60 Phase II studies and 30 Phase III studies. Your Company has access to the resources of a global Company devoted to the application of science not only for the prevention and cure of disease, but also for improving the quality of life.

As reported last year, India has been identified as a major center for clinical research across a number of therapy areas for diseases which are relevant to India such as cancer, psychiatric disorders and infectious diseases. The emphasis of Clinical Research activities today is shifting from large, multi-centric Phase III studies to Phase II studies. GSK has identified 6 Oncology centers capable of conducting early phase studies in India, which are being developed with the expert inputs of the Institute for Cancer Medicine, University of Oxford. Similar initiatives are also being undertaken across other therapeutic areas.

The Company has made excellent progress in its clinical operations in the last three years and has proven itself for its quality, speed and cost effectiveness as demonstrated by successful regulatory inspections by external bodies such as the US FDA. In 2006, your Company participated in 16 global clinical studies (8 global clinical studies in 2005) of which, 11 were Phase II and 5 were Phase III studies, spanning across 6 therapy areas involving over 200 patients. Over the last few years, your Company has also trained more than 100 investigators on ICH GCP guidelines, thus contributing to improving the quality of clinical trials in India.

(d) The Qualigens Fine Chemicals (QFC) Business

The QFC business has maintained its market leadership position with an overall sales growth of 8.7% this year. The Chemicals activity continued to grow in double digits. Several new products were launched during the year. The glassware segment showed good growth with large orders from industries and institutions. For the Diagnostics activity, plans are in hand for introduction of new ranges and advance technology kits.

(e) Exports

Exports recorded a sales turnover of Rs.30 crores, comprising both Bulk Drugs and Formulations. Exports of bulk drugs were to major markets like Japan, Mexico, France, Germany, Holland, UK, South Africa and Denmark. Formulations were exported to Sri Lanka, Myanmar and Vietnam.

(f) Pharmaceuticals Pricing

The National Pharmaceuticals Pricing Authority (NPPA) effected a downward revision in the prices of several vitamin formulations during the year.

As reported last year, the Government has moved the Supreme Court in respect of the judgement of the Hon`ble High Court of Delhi which had set aside the DPEA demand relating to the bulk drug Betamethasone. The matter continues to remain pending before the Supreme Court.

(g) Internal Control System

The Company maintains a system of internal control, including suitable monitoring procedures. The Internal Audit Department regularly conducts a review to assess the financial and operating controls at various locations of the Company. Any significant issue is required to be brought to the attention of the Audit Committee of the Board. The Statutory Auditors and the Head of Internal Audit are invited to attend the Audit Committee meetings.

(h) Human Resources

The Company continued its emphasis on investing in the development of its employees through a number of programs. In the area of manufacturing, a program on `Change Management and Leadership` was conducted in 2006, to help meet new business challenges. Sales force effectiveness was targeted through programs such as Worldwide Sales Force Excellence (selling skills), disease product knowledge accreditation, competency mapping for the sales force supported by development programmes for both frontline sales managers and medical representatives.

On the industrial relations front, your Company continued to enjoy a cordial and harmonious relationship with its employees and Unions. The Long Term Settlement with the Nashik site Union was concluded in August 2006 with agreement on redeployment and productivity improvements.

The Company had a staff strength of 3850 as on 31st December 2006, compared to 4016 as at the end of the previous year. The reduced headcount is mainly on account of divestment of the AFC business.

(i) Procurement

Procurement Excellence programs and strategic sourcing initiatives continued to gain momentum. 460 e-sourcing events were used to identify the capabilities of the supply base, benchmark prices and generate competitive advantage in the market. Use of internet/intranet packages and shared databases made knowledge management a reality and an integral part of day to day work. Such initiatives have enabled your Company to mitigate inflationary pressures. During the year, the procurement processes were subject to further controls in the areas of Compliance, Environment Health and Safety and Risk Mitigation.

The Sourcing Group Management certification programs, Effective Contracting programs and Regional Sourcing Forums helped globalize the Procurement function. The creation of a Procurement Technology Work Cell and setting up of a Low Cost Sourcing Group in India is an expression of the parent company`s recognition of local competencies and India`s importance as a global sourcing base.

Tags: 31st july, annual general meeting, cash generation, companies act, divestment, dividend distribution, going concern, net sales, subsidiary, virbac animal health

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Glaxo Smithkline Pharmaceuticals Ltd. (glaxo)

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