葛蘭素史克 (GSK) 2005 Q3 法說會逐字稿

Welcome to the GSK third quarter results conference call.

At this time all participants are in a listen only mode.

I would like to advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker Dr. J.P. Garnier.

Please go ahead sir.

Thank you and welcome, everybody, for this conference for GlaxoSmithKline third quarter results.

As usual I'm joined by Julian Heslop our CFO and David Stout the President of our Pharmaceutical business.

So shortly I will hand the call over to Julian and David for them to review all the details in their respective areas.

But I would like to make a couple of points on the quarter and also talk about the flu and pandemic before we go any further.

First on the financial performance, well, you have seen the results.

They are pretty -- pretty good.

They are ahead of consensus and fairly driven by good sales performance growth in the U.S., which is really the pillar of our business was 7% in terms of the sales line.

And if you look behind the numbers, you find the usual suspects, Advair, excellent performance.

Avandia growing up 22%.

Products such as Lamictal, Coreg, Valtrex still going strong.

And the new products such as Boniva and the like are contributing.

And finally an excellent quarter for the vaccine business up 20%.

Now, if you look at the foreign exchange that Julian will comment, finally, finally, after three years of waiting, we're getting a bit of a small positive and that's why EPS growth was actually reported [starting terms] up 20% for the quarter.

Now, besides the strong financial third quarter it is important quarter for our again vaccine business.

We have completed the acquisition of Corixa for $270 million.

This gives us, our freedom in terms of the adjuvant which we need to manufacture in very large quantities because it's going to be a part of several of our vaccines including [Severix].

And also we indicated our intention to acquire ID Biomedical for $1.4 billion.

We are confident that this transaction will close shortly around the year end, if everything goes well with the FDC, and so far it is uneventful.

This will give us of course incremental flu capacity and that's why we have an evolving situation in terms of our ability to manufacture flu and also pandemic as we are starting to unblock the capacity of ID Biomedical.

This will greatly help our strategy.

A very important announcement today, frankly, is the Oncology Seminar.

That is going to take place November 30th.

This is going to be a descriptive off all the key, late stage products in oncology and we'll even show you a small peek at a couple of selected first in class type earlier opportunities.

But I think the bulk of the presentations will be on the late stage products and I think that this will be a very exciting day for us and for you.

And we invite you to come and attend.

Now, in terms of the preparations from pandemics, just to be clear on what work has been done, because we haven't exactly discovered pandemics last month, we have been at it for several years now and this gives us a good hope for, you know, the last bit that remains to be done to come up with a shotgun vaccine on H5N1.

And what we had to do first was study other prototypes such as H2N2 and H9 -- 9N2 to see if we could potentialize the efficacy of those vaccines by adding adjuvants which had never been used in -- in flu vaccines before.

And that was really the proof concept and we went through those clinical studies and they were all successful.

So we are now ready to move on to the final product and that will be H5N1 plus this adjuvant, this classic adjuvant.

We expect the clinical trials to be finished by mid next year and therefore complete the filing of this product in the later part of 2006.

Now, on top of that, as you can see on the slide on the last line, we are also already working on a second generation vaccine because if we can use an even more powerful adjuvant that means that we can use a smaller quantity of the vaccine.

To be successful you need a prototype of a vaccine that is effective and also requires a very small quantity of product.

Otherwise you're not going to be able to mass produce it and that's what, in a way, we have seen with the [Sanofi] prototype where the product did work, without an adjuvant, but you needed the -- quite a bit of quantity of the product to -- to make it effective.

Hopefully we won't have that problem and from all we -- we see, we're quite optimistic that even the first generation will be a viable solution and will be a vaccine that can be stock piled.

And of course, once the vaccine is approved with the network that we have established for this, we will be able to produce very large quantities.

Just one more word on this issue.

In the case of Relenza, as you know, Relenza is not a pill.

It is an inhaler, a spray, in other words, and it -- it's composed of many small pieces and therefore, it's -- you know, the production schedule is not comparable to what you could do if it was an all pill that you're trying to manufacture.

This is -- require more complexities and frankly, we just can't produce enough units no matter what we do.

But we are greatly expanding our internal capacity and we have opened new plants for Relenza in the last six months in different continents.

But at the same time we also have to be realistic.

Even with going at it seven days a week, 24 hours a day, we can't come close to what the world might need and therefore, we are actively searching for partners and we're going to be very flexible.

The idea here is to make as many units as possible and also to be able to deal with not just with the developing world -- the developed world, but also with the developing world, and we will see if those partners can help.

The problem is that we have to test their delivery systems for Relenza and there's no guarantee that those alternative delivery systems will work.

In fact, we had some experience in the past and we know what doesn't work, but maybe we -- we can find some -- some interim solution.

So more on that subject as soon as we break through and have a successful new form of Relenza with a partner, or a new form of delivery device with a partner -- with a partner.

And then finally we are continuing to work on other aspects of Relenza because this could be an alert that lasts for years, so we have to worry about, you know, just filing for prophylactic, working on the IV and the like.

On that note and on the -- again, what has been a very good quarter for us on many fronts, I would now like to now pass on to Julian for some specifics on the financials.

JP, thank you and good afternoon, everybody.

Let's start with the performance summary.

Turnover was up 9% in CER terms with pharmaceuticals up 10% and consumer healthcare up three.

EPS growth for the quarter was 16% and we continued to see a benefit, not only from the U.S. dollar and strengthening, but also of the currencies, and actually EPS growth was 20%.

You'll see at the top of the slide that operating profit growth of 14% was higher than sales growth and the next slide looks at this more closely.

Cost of goods for the quarter grew more slowly than sales and this reflected continuing production efficiencies and lower restructuring costs.

This was partly offset by higher costs related to [CEDRA].

