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Please see important disclosure information on pages 47 - 50 of this report.JIL is Authorised and Regulated by the Financial Services Authority.EventWe initiate coverage of GlaxoSmithKline with a BUY and PT of£13.70 suggesting 10% upside. Despite the ongoing drag frompatent expiries we still see solid earnings growth (5.4% CAGR,2008E-13E) driven by good revenue replacement kinetics and thelikelihood of a soft landing for Advair post its patent-expiries.Key Points• Progressive earnings growth: The reported earnings growthprogression of 16% in 2009E, 3% in 2010E and 8% in 2011Eand reliable quarterly cash dividend stream should continue tomake the shares attractive versus the wider economy in thenear term at least.• FX benefit in 2009: We see a strong currency benefit in 2009for GlaxoSmithKline that is not fully recognised in consensusestimates in our view. We see superior reported top-line growth(+11%) versus consensus (+3%) based on 4Q 2008 averagerates with further benefit to come if spot rates hold or improvefurther during the year. This translates into a strong bottom-lineperformance of 16% growth to EPS of 121.9p in 2009E versusThomson consensus of 107.9p• Pipeline beginning to deliver: Whilst pipeline productivity hasbeen disappointing over the last few years versus ambitiousexpectations set by the prior management in 2003, there arenow signs that it is beginning to deliver. Launches of Cervarix,Veramyst, Tykerb and Promacta are testament to this, thoughmore potential blockbuster launches still exist in the form ofArzerra (HuMax-CD20； cancer/ immunology) and almorexant(insomnia).• Counter-rotation risk lurks: As GlaxoSmithKline shares havebenefitted more than most within the sector in terms ofrotational support since mid-2008, they may also be mostsusceptible to counter-rotation into pro-cyclical sectors. Whilstwe do not believe this is imminent (the full year reportingseason should confirm this), it likely will become a growingconcern as the year progresses. However, we believe that thecompany's good mid-term earnings profile, attractive dividendand strong balance sheet will continue to make it appealing atleast through 1H 2009 versus the broader market.Valuation/RisksValuation: Our target price of £13.70 is calculated by placing our2010 EPS estimate on a 50% premium to the 2010 UK market PEto reflect the company's strong defensive characteristics andreturn to a more stable growth trajectory over the near to midterm.Risks: Genericisation profile of Advair (asthma/ COPD)； potentialfor significant acquisitions； regulatory actions (Advair, Cervarix)；patent expiries and litigation (Combivir, Coreg CR, Avodart,Advair and Boniva)； counter-rotation into pro-cyclical stocks.January 26, 2009HealthcarePharmaceuticalsUnited KingdomInitiating CoverageGlaxoSmithKline Plc (LSE: GSK LN)Initiating Coverage: FX Tailwinds and RotationalSupport Argue the Buy CaseInvestment SummaryStrong rotational and FX tailwinds should be supportive of boththe stock's premium to the UK market and the company'searnings through 2009. Solid EPS growth through to 2011E atconstant FX rates and modest expectations in consensus couldprovide further near-term momentum to the shares in our view.Rating: BUYPrice: 1241pPrice Target: 1370pBloomberg: LSE: GSK LNMarket Data52-Week Range: 1339p-986pTotal Entprs. Value (MM): £74,032.9Market Cap. (MM): £64,371.9Shares Out. (MM): 5187.1Avg. Daily Vol.: 18500000Financial SummaryNet Debt (MM): £9,661.0Net Debt (MM): Net debt includes minoritiesPrice: As of 22 JanuaryGBp 2007A 2008E 2009E 2010ERev. (B) £22.7 £24.1 £26.7 £27.0EV/ Rev. 3.3x 3.1x 2.8x 2.7xEPSFY Dec 99.10 105.00 121.90 125.90FY P/E 12.5x 11.8x 10.2x 9.9xBusiness performance EPS (excludes operational excellencerestructuring charges)PE Relative toLocal Market187% 167% 127% 136%Dividend 53.00 57.00 61.00 65.00Implied Yield 4.3% 4.6% 4.9% 5.2%Jeffrey Holford, Equity Analyst44 (0) 20 7029 8673, jholford@JJames Dodwell, Equity Analyst44 (0) 20 7029 8675, jdodwell@JIan Hilliker, Marketing Analyst44 (0) 20 7029 8672, ihilliker@Sonal Sagar, Eq. Research Associate44 (0) 20 7029 8679, ssagar@J155Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 2 of 50Executive Summary Initiating coverage of GlaxoSmithKline with a Buy rating and £13.70 target price We have initiated coverage of GlaxoSmithKline with a Buy rating and £13.70 target price based on a 50% premium to the UK market. The implied upside in our target price yields a return of 10.4%, which is augmented by a further 4.9% yield expected during the year in the form of quarterly cash dividends giving a total return of 15.3%. The company offers a relatively safe haven for equity investors during the current economic crisis and has, we believe, been through the worst of its exposure to patent expiries and the collapse in sentiment over its ability to deliver new products to market. Importantly the earnings of the company are heavily geared towards the US$ and to a lesser extent the Euro: Sterling exchange rate and sees a considerable tailwind through 2009 at current levels. Using Q4 average rates for our forecasts, we estimate a foreign exchange boost to EPS of 13% in 2009E. Currency also has a significant impact on our five-year earnings growth forecasts, with a reported EPS CAGR of 5.4% (2008E–13E) on our estimates versus circa 3% at constant exchange rates. Our 2009E revenue and EPS estimates are currently 8.5% and 13% above IBES consensus, respectively, which we believe has yet to catch up fully with the implication that the weak Sterling: US dollar rate has on revenues and earnings. Furthermore we believe that this effect is likely to persist or even intensify through 2009. GlaxoSmithKline still has exposure to the four key industry pressures of patent expiries, pricing pressure, political reform in the United States and historically poor pipeline productivity, though we see some of these easing for the company over the mid term. GlaxoSmithKline appears to be less threatened than some of its peers by patent expiries (AstraZeneca [AZN LN, £28.81, Hold], Sanofi-aventis [SAN FP, €47.45, Underperform] and Novartis [NOVN VX, CHF51.75, Hold] have a more challenging outlook in this regard in our view) and potential pricing pressure from proposed reforms in the United States. Key to our outlook on patent expiry drag for GlaxoSmithKline in the mid term is our view that the genericisation of Advair likely will be protracted with non-AB rated products launching initially and phased generic introductions across the US and Europe over 2011–13. Furthermore, we see the opportunity for several mid to late-stage R&D products (Arzerra in refractory NHL/rheumatoid arthritis, Armala in renal cancer, LymphoStat-B in lupus and almorexant in insomnia) to potentially create fresh interest in the company. Barring a major piece of M&A, which we do not anticipate for GlaxoSmithKline in 2009, fluctuations in market sentiment/rotation and currency (US$:£ in particular) likely will dictate the company’s share price performance during the year, which at present bodes well for the stock in 2009 in our view. Investment Thesis: Foreign exchange tailwinds and rotational support argue the Buy case New strategic priorities outlined by CEO Andrew Witty at the 2Q 2008 results (R&D restructuring, organic and acquisitive growth in Vaccines, Consumer and branded Generics/Emerging Markets, shift away from small molecule blockbusters, cost cutting, etc.) represent an evolution rather than a revolution in the company’s thinking in our view. Furthermore, like many other companies in the sector, their formulation appears to be driven by a reaction to the recent slump in pipeline productivity and a wave of patent expiries that will continue to stress the sector (and GlaxoSmithKline) over the next five years before easing off again. An immediate consequence was the cessation in the share buy back plan, which has strongly supported EPS growth in recent times, to provide additional liquidity for acquisitions. Whilst this partially weakens the pro-rotational argument for GlaxoSmithKline, its earnings stream looks robust versus many other sectors, which have seen significant downgrades to consensus earnings over the past six months. Top-line growth at constant exchange rates will be limited once again in 2009 (-2% for Pharma and -1% for the group) based on our estimates due to the ongoing drag from US patent expiries (primarily Imitrex for the full year and Lamictal IR for an extra six months, but also Paxil CR, Wellbutrin XL 150mg and ReQuip IR) and likely poor performances from Avandia and Advair due to legacy safety concerns. However, a strong currency tailwind in effect at present likely will see earnings growth boosted by around 13%, from 3% CER to 16% reported if sterling weakness is sustained for the full year. The company will then likely see the introduction of Valtrex generics towards the end of 2009, which will have most impact during 2010 on our estimates. Margins may also come under further pressure as revenue mix increasingly shifts from blockbuster pharmaceuticals to lower margin mid-sized products, Emerging Markets and Consumer Health. However, ongoing cost savings and strong growth in recently launched products and vaccines should serve to negate these pressures. The performance of the company’s Consumer Health division could be a key lever on top-line growth, as could be the impact of any small to mid-sized bolt-on acquisitions (such as those announced in 2008 like Biotene and AstraZeneca OTC products in Sweden). However, even Consumer Health may not look quite as attractive as it did in 2008 due to worsening economic conditions in 2009. GSK LN156Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 3 of 50We expect several major catalysts for GlaxoSmithKline during 2009 and we have listed what we consider to be the most price-sensitive of these in Exhibit 1. The imminent catalyst of the company’s full year 2008 financial results and guidance for 2009 will be paramount amongst these following the disappointment at last year’s full-year results meeting, where downbeat guidance of “a mid-single digit percentage decline in business performance EPS, at constant exchange rates” was issued. We see a return to growth in 2009, albeit at a low single-digit rate (at constant exchange rates). 2009 will also hopefully see the end to the protracted US development and approval process for Cervarix as the final data from the HPV-008 study potentially reads out early in the year. Positive data could see an approval by year-end, though a protracted review would see an early 2010 launch as being more likely. We still see significant risk in the US approval of Cervarix tied to disappointing interim efficacy data from HPV-008, the use of a new adjuvant and an unfamiliar manufacturing process to the FDA (insect cell production). Even if approved, Cervarix then has to play catch-up with Merck’s Gardasil in the United States, though it will report head to head immunogenicity data to help it in this effort during 2009. Several important pipeline catalysts should also play through during the year including Phase III data for Tykerb from the TEACH study in breast cancer, Arzerra in refractory NHL/rheumatoid arthritis, Armala in renal cancer, LymphoStat-B in lupus and almorexant in insomnia. Approval of Rezonic/Zunrisa in chemotherapy-induced nausea and vomiting could also prove a nice fillip for the shares. EXHIBIT 1: GLAXOSMITHKLINE – SELECTED KEY CATALYSTS IN 2009 Timing Event Comment 05-Feb-09 Full year financial results Jefferies EPS estimate of 105.0p. Significant currency movements expected to positively impact reported numbers by 11%-12% in 2008E and circa 24% in Q4 1Q 2009 Cervarix HPV 008 study – final data Complete Response Letter required GSK to produce final data from HPV-008 - was expected to be available during 4Q 2008. GSK anticipates submitting these data in 1H-09. FDA action on the application is expected by GSK to take up to six months following this submission 2Q 2009 Arzerra (ofatumumab) pivotal data in refractory NHL Two pivotal studies in refractory NHL fully recruited – initial studies expected to complete in Apr-09. PII front-line follicular NHL study completes Feb-09. Licensed from Genmab 2Q 2009 Cervarix:Gardasil head to head immunogenicity data Study expected to complete in Mar-09 1H 2009 Armala (pazopanib) PIII data in refractory renal cancer PII data presented as ESMO Sep-08. PIII study vs placebo from VEG105192 (refractory RCC) expected to complete in Apr-09. PII trials in ovarian, fallopian, cervical and peritoneal tumours also ongoing. Mid-2009 Arzerra (ofatumumab) Initial PIII data expected for treatment of RA in MTX and TNFa failures Two PIII studies initiated in Nov-07 (DMARD-IR and TNFα-IR). Phase II study also initiated in RRMS in Apr-08. Initial PIII data expected in 2009. Potential competitor to Rituxan/ MabThera. Mid-2009 US/ EU regulatory approval of Rezonic/ Zunrisa in CINV NDA filing May 2008/ MAA Jul-08. Addition of Rezonic to treatment with ondansetron and dexamethasone in PIII studies improved the control of CINV in patients receiving emetogenic chemotherapy Mid-2009 LymphoStat-B PIII data in lupus Two PIII studies expect to complete in Jun/Jul-09. Two further studies expected to complete in Dec-10. 