GLAXOSMITHKLINE ACCELERATING OUR STRATEGY: GSK …

GLAXOSMITHKLINE ACCELERATING OUR STRATEGY: GSK TO ACQUIRE FULL OWNERSHIP OF CONSUMER HEALTHCARE BUSINESS

Tuesday, 27 March 2018 Analyst Call @ 14.00 hrs

Balbir Kelly-Bisla (Director of Investor Relations): Good morning and good afternoon everyone. Thank you for joining us to discuss the transaction we announced earlier today. You should have received our press release and can view the presentation on GSK's website. For those not able to view the webcast, slides that accompany today's call are located on the Investor section of the GSK website. Cautionary statement regarding forward-looking statements

Before we begin, please refer to slide 2 of our presentation for our cautionary statements. Agenda

Our speakers today are Chief Executive Officer, Emma Walmsley, Simon Dingemans, Chief Financial Officer, and Brian McNamara, CEO of our Consumer Healthcare business. Following our presentation, we will open the call to questions and answers. We request that you ask only a maximum of two questions so that everyone has a chance to participate and with that I will hand the call over to Emma.

Emma Walmsley (CEO): Thank you, Balbir, and a very good morning and good afternoon to everybody. Balanced business to deliver growth and returns to shareholders

I am delighted to be here to discuss the announcement we made earlier today on the agreement to buy out Novartis' stake in our Consumer Healthcare joint venture. A strategic strength for GSK is our business profile beyond Pharma, the sustainable growth, returns and cashflows. Today's agreement strengthens one of our three global businesses and will support overall performance and capital planning for the group. Advancing our priorities

Last year, I laid out my strategic priorities: Innovation, Performance and Trust, and our capital allocation framework. This transaction that we have announced today is

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consistent with both those priorities and this framework. Through full ownership of the Consumer Healthcare business, we aim to deliver improved performance. Very importantly, the transaction removes an inherent uncertainty for the group with the removal of the Novartis put option. This will allow us to plan use of our capital for other priorities, especially Pharma R&D.

As I have said, strengthening and investing in our Pharma pipeline is critical to support the company for its next wave of growth and we expect to give a first update to the market on our R&D plans at Q2. Two important milestones for Consumer Healthcare

The buyout of the Novartis stake means GSK's shareholders will capture the full value of a business we believe is well positioned to deliver future sales growth and continued operating margin improvements. As Brian will come on to explain in a moment, we are confident that the investments and changes we have made to this business in recent years, building new power brands, a stronger focus on OTC and Oral Health, improved innovation capability, increased focus on digital, new operational efficiencies and, of course, building a great team, all mean we have a winning business.

To support the funding of the Novartis buyout, we are also announcing a strategic review of Horlicks and other Consumer Healthcare nutrition products. Horlicks is a terrific brand with a long history especially in India but, in the context of funding for this transaction and our desire to increase focus on our OTC and Oral Health portfolios, as well as other group capital allocation priorities, it makes sense for us to review it.

Given that the vast majority of Horlicks sales are sold through our Indian subsidiary, GlaxoSmithKline Consumer Healthcare Limited, which is a listed company in which we are the majority shareholder, the strategic review will include an assessment of this shareholding. We would expect the outcome of this review to be concluded around the end of 2018.

It is very important to emphasise that India remains a priority market for GSK. Consumer Healthcare will continue to invest in growth opportunities for its OTC and Oral Health brands in the country such as Sensodyne and Eno, and we are actively investing in our Pharmaceuticals and Vaccines businesses, notably with a new state-of-the-art manufacturing facility in Vemgal, Karnataka. Let me now hand over to Simon first who is going to talk through the financial highlights of this transaction.

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Simon Dingemans (Chief Financial Officer): Thank you, Emma. Financial highlights

Today's announcement to buy out Novartis' stake in our Consumer Healthcare joint venture for a consideration of ?9.2 billion, marks the final leg of the three-part transaction we first announced with Novartis in 2015. As part of that transaction, we formed a highly successful joint venture and, whilst we have had a very good relationship with our partner, we have always said we would like to own the rest of the business. We like the market and the categories we are in. We think their prospects are good and that our portfolio of leading brands is well placed to generate attractive returns.

Additionally, we like Consumer cash flows in the mix of the group as they are inherently more stable and balance the significant other investments we have to support, including the R&D pipeline.

The valuation for the buyout was negotiated in a way that was consistent with the methodology set out in the existing Joint Venture Shareholders Agreement, which specifies that the joint venture should be valued as if it were a separate publically traded company with no premium applied. It also reflects our latest views and forecasts for the expected profits of the joint venture.