SG&A increased 13% in the quarter due to high legal costs, increased marketing sales investments to support new products, and higher restructuring costs including those related to the integration of Corixa.

However, if you exclude legal and restructuring costs, SG&A was up 8% roughly in line with sales growth.

The increase in R&D is due to higher levels of clinical activity but also includes additional asset write -offs in the quarter.

Overall we still expect R&D as a percentage of sales for the full year to remain broadly in line with last year.

Other operating income in the quarter comprises 122 million of asset sale profits.

A 37 million mark-to-market gain on the fair events and quest financial instruments which you'll be aware we're required to do under international accounting status with the balance being royalties and other recurring income.

Turn to the next slide.

Each quarter we summarize for you the impact of legal restructuring costs and asset sale profits and you can see from this slide that asset sale profits were more than offset by high legal and restructuring costs this quarter.

Overall, these items totaled 97 million compared to 121 million last year.

Moving on, take a more detailed look at the U.S. dollar, you can see from this chart that if ramates -- rates remain at about $1.77 for the rest of the year, there would be a currency benefit in the last quarter, because in quarter four last year we saw a major weakening of the U.S. dollar as the year finished.

We expect overall reported earnings per share growth for the full year would be approximately 1% favorable to CER growth if the dollar remains at this current level.

Finally let's look at cash flow.

Free cash flow for the quarter was 1.6 billion, up 22% on last year, reflecting the strong growth in sterling operating profit.

Below a dividend arises because we paid two dividends in the third quarter last year.

You may recall the second dividend was paid on the 30th of September rather than early in October.

As you can see, share buybacks this quarter were in line with quarter three last year and we remain on track to buy back one billion pounds this year.

In the acquisitions line you see the purchase of Corixa this year and last year we bought Fraxiparine and Arixtra.

Overall net debt decreased by over 800 million this quarter and at the 30th of September was at only [not] point £4 billion, the lowest I've ever seen it.

I'll now hand it over to David.

Thank you very much Julian and for those of you that are following along, if you'd turn to the slide that's headed Q3 Sales by Region.

This is the look of our total pharmaceutical sales from a regional perspective.

And as you can see here, overall growth for the quarter were reported up 10% to £4.7 billion and just to remind you, this is the best growth we've seen since generic Paxil was launched in the U.S. in early 2003.

From a regional perspective international grew 12 -- grew 8% driven primarily by Japan, our largest business in the region who had growth of 12%.

Quickly moving to Europe, the region's sales grew 9% which was consistent with the grow -- growth rate that we've seen during the first half of the year.

Seretide, Avandia, and Infanrix each delivered very strong contributions during the quarter.

Our overall reported growth rate for Europe continued to benefit from a few points, I just want to remind you, from the addition of Fraxiparine in September of last year.

So in future quar -- quarters the Fraxiparine won't be in the base -- or will be in the base, sorry, so you won't get that same bo -- boost in the future.

That leaves me with the U.S. and as usual I'll comment on our key growth drivers in a bit more detail in the following slides.

Just let me say here that the reported growth in the U.S. of 11% is very consistent with our estimated underlying growth if you measure it by prescription demand for our products.

So turning to the next slide you see the summary of these key growth drivers that J.P. Referenced.

This slide shows that the product's global sales and growth rates, and once again, all of these products continued to deliver very strong growth.

They now represent 43% of our portfolio and they grew a very healthy 21% overall.

And in fact, this beat the 19% growth that we saw in the second quarter.

And while we've come to expect strong growth from the five key products that you see here, I think the new news is the growth in our vaccine portfolio which really had a breakout quarter and I'll review the details behind this performance in another few slides.

But for now, I'd like to make a few points about our largest products, Seretide and Advair.

So if you go to the next slide you'll see the very consistent share gains that we made with Seretide in Europe since we began the roll out of the results of the CONCEPT Study.

You might remember that I recapped the results -- the results of CONCEPT at our year end meeting and in this study, concept beat SYMBICORT in a very scientifically disciplined head to head study.

In the share performance it's clear that the medical community also believes in the benefits of Seretide.

Now if you move to the next slide you can see that Advair's also done a very nice job of gaining market share in the U.S. and while the CONCEPT Study won't be used in the U.S. because SYMBICORT's not on the market.

What is having an impact is something called the Asthma Control Test which I mentioned during our first quarter call.

What this test does is it gives doctors a tangible vehicle which is endorsed by the American lung association to measure whether their asthma patients have their asthma under control and where as -- Advair gets them under control.

This program has been very successful so far and we're now starting to roll out a pediatric version of the test.

So Advair is doing very well.

It should get an excellent boost next year when the results of the next big clinical trial reports in 2006 and that referring to our landmark TORCH clinical trial which will be looking at the benefits of Advair in COPD patients.

So let's move now to our second largest franchise which is Avandia.

If you go to the next slide, you see in total, the Avandia franchise grew 22% to £355 million in the third quarter again with strong sales acrossed all the region.

And as you can see on the slide, the growth rate is very consistent.

I also just wanted to point out that in the first three quarters Avandia has already achieved sales of almost £1 billion.

Obviously we've had tremendous success with Avandia, but I want to continue to -- to emphasize that we do not expect the growth rate to slow down over the next couple of years.

And let me explain a little bit why.

First of all, [EZDs], the class of drug that Avandia is part of still only represent 22% of all of the oral antidiabetic prescriptions in the U.S. and they're almost always used in second or third line therapy.

As a result of the nearly 12 million type II diabetics currently being treated in the U.S., nearly two-thirds are not at the American diabetes association recommended HbA1c goal of 7%.

And yet the majority of the patients are still only on monotherapy.

So with this in mind, I think it's very easy to see the huge opportunity we have to grow this franchise.