3Q 2009 Tykerb adjuvant beast cancer data (TEACH – Tykerb in post-primary neoadjuvant or post-adjuvant chemotherapy) 3,000 patient TEACH study (post-chemo) expected to read out in Aug-09. ALTTO adjuvant trial (Tykerb and/or Herceptin) initiated in Jun-07 and expected to complete in Jun-10. NEO-ALTTO (BIG 1-06) neoadjuvant trial initiated Dec-07. 2H 2009 Almorexant PIII data from RESTORA-1 in primary insomnia Pivotal PIII data from RESTORA 1 expected 2H 2009. Primary endpoints include change in latency to persistent sleep (LPS) and change in wake after sleep onset (WASO) and includes reference zolipdem arm. PII data presented at WSG in Sep-07. Partnered with Actelion 4Q 2009 US Valtrex generics expected Patents expire 2009 (US) and 2009 (EU). Litigation settled in US - generics from late 2009 (Ranbaxy) Source: Company data, Jefferies estimates Financials We expect GlaxoSmithKline to grow its revenues at a cumulative annual growth rate (CAGR) of 2.5% between 2008E and 2013E. Our estimates are slightly above consensus currently (2.1% CAGR), which may not yet fully reflect favourable changes in the US$ and Euro exchange rates versus Sterling during 4Q 2008. Our estimates (and consensus to a lesser extent) show a slowdown in the rate of revenue growth in 2012 and 2013 due to the patent expiry and expected entry of generic alternatives to Advair in the US and European markets during this period. Thereafter we see a more sustainable period of revenue growth contingent on delivery of GlaxoSmithKline’s R&D pipeline along historical average industry success rates, though this has not been achieved by the company during the past five years in our view. GSK LN157Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 4 of 50The company will most likely have to endure a number of other patent expiries and/or slower growth in key products such as Advair, Avandia, Valtrex and much of the HIV franchise (e.g., Combivir and Epivir) amongst others depending upon the outcome of various patent litigation proceedings. As the result of the expected loss of several of GlaxoSmithKline’s largest and most profitable products, we expect sustained pressure on the company’s gross margin during our forecast period, further exacerbated by increased reliance on its lower-margin Vaccine and Consumer Health businesses. The company has already announced several cost-saving and efficiency measures in manufacturing to help to offset some of the gross margin pressure, which are incorporated into our estimates. However, cost savings in manufacturing are difficult to achieve ahead of patent expiries and tend to lag the loss of product exclusivities. EXHIBIT 2: GLAXOSMITHKLINE: KEY INCOME STATEMENT DATA GlaxoSmithKline - Key Income Statement Data (£m)2007A 2008E 2009E 2010E 2011E 2012E 2013E Increment CAGR (%)absolute 08E - 13E08E - 13EAvodart 285 402 553 653 738 812 877 +475 17%Infanrix 543 660 787 842 884 928 974 +314 8%Rotarix 91 165 250 300 345 380 418 +253 20%Epzicom 324 440 579 666 746 783 689 +249 9%Flixotide/Flovent 621 658 694 625 550 468 384 -274 -10%Combivir 455 426 396 325 260 195 146 -280 -19%Wellbutrin Franchise 529 310 97 50 31 27 26 -284 -39%Paxil Franchise 553 472 408 338 277 224 179 -293 -18%Imigran/Imitrex 685 676 212 127 101 83 66 -610 -37%Avandia/Avandamet/Avandaryl 1,219 792 771 642 519 263 162 -630 -27%Lamictal IR 1,097 837 301 192 169 144 122 -715 -32%Valtrex/Zelitrex 934 1,178 1,508 520 338 270 203 -975 -30%Seretide/Advair 3,499 4,120 4,912 4,973 4,625 3,755 2,540 -1,580 -9%Other Launched Products 8,220 8,647 9,648 9,689 9,735 9,453 8,824 +177 0%Total Launched Products 19,055 19,783 21,116 19,942 19,318 17,785 15,610 -4,173 -5%Cervarix 10 120 287 640 837 810 807 +687 Verasmyst/Allermist 21 69 175 287 414 526 621 +552 Tyverb/Tykerb (lapatinib) 51 100 207 351 446 510 548 +448 Lamictal XR 0 0 96 223 351 414 446 +446 Promacta (eltrombopag) 0 0 29 96 198 280 382 +382 HuMax-CD20 (ofatumumab) 0 0 0 21 85 166 331 +331 almorexant 0 0 0 0 62 145 290 +290 Volibris (ambrisentan) 0 6 57 112 175 223 255 +249 Solzira (XP13512) 0 0 17 86 163 201 235 +235 retigabine 0 0 0 12 104 159 228 +228 Rezonic/Zunrisa (casopitant) 0 0 14 60 115 158 201 +201 Other New Products 26 74 238 473 867 1,314 2,003 +1,929 Total New Products 108 369 1,120 2,361 3,817 4,906 6,347 +5,978 Total Pharma (incl Vaccines) 19,163 20,152 22,236 22,303 23,135 22,691 21,957 +1,805 1.7%Consumer Health 3,553 3,939 4,479 4,681 4,878 5,059 5,271 +1,332 6%Total Revenues 22,716 24,091 26,715 26,984 28,013 27,750 27,228 +3,137 2.5%Growth - reported -2% 6% 11% 1% 4% -1% -2%Growth - CER 2% -3% -1% 1% 4% -1% -2%Operating margin - Pharma 37.6% 36.9% 37.6% 38.2% 39.3% 39.5% 40.3% 337 bps Operating margin - Group 34.9% 34.2% 34.8% 35.1% 36.1% 36.1% 36.5% 237 bps Pre-tax margin (clean) 34.3% 32.5% 33.1% 34.0% 35.4% 35.9% 36.8% 430 bps Attributable profit (clean) 5,475 5,463 6,169 6,390 6,923 6,937 6,971 +1,508 5%Growth 2% 0% 13% 4% 8% 0% 0%EPS - reported (p) 94.4 91.3 118.7 125.9 136.1 136.0 136.3 +45.0 8%Growth -1% -3% 30% 6% 8% 0% 0%EPS - clean (p) 99.1 105.0 121.9 125.9 136.1 136.0 136.3 +31.3 5%Growth 4% 6% 16% 3% 8% 0% 0%Net Margin (clean) 24.1% 22.7% 23.1% 23.7% 24.7% 25.0% 25.6% 293 bps DPS (p) 53.0 57.0 61.0 65.0 69.0 71.0 73.0 +16.0 5% Source: Company data, Jefferies estimates GSK LN158Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 5 of 50EXHIBIT 3: JEFFERIES REVENUE ESTIMATES VERSUS CONSENSUS FOR GLAXOSMITHKLINE 20,00022,00024,00026,00028,00030,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (GBPm)GSK Consensus Revenue JEF Revenue EXHIBIT 4: JEFFERIES GROSS MARGIN ESTIMATES FOR GLAXOSMITHKLINE 70%72%74%76%78%80%2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EGross Margin (%)Source: Bloomberg consensus data, Jefferies estimates Source: Company data, Jefferies estimates Our estimates for revenues from recently launched and pipeline products show that we expect this grouping of products to deliver incremental revenues of £9.4bn by 2015 (from £196m recorded in 2007). Key contributors to this include Tykerb/Tyverb, Veramyst/Allermist, Cervarix, Lamicatal XR, Promacta, HuMax-CD20 and almorexant as well as risk-adjusted revenues coming from products currently in Phase II trials. EXHIBIT 5: RISK-ADJUSTED REVENUE ESTIMATES FOR RECENTLY LAUNCHED AND MID TO LATE-STAGE PIPELINE PRODUCTS 02,0004,0006,0008,00010,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (£ millions)Total Ph II (Probability adjusted)Total Ph I (Probability adjusted)darapladib (480848)otelixizumabalmorexantrosaglitazone XRelesclomol (STA-4783)Armala (pazopanib)HuM ax-CD20 (ofatumumab)retigabineLymphostat-B (belimumab)Solzira (XP13512)Rezonic/Zunrisa (casopitant)Bosatria (mepolizumab)Promacta (eltrombopag)Lamictal XRLuniviaEntereg/Entareg (alvimopan)Volibris (ambrisentan)TreximetCervarixVerasmyst/AllermistAltabax/AltargoTyverb/Tykerb (lapatinib)Coreg CRArranon/Atriance (nelarabine) Source: Company data, Jefferies estimates Despite a large Phase II and Phase III R&D program at GlaxoSmithKline, we forecast gently falling R&D intensity (as a percentage of revenues) due to the management’s commitment to try to limit spending in this area, whilst achieving more in terms of productivity. In turn, rising revenues through our forecast period should therefore reduce R&D intensity over time. Similarly we expect SG&A expenditure to fall as a percentage of sales throughout our forecast period as the company right-sizes its sales forces following patent expiries and continues to implement regional and market-specific efficiency measures in selling and marketing. Management also has an ongoing goal to reduce SG&A as a percent of sales on an ongoing basis. Recent movements in currency also help to lower operational expense margins as a disproportionate amount of GlaxoSmithKline’s operational activities in R&D and G&A are based in the UK, whereas the majority of revenues come from Europe and the US where there has been recent currency strength versus Sterling. GSK LN159Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 6 of 50EXHIBIT 6: JEFFERIES R&D MARGIN ESTIMATES FOR GLAXOSMITHKLINE 10%11%12%13%14%15%2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ER&D Margin (%)EXHIBIT 7: JEFFERIES SG&A MARGIN ESTIMATES FOR GLAXOSMITHKLINE 21%24%27%30%33%2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ESG&AMargin(%)Source: Company data, Jefferies estimates Source: Company data, Jefferies estimates The combination of our higher revenue estimates and inclusion of expected efficiency measures in R&D and SG&A results in higher EBITDA margins for the company in the near to mid-term versus consensus. However, as with our EBITDA estimates on an absolute basis, we believe that at least part of our higher margin estimates versus consensus is due to the impact of updating positive foreign exchange effects (Sterling weakness) on the revenue growth and profitability of the company. EXHIBIT 8: JEFFERIES EBITDA ESTIMATES VERSUS CONSENSUS FOR GLAXOSMITHKLINE 5,0007,50010,00012,50015,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EEBITDA (GBPm)GSK Consensus EBITDA JEF EBITDAEXHIBIT 9: JEFFERIES EBITDA MARGIN ESTIMATES VERSUS CONSENSUS FOR GLAXOSMITHKLINE 30%33%36%39%42%45%2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EEBITDA marginGSK Consensus EBITDA margin JEF EBITDA margin Source: Thomson One consensus data, Jefferies estimates Source: Thomson One consensus data, Jefferies estimates Forecasting superior EPS estimates versus consensus, boosted by currency Our current forecasts now imply superior EPS versus consensus throughout our forecast period with an earnings CAGR (2008E–13E) of 5.4%. We believe that part of our more optimistic estimates are due to recent currency impacts, with a significant boost to our EPS estimates of circa 13% in 2009 yielding 16% reported growth, with just 3% growth at constant exchange rates. Furthermore, we appear to have a less aggressive erosion profile now for Advair over the 2011E–13E period versus consensus on our assumption that AB-rated generics may take one to two years to emerge following the combination and Diskus patent expiries in 3Q 2010 and 3Q 2011, respectively. This has positive implications for both our revenue and margin assumptions versus some of the constituent estimates within consensus. GSK LN160Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 7 of 50EXHIBIT 10: JEFFERIES EPS ESTIMATES VERSUS CONSENSUS FOR GLAXOSMITHKLINE 901001101201301401501601702007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EEPS (Pence)GSK Consensus EPS JEF EPS EXHIBIT 11: JEFFERIES EPS GROWTH ESTIMATES VERSUS CONSENSUS FOR GLAXOSMITHKLINE -15%-10%-5%0%5%10%15%2008E 2009E 2010E 2011E 2012E 2013EEPS Growth (%)Consensus EPS growth JEF EPS growth Source: Thomson One consensus data, Jefferies estimates Source: Thomson One consensus data, Jefferies estimates Balance sheet and cash flow In 2007 net debt increased by £3.6bn from £2.4bn at the start of the year to £6.0bn by the end of the year, fuelled by £3.8bn of share repurchases which all but wiped out the group’s free cashflow. In 2008, management had initially earmarked £6bn of share repurchases for the year but this was pegged back to circa £4bn at the 2Q 2008 results to allow sufficient flexibility for investment opportunities. By the end of 2008 we estimate only £3.7bn had been spent and we forecast no repurchases in 2009E. By the end of 2008E we estimate that net debt increased to £9.3bn. Over the next few years, in the absence of major corporate activity (we have pencilled in spend of £500m per annum) we expect that net debt will fall gradually to move the group into a net cash position by the end of 2013E. EXHIBIT 12: GLAXOSMITHKLINE: SIMPLIFIED CASH FLOW Simplified Cashflow (£m)2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013ENet Liquid Funds at beginning of period (1,237) (2,450) (6,039) (9,329) (7,086) (5,172) (2,950) (822)Net cash inflow from operating activities 4,357 6,161 6,478 7,845 7,635 8,059 8,075 7,889 Capital expenditure (net) (1,323) (1,481) (1,475) (1,656) (1,705) (1,756) (1,809) (1,863)Free cashflow 3,034 4,680 5,003 6,189 5,930 6,303 6,266 6,026 Purchase of own shares (1,348) (3,751) (3,689) 0 0 0 0 0 Equity Dividends (2,598) (2,793) (2,929) (2,793) (2,959) (3,122) (3,281) (3,342)Dividends and share repurchases (3,946) (6,544) (6,618) (2,793) (2,959) (3,122) (3,281) (3,342)Intangible assets (net) (49) (618) (321) (325) (325) (325) (325) (325)Purchase of businesses (273) (1,027) (500) (500) (500) (500) (500) (500)Other (incl FX) 21 (80) (854) (328) (232) (134) (32) 59 Other activities (301) (1,725) (1,675) (1,153) (1,057) (959) (857) (766)Increase in net liquid funds (1,213) (3,589) (3,290) 