The agreed price of ?9.2 billion is around 3% different to the undiscounted valuation we included in the year-end accounts of ?8.9 billion, well within normal trading ranges.

Including the buyout, the joint venture has generated a double digit return and met our CFROI target since its formation.

Looking at the direct financial effects, the transaction will be accretive to earnings in 2018 and thereafter and will strengthen our free cash flow. We have also combined the transaction with a strategic review of the Horlicks business and other Consumer nutrition products. This is designed to keep us within our target credit profile, further protecting our access to capital markets and allowing us to continue to invest behind our other capital allocation priorities.

As Emma has said, for us, the transaction removes uncertainty and enables shareholders to capture the full value of the business. With 100% ownership, we now have full control to develop this business how we think best in the future.

We continue to expect operating margins of more than 20% by 2020, in 2015 exchange rate terms but we see opportunity for further margin enhancement beyond that.

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Brian will talk you through some of the drivers in more detail in a moment but we expect to see operating margins for the Consumer Healthcare business approaching the mid-20s percentages by 2022 at 2017 exchange rates.

As I have said, the transaction is accretive to earnings in 2018 but we are not changing our guidance for the year today as we still need to navigate whether or not we see an Advair generic. As you will remember, we gave guidance for growth in adjusted EPS in constant exchange rate terms if there was no generic of 4-7% in 2018 and if there was a launch mid-year of flat to down 3%.

We will update you when we have more clarity on this but most likely not before the middle of the year.

Looking towards our 2020 outlooks, the financial benefits of the transaction further support our increased confidence to drive growth over the next two to three years and to deliver against these outlooks whilst at the same time having the flexibility to invest in the group's other capital allocation priorities, particularly R&D.

On the dividend, we continue to expect to pay 80p per share for 2018. There is no change to our dividend policy, which you will remember is based on free cash flow cover. We expect the buyout to be accretive to free cash flow. Timing and considerations

Moving to timing and other considerations, as Novartis is a related party to GSK we are required to put the buyout transaction to a shareholder vote. We expect that to happen swiftly within the next few months with closing expected to occur around the middle of the year.

On the strategic review of Horlicks and the other Consumer Healthcare nutrition products, we would expect to conclude that process around the end of 2018.

The brands being reviewed amounted to sales of approximately ?550 million in 2017, most of which relate to sales of Horlicks in India.

The review will also involve an assessment of the group's shareholding in our publically listed Indian subsidiary business and we will be consulting with their Board on this process.

Now let me hand you over to Brian.

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Brian McNamara (CEO Consumer Healthcare): Thank you, Simon.

Global leader in Consumer Healthcare

With the investment in the Novartis put we now have full ownership of a worldleading Consumer Healthcare business. As a reminder, GSK Consumer Healthcare delivered ?7.8 billion in net sales in 2017, roughly a quarter of the group turnover.

This is a business with attractive returns and strong cash flows. We have a very strong portfolio with seven Power brands, 11 Core brands, allowing us to compete effectively across our broad geographic footprint. Even excluding the nutrition business under review, over 35% of our business is in emerging markets.

We have a strong track record of execution delivering a sales growth CAGR of 4% over the past three years driven by high single-digit growth of our Power brands and at the same time growing margin 670 basis points to 17.7% in 2018.

We are also building the capabilities in innovation, digital and e-commerce that are preparing us to win in the current environment in the future.

Industry dynamics

Positive long term drivers

The mid to long-term trends are very favourable in Consumer Health. We know that 77% of consumers want to take more control and make more decisions related to their health. The emerging middle class is growing. An additional 2.4 billion consumers are expected to join the middle class by the year 2030. The population is ageing. There will be another half billion people over aged 60 by the year 2030 and there still continues to be unmet consumer needs that will drive innovation and growth in the categories we compete.

Industry dynamics

In addition to the long-term industry drivers, there are short-term dynamics that cause some variability in the market growth rate, some of which had an impact on the market last year. Seasonality is something that affects the market growth in any given year, specifically relating to the severity and duration of the cough-cold and allergy seasons.

Rx to OTC switches are a big driver of growth for the OTC market, but then are often followed by a year of decline by the private label entry after loss of exclusivity. While we see emerging markets as critical for the long term, their short term variability linked to economic factors or government and regulatory changes, like demonetisation and GST in India.

On emerging trends, digital represents a big opportunity for us. We're investing heavily in this area, and I will talk more about that later in the presentation.

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