But we need to help the doctors to move quicker to get their patients under control and this is exactly where the combinations help.

In June, in fact on June 30th we filed for the first line usage of Avandamet and the first line data that we filed is very compelling.

Now, if you think of some analogies, this shouldn't be too surprising since Avandamet really is two medications in one.

And I think you can all relate the story to how Advair became a [dominec] product in the asthma markets.

Though similar to Advair for asthma, Avandamet for diabetes should do a better job of getting patients and keeping patients under control in either of the individual components.

And for the doctors that continue to like the [sulphonureas] we will launch the Avandaryl combination next year.

And then of course by year end next year we should start to see the results of two of our long-term outcomes trials which we believe will continue to re-enforce that the patient benefits when they get their blood sugars under control.

Now let's move on to Lamictal.

Overall the product grew 20% to £210 million, a very strong growth in the U.S. which more than offset the 10% reduction that we're now seeing in Europe as generics continue to launch throughout Europe in most markets.

I expect this -- the trend for the strong growth in the U.S. to continue and will continue to offset the losses that we see in Europe.

Year-over-year script growth in the U.S. remains strong.

And use of Lamictal as first line therapy of bipolar disorder has just been reinforced in a recent issue of the journal , Clinical Psychiatry.

Additionally, as I've indicated on the slide, we're expecting new indications for treatment of grand mall seizures which should boost our prescriptions that are being written by the neurologists.

And again we are on track for a filing of our once a day Lamictal for epilepsy of [inaudible].

Now, if you recall a few years ago, three years ago we began highlighting Coreg,Valtrex and Lamictal as three fast growing products that have the potential to become very significant contributors to growth, and in fact that's become a reality.

Now, in many ways I think of Avodart, Requip, for restless leg syndrome, and Bonviva or Boniva the way I felt about those products a few years ago.

Let me give you an update on where these three products are doing in the market.

I think Avodart is a bit like a giant boulder that is a little hard to get rolling but once you have it moving, watch out.

And as you can see we had a great quarter.

Year-to-date sales were £90 million.

If you take this kind of growth rate [from] Avodart you can already see we're rolling at about a 300 million dollar run rate.

And we still have many key initiatives to drive the brand in the future.

We expect to file a combination pill, and that's a combination of Avodart with an alpha-blocker in 2007.

And our large four year prostate cancer prevention trial in over 8,000 men continues to press.

Turning to the next slide, as you know, Requip for res -- restless leg syndrome was approved in May.

And as we all sort of held our breath waiting to see the market receptiveness to a treatment for restless leg syndrome, you can see now that the prescription trends are very impressive.

And, I would point out, we've only recently begun to launch our branded DTC campaign.

We did launch with a unbranded DTC campaign which did a great job of educating patients about restless leg syndrome.

Our market research is showing us that there's been a big increase in in the overall awareness of restless leg syndrome in just the last few months.

I'd say awareness is up just about 50% from where it was just a few months ago.

Still, even when prompted with hints, almost half the population is not aware of restless leg syndrome.

So with the continued campaigns that we have this will be a great opportunity for us.

And next the Boniva launch, which started around the end of the quarter, you can see we're already making steady consistent progress in gaining market share.

Clearly our market share -- our market research shows that women do prefer a once a month pill over a weekly pill and that's now beginning to show up in the form of the new RXs.

We need to get the message out to them that of course the once a month option is available.

Here again, we'll be using DTC to get the message directly to patients.

But again, a 10% new RX share in six months for a chronic medication is a great start.

We also of course have just received approval in Europe and our launches are starting in various countries first with Germany.

Now let me just say a few words about the terrific performance of the vaccines in the quarter.

And as I mentioned, this was a great success across -- across many different vaccines.

This is the kind of growth that starts to show you why we've been so excited about the whole vaccine business.

As you can see, we had growth on all the major product lines and if you'll move from the right to the left, you'll see Infanrix was particularly strong in the U.S. where it was up 40% -- 44%, and Europe where it grew 35%.

The U.S. was helped by more federal funds.

You always have to be careful in the U.S. market when federal funding becomes available, you can get big orders in one quarter and then slow down.

So don't extrapolate too far with that but it was very strong.

And Europe benefited by the withdrawal of Sanofi's Hexavac in Germany.

Our hepatitis franchise in the U.S. also saw a strong demand for HAVRIX due to concerns about hepatitis A following hurricane Katrina.

Fluarix benefited from our U.S. launch in the quarter and Boostrix, which is our booster vaccine for diphtheria, tetanus, and pertussis is also new in the U.S. and several [E] markets and doing very well.

Several of these positives we would expect to continue very much in the fourth quarter.

For example Fluarix and Boostrix in the U.S. will continue to have strong sales and Infanrix, in Europe, will continue to benefit from having the competitor off the market.

Before I finish my remarks I did just want to give you a brief update about how we're doing with Medicare Part D and how our prep -- preparations and negotiations are going.

As you know, many plants have now been approved by CMS.

We've been working with most of these plans and are now in the final negotiations with most of them.

I'm very pleased with the progress we've made on what I call our 90/90 objectives.

And what I mean by that is I expect that we'll have 90% of the contracts -- we'll be on 90% of the contracts with 90% of our core products.

Market leading position of our products and the diversity of our portfolio gives us an excellent position for collaborating with many of these planned partners.

Rebates and discounts that we've been giving are very much in line with our expectations and business as usual.

So in closing, I think it's been a great corner -- quarter for the pharma business.

We have a lot of opportunities to build on this in the fourth quarter and into next year.

And with that, I'd like to turn it back over to JP.

Thank you, David.

And I'd like now to open for Q&A.

[OPERATOR INSTRUCTIONS] Tim Anderson, Prudential.

Thank you.

A few questions please.