2,243 1,914 2,222 2,128 1,918 Net Liquid Funds at end of period (2,450) (6,039) (9,329) (7,086) (5,172) (2,950) (822) 1,096 Breakdown of Net debtLiquid investments 1,035 1,153 1,000 1,000 1,000 1,000 1,000 1,000 Cash and cash equivalents 2,005 3,379 4,171 6,614 7,578 9,800 9,478 9,846 Short-term borrowings (718) (3,504) (1,500) (1,700) (1,000) (3,500) (2,600) (2,000)Net ST Cash(Debt) 2,322 1,028 3,671 5,914 7,578 7,300 7,878 8,846 Long Term Debt (4,772) (7,067) (13,000) (13,000) (12,750) (10,250) (8,700) (7,750)Debt maturites (as of 31/12/07) 3,504 368 2193 Source: Company data, Jefferies estimates GSK LN161Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 8 of 50Valuation Our primary method for valuing Pharmaceutical stocks is by setting a premium/discount to the local market PE, dependent upon the relative growth rate and earnings security of the company, as we believe this more accurately reflects the traded value of a stock rather than other methods such as DCF and sum of the parts, which better reflect the industrial value of an asset in our view. Ordinarily, we consider direct PE and/ or PEG comparison to the local market to derive a target price. However, as our universe of coverage (and the market in general) is showing sharply lower growth over the 2008E–13E period, we are increasingly relying on PE relative valuations alone to determine our target prices. Accordingly we have set our target price for GlaxoSmithKline of £13.70 based on a 50% premium to the 2010 UK market PE. We have chosen to use a 50% premium to the 2010E UK market PE to reflect the company’s steady revenue and earnings growth prospects now that we believe it has seen the worst of the drag from patent expiries and pipeline failures. Our financial model for GlaxoSmithKline drives a five-year earnings CAGR of 5.4% versus an unweighted average of 3.5% for the sector (unweighted) across the same period. GlaxoSmithKline currently trades on a 2010E PE of 9.9x, a 36% premium to the UK market based on our estimates. Exhibit 13 shows the historic 2009 PE premium awarded to GlaxoSmithKline versus the local market as well as the trend for consensus earnings revisions over time. EXHIBIT 13: CONSENSUS 2009 EARNINGS AND PE PREMIUM RELATIVE TO THE UK MARKET FOR GLAXOSMITHKLINE -10%0%10%20%30%40%50%60%70%Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Jan-092009premiumtoUK market PE95100105110115120Consensus 2009 earnings pencePremium to UK Market PE Consensus earnings (pence)Risks to our recommendation Specific risks to our investment thesis on GlaxoSmithKline include significant sensitivities to the mid-term earnings profile for the company to the expected genericisation profile of Advair (asthma/COPD) in the US and Europe. The actual erosion profile of Advair sales may be affected by regulatory decisions that allow/prohibit an AB-rated (interchangeable) alternative. At present we have assumed the launch of a non-AB rated product in the US from 4Q 2010, followed by the 50% probability of an AB-rated generic approval in 4Q 2011. Advair is GlaxoSmithKline’s largest product with 2008E global sales of £4.12bn (17% of Group) and US sales of £2.16bn (9% of Group). Other significant risk factors include the potential for GlaxoSmithKline to make acquisitions based on its strategy to expand its business in Consumer Health, Emerging Markets, Branded Generics and Biologic medicines, which could have a material impact on the share price in either direction depending upon how well received they are by the market. GlaxoSmithKline may be particularly susceptible to a broader recovery in stock market performance, where it would likely suffer from counter-rotation into pro-cyclical sectors in our view. GlaxoSmithKline is also exposed to a number of ongoing product litigations and safety reviews in the US market. Both Avandia and Advair’s sales have been negatively impacted over the past two years by safety concerns, guideline changes and relabeling actions in major markets. Key ongoing patent litigations include Combivir, Coreg CR, Avodart, Advair and Boniva. The company’s ability to successfully launch new products may also be affected by regulatory decisions — key potential approvals and launches expected in the US or Europe during 2009 include Cervarix (cervical cancer prevention), Lunivia (sleep disorders), Solzira (restless leg syndrome), Bosatria (hypereosinophilic syndrome), Rezonic (chemotherapy induced nausea and vomiting) and Azerra (chronic lymphocytic leukemia). GSK LN162Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 9 of 50The company reports in Sterling, and has a significant cost base in the UK, which makes its earnings sensitive to potential currency swings, particularly against the US$, which could also change its earnings outlook materially relative to current expectations. GlaxoSmithKline is highly dependent on its own and contracted chemical and biologic manufacturing plants, which are highly complex operations and may either encounter production difficulties and/or face regulatory action for non-compliance with local regulations. The company is also dependent upon both public and private payors for its Pharmaceuticals, Vaccines and Consumer Health products and could face pricing pressure that could cause sales to fall below expectations. GlaxoSmithKline could also face fines and/or product withdrawals if it is found to have marketed products with material, undisclosed safety issues. Regulators could also choose at any time to remove any of GlaxoSmithKline’s products from the market if they are found to cause unacceptable adverse events in patients. GSK LN163Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 10 of 50Company Overview GlaxoSmithKline was formed in 2000 as a result of the merger of Glaxo Wellcome and SmithKline Beecham, creating the world’s second largest pharmaceutical company, behind Pfizer (PFE, $17.21, NC). The merger resulted in a business which generated 2007 sales of £22.7bn. The company is focused on two main business areas: Pharmaceuticals, which generated approximately 85% of 2007 revenues, and Consumer Healthcare, which accounts for the remaining 15%, generated by a wide range of well-known brands, such as Ribena, Horlicks, Lucozade, Aquafresh, Panadol and Zovirax. Whilst GlaxoSmithKline has historically developed a significant number of its own pharmaceutical products, it has also supplemented its pipeline with a variety of in-licensing or co-development/co-promotion deals. GlaxoSmithKline has one class of shares which are listed on the London Stock Exchange. They are also listed on the New York Stock Exchange as American Depository Shares (ADSs), with each ADS representing two ordinary shares. At 22 February 2008, 15.6% of Glaxo’s outstanding shares were held in the form of ADSs. Historically, GlaxoSmithKline has run a sizable share repurchase program. However, at the 3Q 2008 results, the company said it does not expect to make significant repurchases in 2009, with the expectation of more investment opportunities arising. At the same time management reiterated that part of its strategy is to increase returns to shareholders through a progressive dividend policy. EXHIBIT 14: GLAXOSMITHKLINE STOCK OWNERSHIP BY GEOGRAPHIC REGION Others17%France4%Germany3%UK58%United States18%EXHIBIT 15: GLAXOSMITHKLINE STOCK OWNERSHIP BY INVESTOR TYPE Unclassified21%Institutions60%Mututal Funds5%Banks10%Other2%Pension Funds2%* Based upon publicly reported holdings, not total shares outstanding Source: Bloomberg, Jefferies research * Based upon publicly reported holdings, not total shares outstanding Source: Bloomberg, Jefferies research GlaxoSmithKline has a wide geographical spread with 48% of its global revenues coming from the United States and approximately 30% from Europe during 2007. The company is building its exposure to higher growth Emerging Markets and reported that 12% of its Pharmaceutical revenues came from the Emerging Markets during 1H 2008 with year-on-year growth of about 10% versus 1H 2007. GSK LN164Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 11 of 50EXHIBIT 16: GLAXOSMITHKLINE BASE BUSINESS SPLIT BY PHARMACEUTICALS AND OTHER BUSINESSES 05,00010,00015,00020,00025,00030,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (£ millions)Pharmaceuticals Vaccines Consumer Healthcare EXHIBIT 17: GEOGRAPHIC SPLIT OF REVENUES FOR GLAXOSMITHKLINE AS OF 31/12/07 Other Countries22%USA48%Europe30%Source: Company data, Jefferies estimates Source: Company data, Jefferies research The company published currency sensitivity guidance in 2005 and has verbally indicated it is still close enough to use as a “rule of thumb”. At that time, it indicated a 10% move in the £/$ rate would impact earnings by about 4%, whilst a 10% move in the £/€ rate would impact earnings by approximately 2%. Key management and strategic goals Andrew Witty took over the CEO position in May 2008, from Jean-Pierre Garnier. He originally joined Glaxo Wellcome in 1985 and has held a number of different roles since then. Prior to his appointment as CEO, he was President of GSK Europe. Julian Heslop has held the CFO position since April 2005. Prior to this he was Operations Controller and before the merger, Financial Controller of Glaxo Wellcome, having joined the company from Grand Met in 1998, where he was Group Controller. EXHIBIT 18: GLAXOSMITHKLINE MANAGEMENT ORGANISATION CHART Source: Company data The company has a broad spread across a number of therapeutic areas with its primary focus in Respiratory, Central Nervous System and Anti-Virals, which collectively accounted for 59% of sales in 2007. Whilst the Respiratory franchise is dominated by the Asthma/COPD treatment Seretide/Advair (18% of 2007 sales), the other areas are dependent upon a broader set of products in depression, epilepsy, HIV and herpes. The importance of the metabolic franchise has now significantly declined following the demise of the diabetes treatment Avandia, due to cardiovascular safety concerns. At its 2Q 2008 results, Andrew Witty highlighted the new strategic priorities for the company, summarized as: • Grow a diversified global business, including selling more of GlaxoSmithKline’s current and future products from its Pharmaceuticals, Vaccines and Consumer Health businesses into Japan and Emerging Markets, • Deliver more products of value with a focus on a more rigorous approach to product selection, terminating early stage products that might be more likely to fail in late stage development, and/ or be unsuccessful in gaining appropriate reimbursement, should they eventually make it to market, • Simplify the operating model, reducing working capital and inefficiencies CEOAndrew WittyVice Chairman, PharmaceuticalsBob IngramR&DMoncef SlaouiConsumer HealthcareJohn ClarkeEmerging MarketsAbbas HussainCFOJulian HeslopAsia Pacific/JapanMark DunoyerPharmaceuticals, EuropeEddie GrayBiologicalsJean StephenneGSK LN165Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 12 of 50Life after JP – Waiting out the pipeline or sea a change in direction? Some six months or so since Andrew Witty’s first presentation to the markets on GlaxoSmithKline’s future strategy in July 2008, we are still wondering whether the company can really alter its trajectory over the mid to long term away from what is already being dictated by extant patent expiries, the lottery of the industry’s pipeline productivity (and regulatory decisions) and likely political pressure in the US on pricing, reimportation, etc. Other companies that have been fortunate enough to have lower exposure to patent expiries and pipeline failures (e.g., Roche [ROG VX, CHF169.4, Buy]) or those that believe they have turned the corner on increasing R&D efficiency (e.g., AstraZeneca) are not making such overt moves to change course. As a result we are likely to see more bifurcation within the sector in terms of corporate strategy — the conglomerates and neo-conglomerates (e.g., Novartis, J&J [JNJ, $56.87, NC], Abbott [ABT, $53.01, NC], GlaxoSmithKline, Sanofi-aventis) versus the more focused pharmaceuticals companies (e.g., Pfizer, Merck [MRK, $27.45, NC], AstraZeneca, Roche). Therefore the ability to efficiently deploy capital into other healthcare subsectors by the conglomerates may be tested against the pipeline productivity of the more focused companies over the next five to 10 years. We think GlaxoSmithKline’s strategy seems appropriate in the near term, based on the fact that the company will likely be down to its last major blockbuster in 2010 (Advair/Seretide) after Valtrex loses its US exclusivity in late 2009. However, we wonder whether the bolt-on acquisitions being made really change the direction of the company in a meaningful way. It seems at present that patent loses and the decline in some product sales from commercial issues (e.g., safety concerns and guideline changes on Avandia) are the biggest drivers of product mix presently rather than the addition of new revenue streams. It would appear that GlaxoSmithKline