David's comments on [TZDs] and future forecasts, it seems to me like this class is potentially at risk from some of the newer agents like the DPP4 inhibitors that might get approved as late as '06 if things go well.

And I'm hoping you can share your thoughts about how that class will interface with the TZDs.

And then Requip and restless leg at one of the previous round tables, I -- I asked the question about peak sales for this sort of product, given the prevalence that you talk about [inaudible] and you said it was too early and you don't have a good feeling.

I'm hoping maybe now you might have a better feel for that.

And then the last question is on Gardacil, Merck's HIV product and the data showing 100% efficacy hoping you can give us your kind of updated thoughts on how you see your product squaring up with that product?

Yes, let me take them one at a time.

The TZDs, there -- there's a lot of new products in development for diabetes.

We see these as an opportunities to add on.

The DPP4s, in particular, right now, the efficacy, they -- they're nice but they haven't shown anything spectacular.

The treatment of the underlying cause of diabetes, we think is still the key opportunity we have with the TZDs and we think they'll make an excellent combination with a lot of different products.

So as I said in my comments, I don't see anything really slowing down the growth rate moving forward.

With regard to Requip RLS, in terms of getting more comfortable with the sales estimates, I'm -- I'm more comfortable that it's going to be well-accepted.

As we -- we -- we never comment and give specific forecasts on the products, but I can tell you we're very happy with the way it's taking off and I'd say it's exceeding our expectations so far.

Okay let me take maybe Gardacil and Severix.

I mean if you look back at the various elements, there is a tricky part which is -- was you measure the efficacy based on the protocol and according to protocol really means that people have received all vaccinations.

Or if you account for all commerce, even people would you receive just one injection.

And of course that's to get the 100% you have to use according to protocol and when you go away from that and you take old commerce, the percentage goes down a bit.

And you have to look at the percentage of patients who receive three versus one.

Those will be the elements of importance in comparing the two vaccines because you do have to compare apples and apples.

Right now when we look at the -- you know, Severix and Gardacil and the equivalent of time point, was it that we look at [immunogenicity] or persistent infection, or CN -- CIN2 and lesions, the percentage varies somewhat.

But it's a little bit -- an unfair comparison because Severix, we have published data at 27 months while the data from Merck now that is out is at 36 months.

So we do look better, but I don't think that's -- that's a totally fair comparison because the duration is very important.

So I think we have to wait.

My prediction is that both vaccines will be licensed.

Both vaccines will have slight differences.

We might have a small edge in cross protection, maybe.

We certainly are seeing good data there.

But they're basically going to be effective, approved.

And once they are approved, physicians are going to use both of them.

Market research gives an indication that, frankly, half of the physicians like the Merck solution and half of the solu -- the physicians like the -- the GlaxoSmithKline solution in terms of product positioning.

So there's room for both of us, the demand will be a pent up demand.

We're going to have to produce many units.

It's not all bad when you see that you have to cover all the developing world that there would be two producers of this vaccine.

I think that gives pretty much our opinion on -- on the status between Gardacil and Severix.

Now, can I ask next question, please?

Graham Parry, Merrill Lynch

Good afternoon.

I have a few questions.

Starting off with your flu vaccine capacity and pandemic contracts, could you just discuss how yields might compare to your existing manufacturing capacity for flu versus the pandemic contracts?

Also, could you also perhaps discuss how you'd balance the need to reduce the normal flu vaccine with the pandemic contracts and whether it's actually possible to get -- still get substantial quantities of pandemic flu vaccine and still meet your demands or requirements for the -- for the normal flu market?

And then, also, just to [inaudible] how frequently do you expect to them restocking orders for pandemic contracts as well?

And perhaps give us a feel [inaudible] what sort of fair manufacturing capacity that you're talking?

That you said large quantities, if you could perhaps give us some definition of that?

Then secondly, you talked about Severix data coming up at some conferences.

I was just wondering if you could give us clarity on which conferences that might be?

And on the Oncology Day, whether that would actually create any data on 115?

And the JP, a final question, just on the market environment.

We obviously saw Pfizer [removing] guidance for 2006 and 2007 recently.

They were talking about a difficult market environment.

I was just wondering what your comments would be on -- on that?

Okay.

Maybe I'll take -- we'll take them in random orders.

Just starting with the last, well, I -- I can't comment on what Pfizer said or did not say.

We think that as we have said many times before the medicare implementation is a good thing short term for the industry.

We also think we have a good product line and as a -- as David mentioned, we're going to have a terrific, terrific formula replacement in 90% of the plants.

To me that's -- that's a sign of good things to come.

We have some new product launches and of course some of the big products are just around the corner so we're pretty bullish about the environment and -- and our ability to compete in -- in what is a difficult environment, no doubt, particularly in Europe.

I want to comment on the -- on the pandemic and leave maybe Severix to -- to David to comment on.

Just on the flu, I mean, basically what has happened is we had roughly 40 million unit capacity in our German plant.

That's it.

That's all we had.

And we were producing for the northern hemisphere and the southern hemisphere which left no time, no dead seasons, no free vacation six months to produce pandemic.

That's where we started.

Now we invested a couple of billion dollars.

I'm counting the expansion of our German plant where we are more than doubling up on the 40 million that we had and of course ID Biomedical.

And ID Biomedical could be huge within six months to a year.

Now, we have to get the product approved by the FDA.

There are a few things that need to happen including the closing of the transaction by the way.

But this opens up a completely different plan for us and because of the nature of the flu vaccinations in North America, we will have half of the year to put to pandemic.

So if there's no pandemic alert we'll use fully the six months to produce pandemic units and if of course there would be an alert, then we, you know, the game is -- is completely different.

We go to plan B and convert all those plants and produce pandemic 100% of the time.

Just to be clear nobody can tell you what the capacity for pandemic is, whether our competitors or ourselves.

Because the final, final concentration that is going to be the effective vaccine for pandemic has not been fully determined.

And it could be as low as a -- you know, two, three, three and a half microgram or as high as 20 microgram.

We saw the Sanofi vaccine go too high to be really effective on a mass production schedule.

Ours, bases on the CONCEPT Studies we have done, we expect a much lower number.

But until the number is finalized, it's very difficult.

Remember people say that the pandemic is only one antigen, , the flu is the antigen so you should multiply by three.

That's not the way it works.

Because the yield in [AGS] is different and there are other factors that maybe David can explain.

But the bottom line is we can't give you a number.

The balance between pandemic and flu I think I -- I talked about.

Restocking contracts, this has gone enormously.

Some countries have building restocking provisions, some countries don't.

Some countries, frankly are not going to restock.

They keep their stock pile and the policies of the comp -- of the country might change over time so it's -- it's -- I can't help you there to do -- to make any kind of prediction.

But for years to come there will be demand for stock piling if we are successful with our H5N1 prototype and the odds are, you know, fairly good in favor of this vaccine.

David do you want to add something on this?

Yes, I think just the three big variables as you identified are the yield from the eggs and of course whenever you deal with a new strain, initially you're going to find lower yields and as you get more experience with it -- with the strain and as we scale up, we would expect the yields to increase.

The second variable is how much antigen is going to be required to get you there, of course is, if you mentioned with our adjuvant that hopefully we'll reduce the antigen burden.

And then the third is how many doses of the vaccine you're required.

I think most people are assuming it's a two-dose series, but we we'll have to [inaudible].

Okay and then finally, I have to say, I'm really excited about the R&D [inaudible] and -- and we will discuss all the key products, particularly the late stage portfolio and give you a peak on some really exciting early stuff which is first in class.

We are collecting data as we -- as we speak so there will be news, there will be new data you haven't seen on several molecules, I know that for a fact because the data is in.

And I greatly encourage you to come.

Yes, and regards to your question on Severix, David, the two next time points f that would be obvious for -- to -- releasing some data would be around [IPCAT] in December, the date was moved because of the hurricane and of course ASCO in the first quarter we do have some bridging work that -- that we've been working on as well as we'll be coming up on our four year data on the -- the initial 16/18.

So those I think are the time periods and some of the data that you'll be seeing.

But everything is progressing as expected.

Next question, please?

Stuart Harris, HSBC

Yes, hi there, thanks very much.

Really this question's on -- on the Avandia franchise.

Talked a little bit about the first line of Avandamet dates that are being filed in June.

I just wondered if you'd give us some -- some head lines there?

And then secondly maybe a bit of a cheeky request to -- to -- to look at the current OHA market in the U.S.

Is there any possibility if you could give us a breakdown of your understanding of current usage profiles?

For example, net form and what percentage would be monotherapy?

What percentage would be with Avandia? and similar what percentage of the total of actual OHA market will be [sulphonylurea] monotherapy combination with other agents?

I'm just trying to get an idea as to the incremental market that Avandia, Avandamet, Avandaryl could attack.

Yes, let me just give you -- some of the types of data that we see when using Avandamet in first line therapy met we get about 77% -- of patients actually to goal.

This is to the ADA goal.

Keep in mind now, and these are rough numbers and anybody has their own opinions but there's about 18 million Americans with diabetes.

About 14 of those are diagnosed, 12 get treated and only about four million get treated to goal.

So if you can get 77% of patients to go in first line therapy there in lies the big upside opportunity.

I don't have with me, handy the first line usage of METFORMIN and everything else.

But I think you'll find tradition -- typically in Europe, METFORMIN, it is the first line of choice in the U.S.

It has been taking over the sulphonureas.

But you could say the same thing historically in the U.S. and Europe with respiratory products.

Europe used to use steroids first line and in the U.S. they used Beta-agonists first line.

Now they're both using Advair or Seretide first line.

So that's sort of goal we have with products like Avandamet.

Are those for the data that you'll be willing to get back to us with later?

Is that sort of stuff, if you have an edge with Glaxo proprietary information which you wouldn't share?

No, we would be glad to, if you make a phone call on the side to give you more specifics out of the IMS audit and the like.

We just don't have this degree of detail at our fingertips.

Thanks ever so much.

Mark Tracey, Goldman Sachs

Hello, gentlemen.

Just two or three quick ones.

And first of all, JP I wonder if you could comment on the Sunday Times R&D article, Brain Storming about doubling R&D?

Second point, '04 sales, were pretty dull for all the reasons we know and you still managed to do with cost flat and CPS, I think it was about 2% up.

You know, year-to-date I think sales are up about seven and you -- you're still doing fantastic cost management and I think your EPS had a mid teen guidance now.

So I'm assuming, maybe you comment in this, in '06 and '07, Glaxos not a 10% earnings growth in your mind.

And then thirdly,R&D productivity, what statistics, now that we're much further down the line since the merger, does [Tache] give to you and the Board when he said he wants to identify sort of in numbers, sort of R&D productivity improvement?

Because I'm looking back at some old notes from mine.

He sort of had a nice base to start with, because I'm looking back at some old notes of mine from a London meeting that you gave J.P.

Well, I can't quite read all my writing, but I think you were sort of asked about the R&D pipeline in 2000 and I think you sort of said I think I inherited a shower of something and I can't quite read the last word.

You must have taken notes from [inaudible] the conference, I would never say something like that.

Let me -- let me just say that in terms of R&D productivity, to start there, you have seen this -- the metrics, whether you look at number of molecules going into man every year, per dollar invested or whether you look at number of molecules going into phase II, which really basically are two key indicators, those numbers have been up now for five years in a row, So this is not a fluke.