needs to take bolder steps than those currently articulated to change growth expectations over the next five years in a significant way. Whilst the company’s shift in strategy may act as a “band-aid” to cover periods of slower growth in the near to mid-term, they will potentially dilute long-term growth and margins once pipelines deliver new revenue growth in excess of sales lost to patents. However, in the case of GlaxoSmithKline almost all of its diversification activities carry strong synergies with its existing Pharmaceuticals business: • OTC switches are an excellent tool for prolonging product life cycles at high margins, • Emerging Markets will surely become increasingly important in the long-run — though we do not see them as a panacea for the drug industry in the near term as they are likely to be sensitive to current economic conditions in more traditional Western markets, • Vaccines are still attractive in terms of future pricing and demand in our view, though few major targets exist and significant liabilities can come with even the smallest safety issues. GlaxoSmithKline would seem to be able to drive the growth of this business perfectly well organically anyway given recently launched products and a relatively full mid to late-stage pipeline, • We are not fans of diversification into the Generics marketplace, which seems increasingly at risk of margin compression as national healthcare budgets tighten and global consolidation sweeps across the industry； GlaxoSmithKline appears to be keeping away from mass generics in terms of its strategy, instead preferring a branded generics business in Emerging Markets, which may still provide decent returns in the near to mid-term. Sooner or later, though, we expect these markets to become more Westernised in their approach to branded generics, leaving their attractiveness in the long term in more doubt. We have summarized some of the more important and strategic acquisitions and licensing deals made by GlaxoSmithKline over the past two years in Exhibit 19. GSK LN166Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 13 of 50EXHIBIT 19: GLAXOSMITHKLINE – RECENT ACQUISITIONS Acquisition Target Date Subsector Sales Price Rationale BMS Pakistan Dec ‘08 Pharmaceuticals $19m $36.5m Further extends GSK’s portfolio in the Emerging Markets, following on from July’s Aspen agreement. AZ Tika (AZN's Swedish OTC ops.) Nov ‘08 OTC £27m £146m Expansion strategy in consumer healthcare business. Genelabs Oct ‘08 Pharmaceuticals $16.9m $57m Develops novel therapies against the hepatitis C virus (HCV). Biotene Oct ‘08 OTC Oral Health $50m $170m Extends oral healthcare portfolio to include a proven treatment for Dry Mouth. Egyptian mature product of BMS Oct ‘08 Pharmaceuticals $48.5m $210m Extend portfolio in emerging markets. GSK now leader in Egypt with approx 9% market share. Aspen July ‘08 Pharmaceuticals n/a n/a Licensing agreement gives GSK access to a large portfolio and pipeline of drugs that it will license and sell on a profit sharing basis in Emerging Markets not already serviced by Aspen. Sirtris Pharmaceuticals (completed 6 Jun 2008) Apr ‘08 Pharmaceuticals n/a $720m GSK establishes a presence in the field of sirtuins - enzymes believed to be involved in the ageing process. Reliant Pharma Dec ‘07 Pharmaceuticals £276m £814m Gains US rights to Lovaza, a treatment for adult patients with very high levels of triglycerides. Domantis Jan ‘07 Biologics none £234m Developing next generation of antibody therapies. Praecis Dec ‘06 Pharmaceuticals None £39m Acquire drug lead targeting technology CNS Dec ‘06 OTC £71m £280m Breathe Right nasal dilator strips and FiberChoice dietary fibre supplements. Source: GlaxoSmithKline, Jefferies Research Lowering the risk of the company is an admirable goal, particularly given the company’s poor performance in recent years. However, this strategy carries its own inherent risk in the long-run — a permanently lower growth potential versus its more focused peers. Spending the time (and money) to fix the issues in R&D may be more painful for investors in the near to mid-term, but potentially more attractive and rewarding in the long run. GSK’s share price performance was dominated by sector rotation in 2008 Over 2008, GlaxoSmithKline shares were unchanged in absolute terms. With the collapse in the market this translated into a relative 49% outperformance and resulted in it being the tenth best performing stock in the FTSE 100 over the period. However, trading over the year was more mixed. At the start of 2008, GlaxoSmithKline initially underperformed the local market as the sector remained out of favour and concerns were growing that full-year ’07 numbers might be disappointing. The 2007 full-year results and 2008 guidance turned out to be worse than expected. Following this, the stock pretty much traded in line with the market until June. Then, shortly after Andrew Witty took over as CEO on May 22, rotation into the sector started to drive outperformance of the stock against the local market. This carried on until July 2008, after which the shares went back to broadly trading in line with the market. The second bout of rotation-driven outperformance picked up again in October as the financial stocks began to collapse, before reverting back to broadly trading in-line with the market over the last two months of the year. One of the notable points about GlaxoSmithKline’s 2008 share price performance is the almost total lack of impact from company-specific events and its almost complete reliance on the market’s rotational influences. Another point of interest arises when comparing its performance to AstraZeneca’s. Although the market’s rotational influence is apparent in both companies’ share price charts, when GlaxoSmithKline and AstraZeneca are compared to each other it becomes clear that the market’s increasing confidence in Astra’s numbers and future expectations, resulted in a developing outperformance by AstraZeneca over GlaxoSmithKline during the year. GSK LN167Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 14 of 50EXHIBIT 20: 2008 SHARE PRICE PERFORMANCE FOR GLAXOSMITHKLINE VERSUS MSCI EUROPEAN PHARMA 60708090100110120Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Jan-09GSK Europe PharmaEXHIBIT 21: 2008 SHARE PRICE PERFORMANCE FOR GLAXOSMITHKLINE VERSUS THE UK MARKET (FTSE100) 5060708090100110120Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Jan-09GSK FTSE100Source: DataStream, Jefferies research Source: DataStream, Jefferies research GSK LN168Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 15 of 50Key Issues: Non-Pharma left as the only lever of growth as Glaxo is hindered by patent drag The past five years have seen a legacy of growth and margin-sapping patent expiries combined with low levels of pipeline productivity that will likely change the nature of GlaxoSmithKline for the foreseeable future. Andrew Witty’s inaugural earnings presentation in 2Q 2008 was clear that the company would look to increase its exposure to Consumer Health and Emerging Markets as a source of lower-risk growth. Nevertheless, it will still keep an R&D-driven Pharmaceuticals unit as the core driver of the company, though with reduced focus on trying to produce mega-blockbusters in favour of a more diversified and lower-risk R&D portfolio. Clearly then it will be important for the Consumer Health and Emerging Market segments of GlaxoSmithKline to hold up well during 2009 for the strategy to resonate well with investors. As for most companies in the sector that have indicated a similar strategy (e.g., Novartis, Sanofi-aventis), this will take time to implement and we see it as an evolution over the next 10 years in the profile of the company rather than an overnight revolution. In the meantime the company will continue to be heavily impacted by the “4P” industry pressures, with Patents and Pricing/Politics perhaps being the most significant of these. Although the patent expiry storm over the past few years has mostly subsided, the company will still see a drag on growth and margins from several products that lost exclusivity over the past few years as well as new pressure from the loss of Valtrex in 4Q 2009/ 2010. Then of course there is the looming potential introduction of generic alternatives to Advair in the US from 2010/11 as the combination and formulation patents expire. The lack of FDA guidelines for long-acting respiratory generics and/or the Diskus device patent may keep AB-rated products off the US market for longer than expected, though we do expect non-AB rated products at least to launch by 2011. Generic alternatives to Seretide could appear imminently in the UK following the end of data exclusivity in 3Q 2008 (the combination patent was invalidated by a court ruling in the UK and only the Diskus device patent covers the product out to 2011). The Seretide patents are also being challenged in Germany currently, whilst the majority of other territories see the expiry of the remaining Seretide patents by 2013. The last major challenge to GlaxoSmithKline over the next few years will likely come in the shape of political reform on drug pricing and drug reimportation in the US — GlaxoSmithKline has moderate exposure to potential Medicare price controls via Advair (asthma/COPD), in particular. GlaxoSmithKline currently has no significant revenue exposure to potential reforms in the US to allow an approval pathway for biologic generics, though the company has specified that biologic medicines will become increasingly important in driving the future growth of the company. Exhibit 22 summarizes what we consider to be the key threats to GlaxoSmithKline’s business over the near to mid-term. EXHIBIT 22: GLAXOSMITHKLINE – SUMMARY OF KEY THREATS Threat Importance Comment Patent expiries High Significant exposure to patent expiries and therapeutic substitution 2009-12. Advair sales Medium Ongoing fall-out from relabeling and safety concerns in asthma. Pricing/ US Politics Medium Exposure to Medicare in the US via Advair, Avandia, Coreg CR, etc. Consumer Medium Potential slowdown in consumer spending. Source: Company data, Jefferies research Margin expansion likely to be muted in 2009/10 despite cost savings Based on our estimates, GlaxoSmithKline will show a 1% revenue decline in 2009E and 1% growth in 2010E at constant exchange rates based on the mix of revenue losses due to patents (predominantly Lamictal and Imitrex in 2009E and Valtrex 2010E) and declining Avandia revenues versus limited contributions from the pipeline and recently launched products (Cervarix, Tykerb, Lamictal XR, Treximet, etc.). The introduction of generic versions of Valtrex towards the end of 2009 may see GlaxoSmithKline left with only one product in 2010 (i.e., Advair/Seretide) with sales in excess of £1bn. We believe that this will put further pressure on gross margins, which have already been negatively impacted by preceding patent expiries as well as a shift towards newly launching products, Consumer Health and Emerging Markets, which we estimate carry lower margins than the Group average. Cost savings implemented through the Operational Excellence program (£700m by 2010 representing 3% of 2007 group sales and 5% of the 2007 cost base) are already implicit in our modeling and should enable gross margins to be broadly stable between 2008E and 2010E. We see only a small improvement in operating margins and further cuts may therefore need to be GSK LN169Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 16 of 50taken to see more dynamic growth at the level of earnings, which we see limited at present to 3% CER growth in both 2009e and 2010E. Exhibits 23 and 24 show the impact of cost savings on operating margins between 2007A and 2010E. EXHIBIT 23: GLAXOSMITHKLINE SALES AND OPERATING PROFIT 2007A TO 2010E 2007A 2008E 2009E 2010E CAGR07A-10ESales 22,716 24,091 26,715 26,984 5.9%Operating profit ex cost savings 7,931 7,884 8,737 8,782 3.5%Operating margin ex cost savings 34.9% 32.7% 32.7% 32.5%Cost savings 0 350 550 700Operating profit 7,931 8,234 9,287 9,482 6.1%Operating margin 34.9% 34.2% 34.8% 35.1% EXHIBIT 24: GLAXOSMITHKLINE OPERATING MARGIN AND IMPACT OF COST SAVINGS 2007A TO 2010E 31%32%33%34%35%36%37%2007A 2008E 2009E 2010EOperatingmarginEx cost savings cum cost savings Source: Company data, Jefferies estimates Source: Company data, Jefferies estimates Exhibits 25 and 26 show our expectations for gross margins/blockbuster concentration and CER revenue & EPS growth over the next five years. EXHIBIT 25: GLAXOSMITHKLINE BLOCKBUSTER CONCENTRATION AND GROSS MARGIN ESTIMATES 20%25%30%35%40%45%50%55%60%65%70%2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013EBlockbusterconcentration73%74%75%76%77%78%79%COREGross marginBlockbuster concentration Gross Margin EXHIBIT 26: GLAXOSMITHKLINE CER REVENUE AND EPS GROWTH, 2008E-2013E -6%-4%-2%0%2%4%6%8%10%2008E 2009E 2010E 2011E 2012E 2013EYoY Growth (CER)Revenues EPS Source: Company data, Jefferies estimates Source: Company data, Jefferies estimates Advair/ Seretide – A bumpy ride, but a crash landing in 2012/ 13 is not a foregone conclusion Despite losing key patent (combination and Diskus device) protection by 2011 and 2013 in the US and Europe, respectively, Advair is likely to remain GlaxoSmithKline’s largest and most profitable single product throughout our forecast period out to 2013E. However, the dynamics of its growth are far from certain due to the deceleration of its growth over the past two years due to safety concerns and relabeling in asthma usage as well as future patent expiries over the 2010E–2013E timeframe. GSK LN170Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 17 of 50EXHIBIT 27: SEASONAL PRESCRIPTION TRENDS AND YEAR-ON-YEAR GROWTH FOR ADVAIR AND SINGULAIR IN THE US ADVAIR TRX -2.7%+2.6%+3.6%+0.5%+0.6%-1.9%-2.7%-3.4%5.45.5Q1 Q2 Q3 Q4Advair TRx(millions)2006 2007 2008 SINGULAIR TRX +12.3%+11.7%+9.2%+5.8%+1.2%-8.9%-8.8%-10%6.06.87.07.88.08.2Q1 Q2 Q3 Q4Singulair TRx(millions)2006 2007 2008 Source: IMS Health, Jefferies research Source: IMS Health, Jefferies research For a while, Merck’s Singulair (allergic rhinitis/asthma) was a key beneficiary of more restrictive black box labeling and warnings for Advair in the US tied to increased death rates seen in the SMART study. However, as can be seen in Exhibits 27 and 28, the situation has somewhat reversed during the course of 2008/09 as data emerged suggesting that there may be causal relationship between the use of Singulair and behaviour/mood changes, suicidality and suicide. The FDA announced that it was conducting a review of these findings in late March 2008, and subsequently we believe that Advair has benefitted to some extent from Singulair’s decline in usage amongst asthma patients. EXHIBIT 28: PRESCRIPTION TRENDS FOR ADVAIR AND SINGULAIR IN THE US (2006-2008) -40%-30%-20%-10%0%10%20%30%40%50%60%70%80%Jan-06Feb-06Mar-06Apr-06May-06Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Annual TRxGrowth (Rolling 4 Week)ADVAIR FRANCHISE PULMICORT (INC RESPULES) FORADIL AEROLIZERSINGULAIR SPIRIVA HANDIHALER Source: IMS Health, Jefferies research US Advair generics’ impact may be softer than expected initially if no AB-rated product is approved Whilst non AB-rated and AB-rated generics of Advair may legally be approvable in the US from September 2010 and September 2011, respectively, the technical and regulatory hurdles in front of potential manufacturers to produce either AB or non-AB rated versions are not trivial. Due to its nature as a long-acting inhaled combination product, based in a proprietary device (the Diskus inhaler), Advair is complex to manufacture and prove bioequivalence for. Furthermore there are currently no FDA guidelines as to what parameters generics of long-acting inhaled products should meet. GSK LN171Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 18 of 50As a reminder, generic versions of Flonase were not seen in significant volumes until March 2006 despite the expiry of the patent almost two years prior in May 2004. Previously, GlaxoSmithKline had filed a Citizen Petition with the FDA arguing that it should issue valid guidelines for approving generic versions of Flonase as well as that any potential generics had to meet the same quality guidelines required for the original approval of Flonase. This strategy was ultimately unsuccessful and generics were launched. However, we would also remind investors that Flonase was an intranasal product rather than inhaled and therefore may not be a perfect proxy for Advair generics. Other examples of inhaled generics, such as Ventolin, were short-acting in nature with less challenging pharmacokinetics and used more simple generic devices for delivery. Exhibit 29 lists the key US and European expiries on the Advair patent estate. EXHIBIT 29: GLAXOSMITHKLINE – SUMMARY OF KEY ADVAIR/ SERETIDE PATENTS AND EXCLUSIVITIES Patent number Territory Expiry Description Market exclusivity UK Sep-2008 Data exclusivity； Combination patent invalidated in the UK； Diskus patent expires in 2011 5270305 (RE40045) USA 7-Sep-2010 Combination patent (patent was reissued in Feb-2008 to show synergy between salmeterol and fluticasone) 6536427 USA 1-Mar-2011 Diskus device patent 6536427*PED USA 1-Sep-2011 Pediatric extension Market exclusivity (I-588) USA 30-Apr-2011 Maintenance treatment of airflow obstruction and reducing exacerbations in patients with COPD including chronic bronchitis and emphysema 6945017 USA 2016 Blister pack patent Diskus Patent Europe March 2011 Diskus device patent Combination patent Europe Sep 2013 Combination patent (invalidated in the UK) Data exclusivity Japan April 2013 Data exclusivity (possibility of a 2 year pediatric extension to April 2015) Combination patent Japan 2015 Combination patent (possibility of a 2 year pediatric extension to 2017) Source: FDA Orange Book, Company Data An update from the Office of Generic Drugs on Critical Path Opportunities for Generic Drugs in May 2007 made a number of observations regarding new guideline requirements that may need to be developed before more expedient methods for approving generic inhaled products can be implemented. We have provided an excerpt from this in Exhibit 30. GSK LN172Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 19 of 50EXHIBIT 30: EXCERPT FROM OFFICE OF GENERIC DRUGS’ OBSERVATIONS ON NEW GUIDELINE REQUIREMENTS Source: FDA Though we believe that these hurdles will be overcome in time, they may result in a softer (if non-AB rated products are initially launched) or delayed erosion curve for Advair than the market expects — GlaxoSmithKline’s own management hold the view that it will take some time to see an AB-rated product on the market. We are aware of at least two specific approaches by generics companies towards taking market share in the steroid/LABA combination market for asthma/COPD in the US including Dey and Vectura/Sandoz. European Seretide generics likely to be phased across territories or delayed until 2013 helping to spread the hit； Japan still only just launching with likely protection out until 2017 The Advair combination patent protects the product out to 2013 across the majority of Europe. Following litigation and expiry of data exclusivity, there are now no patents left standing in the UK and generics could technically launch immediately. Furthermore the 2013 combination patent has also been challenged in Germany. Further growth and longer-term exclusivity is expected through the launch of Advair (as Adoair) in Japan, which was approved and launched in 2007 and likely has protection out until 2017. It is important to note that a large proportion of Advair use is outside of the US and the likely phasing of generics across the US, Europe and Japan combined with the potentially protracted launch of non-AB and in particular AB-rated generics may soften the impact of the patent expiries in the US and Europe across 2010–2013. Exhibit 31 shows our sales estimates for Advair/Seretide by region out to 2015. 4.3.1 Bioequivalence of Inhalation Products Currently, bioequivalence for oral inhalation products is demonstrated through in vitro testing for device performance, pharmacodynamic studies of lung function for local delivery, and pharmacokinetic studies for systemic exposure. Due to the difficulty in demonstrating bioequivalence by passing all of these tests, as well as other factors, FDA receives few applications for these kinds of products, even though many of the older MDI products are on the market without patent or exclusivity protection. FDA has identified many of the scientific challenges that need to be addressed to develop generic versions of these products. Critical path opportunities include: Molecular Level Imaging: Imaging techniques that can quantify the amount of drug at the site of action can be used to validate new in vitro tests or new biomarkers. Imaging of particle deposition for inhalation aerosols is a direct measure of local delivery and could establish the correlation of in vitro tests with in vivo local delivery. Novel Pharmacodynamic Study Designs: Many asthma drugs have a very shallow dose-response curve and exhibit high within- and between-subject variability, requiring the use of a very large number of subjects in a pharmacodynamic equivalence test. Novel pharmacodynamic study designs that enable using a forced expiratory volume in 1 second (FEV1) endpoint in a crossover study would allow bioequivalence studies to be conducted using a much smaller number of subjects. Study Design for Combination Products: Several inhalation products contain two active ingredients, an inhaled corticosteroid and a long-acting beta-agonist. To demonstrate bioequivalence, local delivery of both components must be equivalent. However, the FEV1 endpoint is initially affected by the beta-agonist and affected by both components at later times. An exhaled nitric oxide (eNO) endpoint is affected only by the inhaled corticosteroid. Combining these endpoints could potentially allow bioequivalence determinations for both components. Study Designs for COPD: Chronic obstructive pulmonary disease includes chronic bronchitis, emphysema, and chronic asthma, which have different degrees of reversibility to bronchodilator therapy. Reversibility is necessary to obtain a dose-response relationship. Unresolved issues in the design of a bioequivalence study are identification of a subgroup of COPD responders, improved understanding of the dose-response characteristics of anticholinergic bronchodilators, selection of doses for the study, and type of systemic exposure study for poorly absorbed drugs. An additional issue related to the prior bullet point is the design of studies that can establish the bioequivalence of each component in combination inhalers containing both anticholinergic and beta-agonist drugs. Evaluation of Differences in Formulation Composition: In the past, FDA has requested applicants of ANDAs for nasal and inhalation products to formulate products that are qualitatively (Q1) and quantitatively (Q2) the same as the reference product. The acceptability of Q1 and Q2 differences for inhalation products should be explored. Scientific issues involved include the impact of chemical changes in the emitted aerosol, alteration of in vitro drug delivery due to changes in excipients, impact of formulation changes on local site (lung) safety, and whether changes in composition of liquid formulations modify the quality and quantity of leachable substances over the product’s shelf life. Modeling and Simulation of Dry Powder Inhaler Product Performance and Drug Delivery: Identification of key formulation and device performance variables would aid FDA and applicants in establishing appropriate equivalence limits and quality specifications. GSK LN173Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 20 of 50EXHIBIT 31: JEFFERIES SALES ESTIMATES FOR ADVAIR/ SERETIDE, 2007A-2015E (IN £ MILLIONS) 01,0002,0003,0004,0005,0006,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (£ millions)US Rest of the world Source: Company data, Jefferies research Further details of key hard patent expiries and challenges for GlaxoSmithKline are shown in Exhibit 32. GSK LN174Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 21 of 50EXHIBIT 32: GLAXOSMITHKLINE – PATENT EXPIRIES AND CHALLENGES Product Patent expiry/challenge Earliest Generic Comment Wellbutrin XL/ Zyban US generics launched Jun 2008 EU - exclusivity to 2009 in some markets. US - remaining 150mg dose genericised in 2008. Paxil CR Generics launched May 2008 Mylan settlement means all strengths genericised from May 2008. Requip Generics launched May 2008 Genericised in US and in EU Nov 2008. Patent covering use in Parkinson's (EU) expires 2011. Lamictal Generics launched Jul 2008 US Litigation settled with generic entry in mid 2008. EU generics already launched. Imigran/ Imitrex Generics due late ‘08 Nov 2008 Sumitriptan US patent expires 2009 (EU already expired). Litigation settled - Generic launch Nov 2008 by Dr. Reddy’s. Valtrex Generics due late ‘09 Late 2009 Patents expire 2009 (US) and 2009 (EU). Litigation settled in US - generics from late 2009 (Ranbaxy). Combivir 7119202*PED - Aug 8 2009 5047407*PED - May 17 2010 5859021 - May 15 2012 5905082*PED - Nov 18 2016 EU - 2013 May 2010 Patents on the combination of lamivudine and zidovudine expire 2012 (US) and 2013 (EU). US litigation against Teva is ongoing. Teva has not challenged the 2010 patent. Epivir 5047407*PED - May 17 2010 5905082*PED - Nov 18 2016 7119202*PED - Aug 8 2009 RE39155*PED - Jan 2 2014 EU - 2011 May 2010 Co says patents expire 2010 (US) and 2011 (EU). Coreg CR 5902821*PED - Aug 7 2016 6022562*PED - Apr 17 2016 7268156*PED - Jun 27 2023 RE40000*PED - Dec 5 2015 Jun 2010 Protected by formulation patent that expires in 2016 and patent on active form to 2023. Both have been challenged in US. Carvedilol patent expired 2007. 