By about anywhere from 75 to 150% based on -- on the point.

I have a graph in front of me here.

Now this is, of course -- and the erosion in the pipeline has been sort of static.

We are losing as many drugs as we used to.

And frankly, the whole industry is losing pretty much the same percentage of drugs in the various phase I, II and III.

So this basically had a consequence.

We have doubled the size -- or not quite but nearly doubled the size of our pipeline in the last four years.

I look at NCEs are up 74% and -- and sorry, phase II and III are up 74% and phase I, II, and III are up 57%.

So we've -- we've clearly, you know, ratcheted up the R&D productivity and -- and that is true for -- for drugs.

For vaccines, I think we were pretty high to start with and we have a terrific pipeline with five major vaccines to be introduced in the next five years.

There we have had pretty much stability.

Because frankly, we were already operating under the said concept.

We haven't made a significant change of technologies.

None of the big earthquake changes that we did in R&D for pharmaceuticals took place in vaccines so not surprisingly their productivity has stayed high but pretty similar to -- to the past.

In terms of doubling R&D, here's a very simple point of view that I have about our Company.

I think that the only long lasting competitive advantage we can build is the ability to operate at a high level of R&D productivity and to have a big stake in R&D.

I think 17% on sales for a Company of our size is very significant but I don't think that's a competitive advantage.

Everybody else is around 15, 16, 17, 18.

I think we are in a position, with a good product cycle, to start to reinvest in R&D at an accelerated pace.

We're not going to do it to the detriment of the shareholders.

We -- we realize we have to produce, sound profes -- you know, sound financial performances but it would be, frankly.

It's nearly a wish of mine to start to put more money into R&D so that the Company that I always describe as R&D centric becomes truly R&D centric from a financial investment standpoint.

There are many lakes in which we can cast our lines.

Our own lake is well covered and we're discovering drugs as you know.

But we could buy more and more and more scientific programs from the outside and therefore end up with more shots at the goal and if we get to an intensity of R&D spanning the order of 25 or 30% of sales, I think we'll have created a competitive advantage now.

That I would only do if I'm convinced we're successful in terms of R&D productivity and after five years I think only the blind would disagree with some of the statements we made at the time that we were going to become the champions of R&D and build the best pipeline of the industry.

At the time he was bragging, and maybe he was, but you have focused the Company on that goal and I think we're pretty much there.

That doesn't mean we're out of the woods and we're certainly not claiming victory.

Even with the enhanced pipeline, I am concerned about the long-term sustainability of our enterprise and I think we need to get to the next dimension, both improving R&D productivity and we have a second wave of initiatives ready to start and by doubling up the [bed] gradually, progressively, and carefully.

I think if we do that, the comp -- the Company will continue to be positioned well for the future.

Next question, please?

Alexandra Hauber, Bear, Stearns & Co.

Good afternoon.

I have three questions.

First, David, on just your comments on the comparison to the respiratory market with Avandamet.

I was wondering if that's really fair because in Advair you're really combining two -- two compounds with Compton and [inaudible] of actions to be agonist in a steroid and with Avandamet. you combine two insulin sensitizers now this is clearly [desktop] oncology and may be nothing that you encounter in the field.

I was just wondering whether in the -- in the -- whether in second line use if that is ever an issue?

Secondly, on Relenza, I think JP, you -- you have quantified a few weeks ago that your current capacity is about 30 million and you plan to double that to 60 million and I'm not sure if these numbers still apply given that the environment has changed quite a lot in a few weeks.

Could you just roughly quantify how much of that 30 million you actually will use on the full-year basis this year?

Because I would assume you've [inaudible] ramped up production only sometimes half way through the year.

And the third question is on the pandemic vaccine.

And clearly I do appreciate very much all your efforts, but from -- from a business point of view, my understanding, and that comes from discussing with other companies in the field, they mostly argue that producing a pandemic vaccine is not really a commercial opportunity because you don't really [inaudible] -- all you stock probably is a prototype.

But clearly companies do this differently so I was wondering whether you could share with us how you see the commercial significance of this, what will clearly be a very, very agressive achievement for all of us.

Okay, let me take the last two and then I'll let David talk about Avandamet.

Relenza, number was not me.

I never mentioned a number because I don't know what the number is, as we are evolving very quickly.

It's possible, tough, that someone from GSK did throw a number here and there but that number is already obsolete.

Frankly, in terms of your forecast assume minimum sales in -- in 2005.

Because the ramp up of -- of our production is going to really have a major effect next year and even more the year after, but we start from a very low base in 2005.

Again, I can't give you numbers because you know, my -- my head of manufacturing three months ago gave me a number that we have tripled in -- in between because we're able to -- to put all those assembly lines, you know, 24/7.

And you know, ingenuity and the opportunity, of course, have driven us to do more.

And if we were lucky enough to find a partner, we could cover more of the developing world with the low price policy and add to the pot.

But right now, we're very focused on at least making sure we -- we develop our internal manufacturing capability.

On the -- on the [inaudible] -- okay, I know there's a technical glitch because if you stock pile in the U.S., you're not trying -- you're not supposed to report it as sale.

But I think that will actually be corrected.

So that if you deliver vaccines in a stock pile and there is no possible return of goods, in case the vaccine does not get utilized because, thank God, there would be no pandemic.

Never the less, it's like selling to the military.

Sometimes they never use the stuff, but we still get paid.

So I think the stock piling is real.

There is big money available in -- in some of the markets for stock piling.

The problem everybody has is those RSPs are coming, you know, at a very fast clip.

But you know, we are not able to commit because we don't have a finalized product and that's the same for direct competitors.

But I don't think you should underestimate the temporary opportunity that exists with stock piling on antivirals and on pandemic vaccine, if you have one that -- that is an effective shotgun pandemic vaccine as we hope to get.

So that will impact I would say more the end of '06 and '07.

There are all kinds of schemes which are fast moving in front of us.

Some governments are offering us fees to reserve capacities so they would actually pay us earlier.

That would also side step the accounting issue because that becomes a non-refundable fee for us.

There are all kinds of schemes that are going on because governments want to try to get the -- at the beginning of the cue, you have to have a very high responsible and high integrity system that doesn't reserve everything.

I won't mention the country, but I was with the minister of health and within two minutes of a conversation and once I had mentioned to him how much Relenza was going to do in '05 he said I'll buy it all.

The countries have to stock pile and they realize that otherwise it's going to be difficult.

Difficult order and I'm sure [Barosha's] not that different from us.

Typical order for Relenza is not a one-year order, it's a three-years order, because the government's realized we're not going to be able to -- to -- to give -- to produce it on time.

So I think this gives you kind of a broader picture now,I'm going to pass it to David.

Yes, I think it is a fair comparison, actually to Advair in the sense that the first METFORMIN is an insulin sensitizer, but it's not the best of insulin sensitizers, but it does much more than that.

Avandia is a very potent insulin sensitizer.

And course the data at the end of the day has to speak for itself.

And when you put the two together you see a synergistic effect, or at least an additive effect.

And the fact that you can get more patients to the goal with a single tablet is in fact what physicians are looking for and somewhat what you get with -- with Advair.

In fact another analogy that you could take in addition, is that with an Advair, we have seen that, you know, people that don't want to use high doses of steroids can actually use lower doses of steroids when the combine it with the [inaudible] also you have decreased the side effects.

Of course, if you have to go to very high doses of METFORMIN, and you know the side effects, very well and we've been able to show that you can use lower doses of each.

And I think this is really what's critical.

That there's a growing recognition in the medical community, not just for Advair, and not just for Avandamet, but for many different diseases.

Combination therapy is the -- is a preferred approach.

Get better synergistic effects with smaller side effects and I think that's where we want to go.

Your next question comes from David Beadle at UBS.

Hi gentlemen.

A couple of questions.

First on cervix I was wonder if there was any updates on discussions with either the CDC or on a state by state basis regarding, you know, what their -- what the possibilities of public vaccination programs are and I don't want to second guess what you think they're going to say but I was wondering if you could tell that moving forward.

First thing on Severix.

I was wondering if there was any updates on discussions with either the CDC or on a state by state basis regarding, you know, what their -- what the possibilities of public vaccination programs are?

And I don't want you trying to obviously second guess what they're going to say, but I was wondered whether though you've been moving forward.

And then, secondly on the legal provisions.

I think there was an anticipation that potentially legal provisions in Q3 and Q4 this year would be lower than -- than last year in the same quarters.

ANd obviously we're seeing, for Q3 certainly a higher legal provision.

And I just wondered, Julian, whether that was just a fact of life of doing business with Glaxo going forward and that's pretty much all we're going to see? or if there's anything specific that having changed the sort of legal provisioning policy that you're now anticipating which is why we're seeing these -- these higher charges again in -- in this quarter?

We have no update on the CDC itself.

I could report to you that you know, many countries are being very proactive in approaching us to talk about working with us for an accelerated filing.

People are looking -- they see this as greater opportunity to better the healthcare in their country and -- but nothing specific within the CDC or state vaccination policies.

And in terms of the --

In terms of legal, last year's legal charge, you may recall, was just under £600 million.

Each quarter we are required to reassess those provisions based on the progress of legal cases and advice from our lawyers, and it's a fact of life.

You know, each quarter we do that assessment.

Sometimes it gives a larger charge, sometimes it gives a smaller charge, but our expectation continues to be what I said all along.

This year's legal charge will be lower than next year's -- sorry, lower than last years, but it's difficult one to call as to exactly how much each quarter.

I think on the legal front if you -- if you go back to beginning of '04 and you look at the burden ahead of our heads, in other words, all the cases that we had to settle, you know, from a patent antitrust ,and product liability, and marketing practices, the good news is, you know, we have -- we have crossed a number of those cases off the books for the majority anyway of the payments.

So we have dispersed a lot of money in the last two years including '04 and feel this year where they settled the Boston case and so forth.

So there is -- there's still a list of outstanding cases that will need to be resolved through litigation and in some cases through settlements.

And some of that money is in reserves, hopefully most of it.

And what I'm trying to say is that our risk exposure to the legal liability has been less, but we have paid through the nose to get there.

This year the legal bill at the end of the year will be lower than '04 as we indicated and I would -- I would say that we will give additional guidance on this for next year, for '06 in February.

I think the trend is going in -- finally is going in the right direction.

In your terms of your question, our accounting policy, it remains the same.

We haven't changed it, we're applying the same policy each quarter.

Kevin Wilson, Citigroup

Thanks very much.

Three questions if I may.

Firstly, on the R&D trends, I recall a conversation with Tadataka Yamada, [inaudible] he talked about the guidelines he was giving for the business which was above inflation and below the revenue growth.

Clearly the R&D growth this quarter broke through that particular constraint, but on a -- on a medium term view, are you now saying that you'll prepared to loosen those shackles because you see the -- see the benefit?

And could you give us some sense, perhaps Julian of the impact on the range of operating margins you might expect in the context of what we've seen so far this year for next year?

Because clearly that -- that's an important change if it's happening.

Secondly, to what extent is Avandamix -- Avandamet XR important component of the Avandamet offering?

Could you just update us on the timing of that introduction?

And finally, post the 140 disappointment, could you give us your perspective on what you're going to do to strengthen the HIV portfolio in terms of either licensing or acquisition, or internal development going forward?

Okay.

Kevin, I'll take the first one and pass it on.