30 Month stay to Jun 2010 and data exclusivity to Apr 2010. Avodart 5565467 - Nov 20 2015 5846976 - Sep 17 2013 5998427 - Sep 17 2013 EU - 2017 Jul 2010 Barr’s ANDA challenge has a 30 month stay to Jul 2010. The 2013 patents are use patents, whilst the basic compound expires 2015. US Litigation is ongoing. Advair RE40045 - Sep 7 2010 6536427 - Sep 1 2011 2013 (Europe), challenged in Germany Sep 2010 The ‘045 and EU patents cover the combination, with the US patent recently re-issued. ‘427 is device patent. Patents on individual ingredients have expired. UK patent revoked by the Courts. Patent challenged by Neolabs in Germany. Boniva 4927814 - Mar 17 2012 6143326 - Apr 21 2017 6294196 - Oct 7 2019 7410957 - May 6 2023 2011 (EU) Nov 2010 GSK has co-promotion rights. Roche is suing seven generic Co’s in US, litigation is ongoing - GSK highlights that only one company has challenged the basic compound ibandronate patent, which expires in 2012. 30 Month stay to Nov 2010. Treximet US patents challenged 6060499 - Aug 14 2017 6586458 - Aug 14 2017 7332183 - Oct 2 2025 Apr 2011 ANDA filing accepted Oct-08； US data exclusivity expires Apr-11. Avandia 5002953 - Mar 17 2012 5741803 - Oct 21 2015 2013 (EU), 2014(EU) Mar 2012 The earlier patents (US & EU) cover rosiglitazone, whilst the later ones cover the active rosiglitazone maleate salt. Generic challenge has been settled, with US generic due to launch late Q1 2012. Ziagen 5034394*PED - Jun 18 2012 5089500*PED - Dec 26 2009 6294540*PED - Nov 14 2018 Jun 2012 Abacavir patents expire 2012 (US) and 2014 (EU). Epzicom 5089500*PED – Dec 26 2009 5047407*PED – May 17 2010 5034394*PED - Jun 18 2012 5905082*PED - Nov 18 2016 6294540*PED - Nov 14 2018 7119202*PED – Aug 8 2009 Jun 2012 Abacavir patents expire 2012 (US) and 2014 (EU). Trizivir 5905082*PED - Nov 18 2016 6294540*PED - Nov 14 2018 6417191 - Mar 28 2016 Nov 2016 Method of treatment patents, combining lamivudine, Zidovudine & abacavir, expires 2016 (US & EU). Lovaza 5698594 - Aug 4 2009 5502077 - Mar 26 2013 5656667 - Aug 27 2018 Aug 2018 US formulation patent expires 2018. NCE Exclusivity to Nov 10 2009. Tykerb 6391874 - Jul 2017 6713485 - Jan 2019 6727256 - Jan 2019 6828320 - Jul 2017 7157466 - Nov 2021 2020 Patents expire 2020 (US – assuming patent term restoration) and 2022 (EU), whilst US NCE Exclusivity goes to Mar 2012. Avamys / Veramyst 7101866 - Aug 2021US 7101866 - Aug 2021US 2022 (EU) Aug 2021 Source: GlaxoSmithKline, FDA, Jefferies Research GSK LN175Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 22 of 50Upside potential in acquisitions and currency； US Cervarix and almorexant still the major pipeline events We see a number of positive drivers for GlaxoSmithKline in 2009； extrinsic factors such as sector rotation and significant favourable movements in foreign exchange rates should be supportive of the shares — at least for the early part of 2009. As for all companies, 2009 guidance at the full-year results on 5 February 2009 will set the tone for consensus expectations for the year. We are mindful ahead of this event that the company still needs to offset the significant drag from patent expiries on top-line growth and margins. Cost savings and operational excellence activities are already ongoing, though we suspect incremental announcements will continue to be made in this area. Whilst we do not expect GlaxoSmithKline’s management to contemplate any large-scale M&A activity in the near future, we would not be surprised to see announcements of small to mid-sized bolt-on acquisitions in the areas of Pharmaceuticals/Biotechnology, Consumer Health, Vaccines and Generics/Emerging market brands. The pipeline should deliver a large number of catalysts in 2009, including proof of concept data for a large number of Phase II products, pivotal Phase III data and regulatory actions. Final data from Cervarix’s HPV 008 trial in 1Q 2009 and potential FDA approval by year-end are important for the company, though we suspect that GlaxoSmithKline has missed the bulk of the opportunity in the US due to a delayed market entry versus Merck & Co.’s Gardasil. The company will also likely keep investors well informed of new product launches and performances in Japan and emerging markets. We too will be interested to see if last year’s emerging market growth is repeated in 2009 across our whole coverage universe, despite evidence that these economies are also encountering the same recessionary pressures as Western markets. EXHIBIT 33: GLAXOSMITHKLINE – SUMMARY OF KEY OPPORTUNITIES Opportunity Importance Comment Pipeline delivery High Key clinical data on Cervarix (HPV 008 and Gardasil head to head data), Tykerb (TEACH study in neoadjuvant breast cancer), Arzerra (PIII NHL), Armala (PIII renal cancer), LymphoStat-B (PIII lupus) and almorexant (PIII insomnia). Potential approvals in 2009 include Cervarix (US), Lunivia (EU), Solzira (US), Bosatria (EU), Synflorix (EU), HibMenCY-TT (US), Arzerra (US). Acquisitions High Bolt-on acquisitions likely to be main drivers of incremental upside over the next five years. Currency High Positive impact likely to be felt on reported and CER earnings from weaker sterling. Japanese launches Medium More than 40 launches of established products expected in Japan – Pharmaceuticals market worth circa £39bn (GSK market share 3% in 2007), Vaccines market worth £0.4bn (no GSK presence in 2007), Consumer market worth £6.4bn (GSK market share 0.5% in OTC, 13% in oral care during 2007). Emerging market growth Medium Approximately 12% of revenues come from the Emerging Markets, which grew at circa 10% over 1H 2008 Source: Company data, Jefferies estimates. Bolt-on acquisition space looking increasingly competitive — expect lots of activity and high prices GlaxoSmithKline has made a number of strategic acquisitions over the past two years that will help to diversify both their revenue base and research activities. In terms of revenue-generating acquisitions, these have been relatively small bolt-on deals to date with the Reliant Pharma (Lovaza), Bristol Myers products (Egypt and Pakistan), Breathe Right/FiberChoice (OTC) and Biotene acquisitions (OTC oral health) perhaps being the most significant of these. The licensing agreement with Aspen was another innovative deal, which should help to diversify the revenue base into emerging markets — a stated strategy of management. Other recent significant acquisitions in R&D (Domantis and Sirtris) remind us that the company will continue to look for opportunities to build its efforts in biologics and specific therapeutic areas such as antibody therapeutics and ageing. The strategic review announcement at the 2Q 2008 results presentation by Andrew Witty made it clear that the company was set to make long-term strategic changes to lower its risk profile and diversify its growth away from dependence upon the Western market blockbusters that have defined many of the companies in the sector over the past 10 to 20 years. Mr Witty also specified that incremental investments in Vaccines, Biopharmaceuticals, Consumer Health, Emerging Markets and Asia Pacific would be made. Certain mid- to late-stage pipeline products might imply that specific targets such as Genmab, Actelion and Theravance could be in mind already. Recent developments could also put Generics companies such as Ratiopharm and Actavis in play, though these would appear to be less strategically important to GlaxoSmithKline than for other larger generic companies in our view. Some non-core products will likely be divested to help trim margins in some areas as well as provide additional cash for acquisitions. In addition, management has stated it does not intend to make significant share repurchases in 2009 to provide further liquidity. GSK LN176Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 23 of 50Whilst GlaxoSmithKline certainly has the resources and capability to achieve a number of strategic acquisitions in 2009, we remain somewhat skeptical to the degree to which any of these can make a meaningful difference to the business and are concerned that Pharmaceuticals companies are producing their own mini asset bubble by all rushing to acquire the same types of businesses, i.e., Consumer/ OTC, Emerging Market, Biologics, Generics and Vaccines companies — particularly as some of these are becoming in short supply. Currency likely to be a key driver of performance if Sterling continues to weaken As previously mentioned we are acutely aware of the past historical correlation between the local market price relative valuation of GlaxoSmithKline versus the Sterling:US$ exchange rate (Exhibit 34). Whilst this is no guarantee of absolute performance, we expect to see GlaxoSmithKline’s relative performance aided by this phenomenon if exchanges rates hold or if Sterling weakens further against the US$. This is because of our entire current coverage universe, we estimate that GlaxoSmithKline is most sensitive at the level of earnings versus fluctuations in the US$ due to its high levels of revenue exposure in the US (45% of Group revenues in 2007A) and lack of a full hedge against its UK cost base. EXHIBIT 34: PAST CORRELATION OF STERLING:US$ RATE VERSUS LOCAL MARKET PRICE RELATIVE FOR GLAXOSMITHKLINE 50607080901001101201302001 2002 2003 2004 2005 2006 2007 2008 2009GSK/FTSE All Share £/US$ Source: DataStream, Jefferies Research A large number of important clinical and regulatory milestones should come to pass in 2009 As shown in Exhibits 37 and 40, GlaxoSmithKline’s R&D pipeline and post-marketing programs should produce a number of important clinical and regulatory catalysts during 2009. The most price-sensitive of these in our view have already been summarized in Exhibit 1, and we discuss critical developments for Cervarix in the US this year in the following section. Hopefully 2009 may mark a turnaround in the fortunes in GlaxoSmithKline’s pipeline productivity with a number of new products reporting potentially pivotal data this year. In particular we have high hopes of positive outcomes for Armala Phase III data in refractory renal cancer, and Arzerra in refractory NHL, although these initial indications for these products would not likely carry significant sales potential, but could raise the hopes of the market for efficacy in front line indications in the same disease further down the line as well as reinforcing the efficacy and safety profile potential in other cancer types. The first piece of pivotal Phase III data for almorexant (insomnia) should be delivered in 2H 2009 and could build multi-billion US$ expectations for the product, though we still question its safety profile and commercial potential in a post-Ambien generics world. Regulatory catalysts are always most important (and difficult to predict) in our view and GlaxoSmithKline will see several of these in 2009. Most critical will likely be the US regulatory review of Cervarix for the prevention of HPV infection (though this will likely slip into 1H 2010 in our view unless filed early in 2009). The US approvals of Solzira (restless leg syndrome) and Synflorix (meningitis, otitis, pneumonia and non-typeable Haemophilus influenzae) would certainly be important in underpinning consensus expectations for new product launch growth for GlaxoSmithKline in addition to Promacta and Cervarix. Smooth approvals for Arzerra (CLL) and potentially Armala GSK LN177Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 24 of 50(renal cancer； depending upon timing of filing) in refractory settings in 2009 are important for supporting longer-term peak sales expectations for these products in our view. EXHIBIT 35: ESTIMATED REVENUES FOR THE PHARMACEUTICALS BASE BUSINESS AND R&D PIPELINE 05,00010,00015,00020,00025,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (£ millions)Existing Products (pharmaceuticals) New products (yet to launch) EXHIBIT 36: ESTIMATED REVENUES FOR THE GROUP BASE BUSINESS AND R&D PIPELINE 05,00010,00015,00020,00025,00030,00035,0002007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ERevenue (£ millions)Existing Products (of total sales) New products (yet to launch) Source: Company data, Jefferies estimates Source: Company data, Jefferies estimates A comprehensive summary of key products in GlaxoSmithKline’s late-stage development pipeline is also shown in Exhibit 37. GSK LN178Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 25 of 50EXHIBIT 37: GLAXOSMITHKLINE – KEY LATE-STAGE DEVELOPMENT OPPORTUNITIES Product Status Indication Peak est. Filing est. Comment Lunivia Filed Sleep disorders $300m 2007 Licensed marketing rights for all markets excluding the US, Canada, Mexico and Japan from Sepracor. Recommended for approval by CHMP in Oct-08. Solzira Filed Restless leg (RLS) $500m 2008 NDA filed Sep-08 and subsequently withdrawn for data reformatting. Data refilled in Jan-09. Partnered with Xenport. Bosatria Filed Hypereosinophilic syndrome $250m 2008 Filed in EU (Sep-08)； PIII trials ongoing in the US – expected completions in Jul and Dec-09. Rezonic/ Zunrisa (casopitant) Filed CINV/PONV $500m 2008 NDA filing May 2008/ MAA Jul-08. Addition of Rezonic to treatment with ondansetron and dexamethasone in PIII studies improved the control of CINV in patients receiving emetogenic chemotherapy. Synflorix (Streptorix) Filed S pneumoniae and NTHi $500m 2008 Competitor to Prevnar. Pneumococcal conjugate decavalent pediatric vaccine as an injectable prophylactic against meningitis, otitis and pneumonia caused by Streptococcus pneumoniae and non-typeable Haemophilus influenzae (NTHi). EMEA accepted registration file in Jan-08. US filing strategy under review, but likely to require additional PIII studies. HibMenCY-TT Phase III MenCY and Hib prophylaxis $300m 2009 Conjugated pediatric vaccine for the potential prophylaxis of meningitis (types C and Y) and Haemophilus influenzae (type b) virus infections. Only US filing planned. Arzerra (ofatumumab) Phase III CLL US$700m 2009 Pivotal data presented at ASH in Dec-08. FDA filing expected Jan-09. Licensed from Genmab. Arzerra (ofatumumab) Phase III NHL US$800m 2009 Two pivotal studies in refractory NHL fully recruited – data expected in Apr-09. PII front-line follicular NHL data expected Feb-09. LymphoStat-B (belimumab) Phase III Lupus US$750m 2009 Two PIII studies expect to read out in Jun/Jul-09. Two further studies expected to complete in Dec-10. Elesclomol (STA-4783) Phase III Metastatic melanoma US$500m 2009 PII data presented as ESMO Sep-08. PIII SYMMETRY study in chemo-naïve stage IV patients expected to read-out in Jun-09. Licensed from Synta Pharmaceuticals. Armala (pazopanib) Phase III Renal cell cancer US$250m 2009 PII data presented as ESMO Sep-08. PIII data vs placebo from VEG105192 (refractory RCC) expected Apr-09. PII trials in ovarian, fallopian, cervical and peritoneal tumours also ongoing. retigabine Phase III Epilepsy US$1,000m 2009 Partnered with Valeant. Positive data from RESTORE 1 reported in Dec-08. US and EU filings anticipated in 1H 2009. Development programme also includes an ongoing PII study in post-herpetic neuralgia. MenACWY Phase III MenACWY prophylaxis US$500m 2009 Conjugated paediatric vaccines for the potential prevention of meningitis (types A, C, W and Y) infection. Initial filings focused on EU market. Simplirix Phase III Genital herpes US$500m 2010 gD2 subunit of herpes virus together with GSK’s SBAS4, an adjuvant containing Corixa’s MPL adjuvant, for the potential prevention of herpes simplex virus (HSV) infection. New generation flu Phase III Influenza prophylaxis US$200m 2010 Pivotal studies initiated Sep-08. almorexant Phase III Primary insomnia US$2,000m 2010 Pivotal PIII data from RESTORA 1 expected 2H 2009. Primary endpoints include change in latency to persistent sleep (LPS) and change in wake after sleep onset (WASO) and includes reference zolipdem arm. PII data presented at WSG in Sep-07. Partnered with Actelion. rosiglitazone XR Phase III Alzheimer’s disease US$500m 2010 Extended-release version of Avandia. Initial PIII data (REFLECT-1, 2 & 3) expected in 2009. REFLECT 4 & 5 PIII data expected 2Q 2010. Armala/ Tykerb Phase III IBC US$200m 2010 PIII study (VEG108838) initiated in Nov-07 comparing lapatinib +/- pazopanib in patients with IBC. Expected completion in May-10. Arzerra (ofatumumab) Phase III Rheumatoid arthritis US$500m 2011 Two PIII studies initiated in Nov-07 (DMARD-IR and TNFα-IR). Phase II study also initiated in RRMS in Apr-08. Initial PIII data expected in 2009. otelixizumab Phase III Type I diabetes US$300m 2011 PIII DEFEND-1 study initiated Aug-08 and expected to complete in Dec-11. Armala (pazopanib) Phase III Sarcoma US$250m 2011 PII data presented as ESMO Sep-08. GSK-VEG110727 PIII study vs placebo in relapsed/ refractory patients initiated Oct-08. PII trials in ovarian, fallopian, cervical and peritoneal tumours also ongoing. darapladib Phase III Atherosclerosis US$5,000m 2012 15,000 patient STABILITY study and second 12,000 patient study initiation in 2009 in patients with chronic coronary heart disease and post ACS respectively. Both studies event driven. PII data missed primary endpoint of reduced plaque deformability and lowered CRP. HGS has 10% royalty license with GSK. 698/444 Phase II Asthma/COPD US$2,000m 2013 Positive '444 phase IIb data in asthma and COPD reported in Dec-08. Additional phase II studies for’698 expected to complete in asthma in early 2009. '444/'698 PII combination studies are also ongoing. Partnered with Theravance (low to mid-teen royalty). MAGE-A3 Phase III NSCLC (therapeutic vaccine) US$500m 2015 PIII MAGRIT study initiated in MAGE-A3 +ve, Stage IB to IIIA NSCLC patients. Course is 13 injections of the vaccine with or without standard chemotherapy after surgery over 27 months. Primary endpoint of DFS expected to read out in 2015. Source: Company data, ClinicalTrials.Gov, Jefferies estimates GSK LN179Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 26 of 50Cervarix – US approval challenged by efficacy, a novel adjuvant and new manufacturing processes With Cervarix now looking to potentially make its debut on the US market no earlier than late 2009, based on a 1H 2009 filing, its potential has clearly diminished in our eyes due to it being three and a half years behind Merck’s Gardasil on a best-case scenario in this territory. Cervarix was approved for use in Europe in September 2007 for the prevention of high-grade cervical intraepithelial neoplasia (CIN 2/3 — pre-cancerous lesions) in 10- to 25-year-olds. The first approval for the product came in May 2007 by the Therapeutic Goods Administration of Australia for females aged 10-45 years old. The US approval of Cervarix has been delayed, in our view, due to several complicating factors, namely inconclusive efficacy findings in the interim analysis of study HPV 008, the use of a novel adjuvant (AS04) and an insect cell-based manufacturing system, which has not been used to produce vaccines previously in the US market, to our knowledge. EXHIBIT 38: COMPARISON OF CERVARIX AND GARDASIL DEVELOPMENT AND APPROVALS Indication Gardasil status Cervarix status Cervical cancer prevention in young girls/ women Approved in 2006 Approved in 2007 (US approval expected 2009/10). Genital wart prevention in young girls/ women Approved in 2006 NA – Cervarix does not prevent infection with key wart-causing HPV types. Vulvular and vaginal lesion prevention in young girls/ women Approved in 2008 Not disclosed HPV type cross-protection in young girls/ women Filed Not disclosed Older women indication Filed Study HPV-006 will measure efficacy in women aged 26-55. Genital wart and cancer prevention in young boys/ adolescents CDC meeting expected in 2009 to discuss NA – Cervarix does not prevent infection with key wart-causing HPV types. Genital wart and cancer prevention in young men Filing planned for 2009 NA – Cervarix does not prevent infection with key wart-causing HPV types. Source: Company data, Jefferies research AS04 adjuvant adds additional safety questions — unclear as to whether it offers a significant advantage Whilst potentially complicating its US approval process, the novel adjuvant in Cervarix, AS04, potentially fulfills an important role in differentiating it from Gardasil, which uses a common aluminium-based adjuvant — AS04 is designed to enhance the normal human immune response beyond what is normally seen with conventional adjuvants, which may result in longer-lasting protection for the recipient of the vaccine. This could be a key pharmacoeconomic consideration for governments and other payors for the vaccine as it may reduce the frequency and/or requirement for booster shots — an important factor for a vaccine designed to prevent human papilloma virus (HPV) infections in females from the age of 10 onwards. The key question is whether this new adjuvant does confer a risk-benefit advantage in reality. GlaxoSmithKline’s management expect to release new data in 2009 comparing the immune response of Cervarix with Gardasil in over 1,000 women aged 18–26 years over a period of up to 24 months after the first vaccination. However, there is some debate as to whether immunogenicity data would be sufficient to confer the advantage of one HPV vaccine over another — this is because it has been shown by Merck that women who initially showed a strong anti-HPV response on vaccination with Gardasil and then seroreverted (i.e., stopped producing detectible levels of anti-HPV antibodies) within 24 months still retained a high degree of protection against HPV infection. This is a recognized phenomenon amongst some vaccines (e.g., hepatitis B), where boosters are often not required due to the body’s ability to produce what is referred to as an anamnestic response to infection — i.e., the renewed rapid production of an antibody on the second or subsequent encounter with the same infection/ antigen. Insect-cell based manufacturing also unconventional, but should do no more than just delay a wary FDA The manufacturing process behind Cervarix is perhaps less contentious in our view. The key antigenic product is manufactured in insect cells versus the more conventional manufacturing processes, which use yeast cells. However, the FDA may wish to see longer-term safety data from the final analysis of the HPV 008 study and/or become more familiar with the process before allowing approval in the United States. No significant issues arising from the use of this new system, or the AS04 adjuvant, have shown themselves to be apparent in any clinical data released to date on Cervarix to our knowledge. However, given the concerns voiced during 2008 over the potential safety of Gardasil in the US linked to adverse events (some serious) including fainting/falls, Guillain-Barre Syndrome (rare neurological disorder causing muscle weakness), thromboembolic disorders (blood clots) and death, reported in the Vaccine Adverse Event Reporting System (VAERS) we can see why the FDA might be cautious in approving a second HPV vaccine without having a large and consistent safety database in hand for Cervarix. However, following a review of the database after more GSK LN180Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 27 of 50than 16 million doses have been administered in the United States, the FDA has found no causal link between Gardasil and any of these reported adverse events. Large post-marketing safety studies are currently ongoing for Gardasil in the United States. EXHIBIT 39: CERVARIX OVERALL SAFETY PROFILE FROM THE INTERIM ANALYSIS OF STUDY HPV 008 94.7%85.0%91.2%90.0%81.6% 79.9%0%20%40%60%80%100%Any Symptom General Symptom Local Symptom%reporting asymptomCervarix Control Source: Company data, Jefferies research Questionable efficacy remains the most significant regulatory and commercial challenge Last, but most critical in our view, is the reduced efficacy seen for Cervarix in the interim analysis of study HPV 008 (90% per protocol efficacy) versus the near-100% efficacy for Gardasil in its pivotal study. GlaxoSmithKline management have argued 100% efficacy for Cervarix in the interim review of HPV 008, and some regulators have also indicated this in product labeling, based on adjudication of several instances of CIN2+ lesions carrying infection with multiple HPV types. However, we believe that management’s arguments reflect a hypothesis that the HPV16 and 18 infections seen in these cases were incidental to other previously ongoing HPV-58/51/52/54 infections. An alternative thesis backed by published medical literature (see Trottier et al, 2006； Fife et al 2001) that co-infection with multiple HPV types (usually including HPV 16 or 18) is a key driver of precancerous cervical lesions and in these particular [adjudicated] cases in HPV 008, Cervarix failed to prevent this. The final analysis of HPV 008 should provide further illumination on the matter. Cross-protection not really differentiating for Cervarix when genital wart protection also taken into account Both Merck and GlaxoSmithKline have published positive cross-protection data for their HPV vaccines that show protection against a broader number of HPV types than previously anticipated. However, as both products have shown similar data in this area, we still see Gardasil’s protection against HPV types 6 and 11 for genital warts and some additional cancers in men as being advantageous versus Cervarix. We suspect that both vaccines will be viewed as cost-effective by payors — market entry timing, national interests and keen pricing will likely be the biggest drivers of vaccine penetration for both players. Certainly in the US, Cervarix would seem to be at a disadvantage here. We have listed an update on post-marketing studies and regulatory development programs and recent commercial performances for a number of important products already launched by GlaxoSmithKline including Cervarix, Tykerb, Promacta in Exhibit 40. GSK LN181Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 28 of 50EXHIBIT 40: GLAXOSMITHKLINE – KEY PRODUCT LAUNCHES/ LABEL EXPANSIONS Product Indication US approval EU approval Comment Advair Asthma, COPD 2000 1999 Management reported increase in US prescription volumes in 3Q 2008. US label updated for COPD exacerbation data in Apr-08. alli (OTC) Obesity Feb-07 2009 Positive CHMP opinion in EU received Oct-08. Licensed for OTC use from Roche. Arixtra Deep vein thrombosis, ACS 2001 2002 GSK launch supported by OASIS-5 & 6 data for a wide range of ACS patients. Potentially at risk of therapeutic substitution if Lovoenox generics approved in the US. Avandia franchise Type II diabetes, Alzheimer’s disease 1999 2000 Avandamet XR/ Avandia + statin filing strategy under review for the US and Europe. Avandia (plain) sales outlook is negative due to ongoing CV safety concerns. Avodart Benign prostatic hyperplasia, prostate cancer prevention 2001 2002 Co-administration with tamsulosin approved in EU and US in mid 2008. PIII studies for prostate cancer prevention and fixed dose combination trials ongoing. Barr’s ANDA challenge has a 30 month stay to Jul 2010. The 2013 patents are use patents, whilst the basic compound expires 2015. US Litigation is ongoing. Cervarix HPV infection prophylaxis 2H-09/ 1H-10 Sep-07 Complete Response Letter required GSK to produce final data from HPV-008 - expected to be available during 4Q 2008. GSK anticipates submitting these data in 1H-09. FDA action on the application is expected by GSK to take up to six months following this submission. US approval anticipated by management in end-09/ early-10. Management report that Cervarix has won 70% of tenders by volume since launch. Coreg CR +ACEi Hypertension Oct-06 NA Coreg CR +ACEi filing strategy under review in the US. Entereg Post-operative ileus May-08 NA Obstructive bowel disease rights returned to Adolor and development in this area subsequently discontinued. Kinrix DTaP-IPV Jun-08 NA US vaccines for children funding commenced Aug-08. Lamictal XR Epilepsy 2009 NA US generics of immediate-release Lamictal launched mid-08. Lovaza/ Omacor Hyperlipidemia Oct-06 Jan-96 Acquired with Reliant Pharmaceuticals in Dec-07. US sales of US$75m in 3Q 2008. Prepandrix HN51 pandemic flu 2010 May-08 GSK has previously announced its intention to donate 50 million doses of Prepandrix to the WHO in support of its stockpile initiative. GSK has already signed contracts with the US and several European countries for the supply of its pre-pandemic vaccine and bulk antigen. Promacta/ Revolade Thrombocytopaenia, Hepatitis C/ CLD Nov-08 2009 RAISE six month data in chronic ITP presented at ASH in Dec-09. MAA submitted in Europe in Dec-08. Nplate (Amgen) already has recommendation for approval in EU and US approval. Three PIII studies in Hepatitis C/ CLD ongoing. Data expected Jul-09 (TPL104054) and Aug-11 (TPL103922, TPL108390). Requip XL Parkinson’s Disease Dec-07 Jun-08 Generic equivalents of Requip (immediate-release) launched in the US and in the EU in Nov-08. Patent covering use in Parkinson's (EU) expires 2011. Rotarix Rotavirus Apr-08 Feb-06 US vaccines for children funding commenced Aug-08. Treximet Migraine Apr-08 NA sNDA filed for probable migraine in Sep-08. Patent challenged by Par in Oct-08 – data exclusivity expires Apr-11. Tykerb/ Tyverb Breast cancer, head & neck cancer, gastric cancer Mar-07 Jun-08 Refractory breast: Hepatotoxicity risk identified and labelled during 1H 2008 in Europe. 1st-line breast: Positive data in combination with Femara presented at SABCS in Dec-08 (EGF30008) when analysed by HER2+ status. Primary completion date for EGF104535 (chemo +/- Tykerb in Her2+) expected Jul-10. Primary completion date for EGF104383 (chemo +/- Herceptin/Tykerb) estimated Sep-14. Adjuvant breast: 3,000 patient TEACH study (post-chemo) expected to read out in Aug-09. ALTTO adjuvant trial (Tykerb and/or Herceptin) initiated in Jun-07 and expected to complete in Jun-10. NEO-ALTTO (BIG 1-06) neoadjuvant trial initiated Dec-07. Head & neck cancer: Positive PII data presented at ESMO in Sep-08 in 1st-line SCCHN patients. EGF102988 (MAINTYNANCE study) initiated in Dec-06 and expected to complete in Jun-12. Gastric cancer: EGF104578 (paclitaxel +/- Tykerb) recruitment ongoing as of Nov-08. Will measure all cause mortality up to 1 year after last patient enrolled. Volibris PAH class II/III NA Apr-08 GSK licensed commercialization rights to ambrisentan for PAH outside the US in Mar-06. Source: Company data, Jefferies estimates GSK LN182Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 29 of 50Financial Model EXHIBIT 41: GLAXOSMITHKLINE: PROFIT AND LOSS ACCOUNT, 2007A-2015E Profit & Loss Account (1) (£m)Year-end: 31 December 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EReported revenues 22,716 24,091 26,715 26,984 28,013 27,750 27,228 27,445 28,158 COGS (5,206) (5,909) (6,505) (6,616) (6,882) (6,941) (6,733) (6,787) (6,963)SG&A (6,817) (7,035) (7,709) (7,709) (7,786) (7,588) (7,354) (7,302) (7,375)R&D (3,237) (3,418) (3,650) (3,650) (3,723) (3,723) (3,723) (3,723) (3,760)Other operating income/expenses 475 505 436 473 492 512 533 555 578 Total expenditures (14,785) (15,857) (17,428) (17,502) (17,899) (17,740) (17,277) (17,257) (17,520)Operating profit 7,931 8,234 9,287 9,482 10,114 10,010 9,951 10,188 10,638 Operating Margin 34.9% 34.2% 34.8% 35.1% 36.1% 36.1% 36.5% 37.1% 37.8%Profit on disposal of Associates 0 0 0 0 0 0 0 0 0 Profits/losses of Associates 50 45 56 59 62 65 68 71 75 EBIT 7,981 8,279 9,343 9,541 10,176 10,075 10,019 10,259 10,713 Margin 35.1% 34.4% 35.0% 35.4% 36.3% 36.3% 36.8% 37.4% 38.0%Exceptional items (338) (950) (212) 0 0 0 0 0 0 Profit before interest 7,643 7,329 9,131 9,541 10,176 10,075 10,019 10,259 10,713 Net finance costs (191) (449) (493) (371) (246) (115) 1 61 137 Pre-tax profit (reported) 7,452 6,880 8,638 9,170 9,930 9,960 10,020 10,320 10,850 Margin 32.8% 28.6% 32.3% 34.0% 35.4% 35.9% 36.8% 37.6% 38.5%Pre-tax profit (clean) 7,790 7,830 8,850 9,170 9,930 9,960 10,020 10,320 10,850 Margin 34.3% 32.5% 33.1% 34.0% 35.4% 35.9% 36.8% 37.6% 38.5%Taxation (reported) (2,142) (2,033) (2,514) (2,659) (2,880) (2,888) (2,906) (2,993) (3,147)Taxation (clean) (2,219) (2,271) (2,567) (2,659) (2,880) (2,888) (2,906) (2,993) (3,147)Tax rate (reported) 28.7% 29.5% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0%Tax rate (clean) 28.5% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0%Profit after tax (reported) 5,310 4,847 6,124 6,511 7,050 7,072 7,114 7,327 7,703 Profit after tax (clean) 5,571 5,559 6,283 6,511 7,050 7,072 7,114 7,327 7,703 Minority interests (96) (96) (114) (121) (127) (135) (143) (152) (161)Attributable profit (reported) 5,214 4,751 6,010 6,390 6,923 6,937 6,971 7,175 7,542 Attributable profit (clean) 5,475 5,463 6,169 6,390 6,923 6,937 6,971 7,175 7,542 Source: Company data, Jefferies estimates EXHIBIT 42: GLAXOSMITHKLINE: PER SHARE DATA, 2007A-2015E Profit & Loss Account (2)Year-end: 31 December 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EPER SHARE DATAAverage shares outstanding (m) 5,524 5,205 5,062 5,076 5,089 5,101 5,114 5,127 5,140 EPS - reported (p) 94.4 91.3 118.7 125.9 136.1 136.0 136.3 139.9 146.7 EPS - clean (p) 99.1 105.0 121.9 125.9 136.1 136.0 136.3 139.9 146.7 DPS (p) 53.0 57.0 61.0 65.0 69.0 71.0 73.0 75.0 79.0 Payout Ratio (reported) 56% 62% 51% 52% 51% 52% 54% 54% 54%Payout Ratio (norm) 53% 54% 50% 52% 51% 52% 54% 54% 54%Dividend cover (x) 1.9 1.8 2.0 1.9 2.0 1.9 1.9 1.9 1.9 Source: Company data, Jefferies estimates EXHIBIT 43: GLAXOSMITHKLINE: COST AS A PERCENTAGE OF SALES, 2007A-2015E Costs as % of Sales (%)Year-end: 31 December 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015ECOGS 22.9% 24.5% 24.3% 24.5% 24.6% 25.0% 24.7% 24.7% 24.7%SG&A 30.0% 29.2% 28.9% 28.6% 27.8% 27.3% 27.0% 26.6% 26.2%R&D 14.2% 14.2% 13.7% 13.5% 13.3% 13.4% 13.7% 13.6% 13.4%Other operating income/expenses -2.1% -2.1% -1.6% -1.8% -1.8% -1.8% -2.0% -2.0% -2.1%Profit on disposal of Associates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Profits/losses of Associates -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.3% -0.3% Source: Company data, Jefferies estimates GSK LN183Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 30 of 50EXHIBIT 44: GLAXOSMITHKLINE: YEAR ON YEAR CHANGE, 2007A-2015E Year on Year Change (reported) (%)Year-end: 31 December 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EReported revenues -2% 6% 11% 1% 4% -1% -2% 1% 3%COGS 4% 14% 10% 2% 4% 1% -3% 1% 3%Gross profit -1% 7% 11% 1% 4% -1% -2% 1% 3%SG&A -6% 3% 10% 0% 1% -3% -3% -1% 1%R&D -6% 6% 7% 0% 2% 0% 0% 0% 1%Other operating income/expenses 55% 6% -14% 8% 4% 4% 4% 4% 4%Total expenditures -4% 7% 10% 0% 2% -1% -3% 0% 2%Operating profit 2% 4% 13% 2% 7% -1% -1% 2% 4%EBIT 1% 4% 13% 2% 7% -1% -1% 2% 4%Pre-tax profit (reported) -4% -8% 26% 6% 8% 0% 1% 3% 5%Pre-tax profit (clean) 0% 1% 13% 4% 8% 0% 1% 3% 5%Profit after tax (reported) -3% -9% 26% 6% 8% 0% 1% 3% 5%Profit after tax (clean) 1% 0% 13% 4% 8% 0% 1% 3% 5%Minority interests -12% 0% 19% 6% 5% 6% 6% 6% 6%Attributable profit (reported) -3% -9% 26% 6% 8% 0% 0% 3% 5%Attributable profit (clean) 2% 0% 13% 4% 8% 0% 0% 3% 5%Average shares outstanding (m) -2% -6% -3% 0% 0% 0% 0% 0% 0%EPS - reported (p) -1% -3% 30% 6% 8% 0% 0% 3% 5%EPS - clean (p) 4% 6% 16% 3% 8% 0% 0% 3% 5%DPS 10% 8% 7% 7% 6% 3% 3% 3% 5% Source: Company data, Jefferies estimates EXHIBIT 45: GLAXOSMITHKLINE: KEY EXCHANGE RATES, 2007A-2015E Key exchange rates 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EUS$/£ exchange ratesAverage 2.00 1.85 1.57 1.57 1.57 1.57 1.57 1.57 1.57 End Period 1.99 1.44 1.57 1.57 1.57 1.57 1.57 1.57 1.57 €/£ exchange ratesAverage 1.46 1.26 1.19 1.19 1.19 1.19 1.19 1.19 1.19 End Period 1.36 1.03 1.19 1.19 1.19 1.19 1.19 1.19 1.19 Source: Company data, Jefferies estimates GSK LN184Please see important disclosure information on pages 47 - 50 of thisreport.Jeffrey Holford, Equity Analyst, jholford@J, 44 (0) 20 7029 8673 Page 31 of 50EXHIBIT 46: GLAXOSMITHKLINE: CASH FLOW STATEMENT, 2007A-2015E Cash Flow Statement (£m)Year-end: 31 December 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015EOperating ActivitiesOperating profit 7,931 8,234 9,287 9,482 10,114 10,010 9,951 10,188 10,638 Depreciation, Amortisation & impairments etc. 1,228 1,352 1,457 1,506 1,558 1,612 1,669 1,729 1,792 Increase in working capital (846) (400) (442) (464) (487) (511) (537) (564) (592)Other incl restructuring charge/merger costs (233) (600) (300) (450) (600) (300) (450) (600) (300)Cashflow from operating activities 8,080 8,586 10,002 10,074 10,585 10,811 10,633 10,753 11,538 Taxation (1,919) (2,108) (2,157) (2,439) (2,526) (2,736) (2,744) (2,761) (2,843)Net cash inflow from operating activities 6,161 6,478 7,845 7,635 8,059 8,075 7,889 7,992 8,695 Investing ActivitiesCapital expenditure (net) (1,481) (1,475) (1,656) (1,705) (1,756) (1,809) (1,863) (1,919) (1,977)Purchase of intangible fixed assets (627) (496) (500) (500) (500) (500) (500) (500) (500)Sale of intangible fixed assets 9 175 175 175 175 175 175 175 175 Purchase of equity investments (186) (100) (100) (100) (100) (100) (100) (100) (100)Sale of equity investments 45 25 25 25 25 25 25 25 25 Share transactions with Minority shareholders - - - - - - - - - Disposal of Associates - - - - - - - - - Purchase of businesses (1,027) (500) (500) (500) (500) (500) (500) (500) (500)Disposal of businesses - - - - - - - - - Investments in JVs and Associates companies (1) (9) (9) (9) (9) (9) (9) (9) (9)Interest received 247 338 285 285 285 285 285 285 285 Earning/Dividends from JVs & Associates 12 13 14 15 16 17 18 19 20 Net cashflow from investing activities (3,009) (2,029) (2,266) (2,314) (2,364) (2,416) (2,469) (2,524) (2,581)Other activitiesShare options 116 50 53 56 59 62 65 68 71 Shares issued 417 110 116 122 128 134 141 148 155 Purchase of own shares (3,751) (3,689) 0 0 0 0 0 0 0 Shares acquired for ESOP Trusts (26) (20) (20) (20) (20) (20) (20) (20) (20)Interest paid (378) (604) (595) (503) (410) (311) (224) (179) (122)Equity Dividends (2,793) (2,929) (2,793) (2,959) (3,122) (3,281) (3,342) (3,402) (3,460)Dividends to Minority interests (77) (82) (97) (103) (108) (115) (122) (129) (137)Dividends paid on preference shares 0 0 0 0 0 0 0 0 0 Other (161) (274) - - - - - - - Cashflow from other activities (6,653) (7,438) (3,336) (3,407) (3,473) (3,531) (3,502) (3,514) (3,513)Exchange Differences (88) (301) 0 0 0 0 0 0 0 Increase in net liquid funds (3,589) (3,290) 2,243 1,914 2,222 2,128 1,918 1,954 2,601 Net Liquid Funds at beginning of period (2,450) (6,039) (9,329) (7,086) (5,172) (2,950) (822) 1,096 3,050 Net Liquid Funds at end of period (6,039) (9,329) (7,086) (5,172) (2,950) (822) 1,096 3,050 5,651 Pension liabilities (1,383) (1,383) (1,383) (1,383) (1,383) (1,383) (1,383) (1,383) (1,383)NLF including pension liablilities (7,422) (10,712) (8,469) (6,555) (4,333) (2,205) (287) 1,667 4,268 Shareholders funds 9,910 7,989 11,898 14,940 18,287 21,381 24,232 27,211 30,894 Gearing 61% 117% 60% 35% 16% 4% NA NA NA Interest cover (x) 42 18 19 26 41 88 NA NA NA Source: Company data, Jefferies estimates GSK LN185

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