There are no shackles.

You know, we'll do what's right to develop the best pipeline we can.

The long-term trend has been say not so much inflation and below sales line, it was always sales line.

If we grow 8%, 9% we should grow R&D at least 8% or 9% as I indicated earlier during the call.

My kind of, you know, wish would be to accelerate that over time to increase a number of shots at the goal and preserve our ability to discover more drugs than we lose to the generics.

So I think that over time you'll see that number creep up.

I don't expect this to happen in the near future.

I have to wait for a very positive product cycle to be able to do it both.

That is to grow financially at a -- at a pace that you expect, but also to start to put money aside for additional R&D [bets], but I think this guidance, this quarter, don't pay attention to 15%.

It's a bit of a fluke.

There are a couple of one-time items in there.

There is also vaccine research has, you know has gone up a notch.

If you look at, again, guidance for, you know, on a yearly basis, it's more like in line with sales growth.

With regard to Avandamet XR, what -- what's been going on in CEDRA, we've had to move that date and we don't have an update for you.

But the urgency around the Avandamet XR has slightly diminished as you know, one of their key thoughts behind a once a day Avandamet , was a fear of [Inactos] plus METFORMIN once a day combination.

Of course, with their approval, we've realized it's now -- it's a twice a day product with some limiting dosing schedules.

So we feel still very good, Kevin, about the Avandamet that we have and the abilities as we move forward.

Thanks.

Kevin, on '06, '07, we're not obviously not giving guidance at this stage on '06.

We'll do that in February.

And we managed the business as we always have to grow sales in [inaudible] and whatever nix will be the optimal result been the mix we follow.

But we continue to basically take out G&A as we do that regardless.

And HIV?

And HIV.

I mean obviously the loss of the CCR5 is a disappointment.

We have some backups, we even have a concern that maybe the class has a liver effect.

Remember you see lots of patients with liver damage when you do those trials and you have to annalize then one by one to find out which liver damage is due to what.

In our case there were over 15 patients with some kind of liver damage and one was due to the drug.

So it's a little bit early to conclude that our drug was dirty from a liver standpoint and the others are not.

Which you will tell but we are a little bit concerned because we do have backups to the -- to the CCR5 which we are going to pursue, they are unfortunately a year behind.

But we also keep an eye on the -- on the mechanistic enigma here in terms of the effect on the liver.

Secondly, of course we are on the lookout for in licensing and acquisition.

But frankly, unless you want to go for yet, you know, protease inhibitor number 67, there's not a lot -- there's not -- there are not too many assets here that we -- we are on the verge of -- of going after.

There's a [poor] offering, let me put it this way but we keep trying to find some.

And the rest of the pipeline, in HIV is pretty good.

But you know, clearly this is not going to be an area of -- of, you know, rapid growth for the Company in the next two to three years and that's fully known to our members.

Sean Manning, Society General.

Good afternoon.

A couple of quick questions if I may, please.

Firstly on your [inaudible] inhibitors which you have in phase II, I wonder when we're going to get some data from those because they look rater interesting.

Secondly, [inaudible] mentioned the effects of the DPP4 inhibitors on the [inaudible] there.

What about yours, 093?

In terms of development when can I expect some news? and how would you position that do you think against [inaudible] last 237?

And then finally, with regards to your vaccine plant in Pennsylvania that you've acquired, could you give us some updates on maybe your -- your [egg free] vaccine production work that you're doing there?

Also comment if the [ID Biomedica] acquisition is the end of your vaccine based spending [inaudible] as it were, or whether or not we can expect more acquisitions going forward?

I'm not going to deal with all the products.

I mean you're asking us to -- to give an R&D update and just giving you data, of course there will be data on DPP4.

So when you're going to tell us?

Well, I mean all around, I mean, the next year and beyond, you know, we give updates when there's news.

I don't want to tell you when you're going to get the next update.

I'll tell you the news when they come out and of course starting in two weeks where you get plenty of news and a number of molecules.

But the DPP4, -- I mean all the molecules you mentioned will produce news from clinical data in '06 and beyond.

But today, as we speak, I don't have anything specific to report on that.

On the issue of Biomedica , I mean clearly this is a big -- a big acquisition.

We -- we are looking at anything that could enhance our position in vaccines, particularly products.

And you know, clearly if there's something else of interest we will -- we will take a --take a go at it.

But I don't think you should draw too many conclusions.

We have been at this for -- for 15 years now.

This is not -- we're not just discovering vaccines today so we're pretty well equipped.

We have a great supply network which is critical in this business, far more than in pharma.

We have good mana -- good partnerships in research in place, but we can always do more and we will do more.

There will be some.

And then you had --

[Merrier] I think your question was --

Merrier tissue cell.

We are in this race with Merck and [Kyron] and also Sanofi, everybody's looking for the next technology for flu.

I have to say we are a little bit more cynical about this tissue cell technology than maybe some of our direct competitors because we have tested the yields of some of those products and to get to the level of -- of, you know, predictability and high yield that we're observing in the [AG] based technology is not simple.

Now, in this new campus we're -- we have state of the art equipment and research to be ready to, you know, do large production of -- of tissue cell based vaccines, but this is not going to replace egg based.

You can't look at one replacing the other.

This is going to be a fairly slow process.

And because there's a shortage in capacity in the first place, egg based technology is not going to be obsolete for quite a few years.

But clearly, we have to go with the next generation.

The great advantage of tissue cell is that you don't need six months to go through a cycle.

So that's why people continue to try to find a system that -- and everybody's looking at the same technology by the way.

So it's not a lot of differentiation from the companies.

And we will all come through.

And it will gradually become the main stream technology, but we're talking years before tissue cell takes over the egg base in my opinion.

Thanks so much.

Thank you.

Okay.

We are now going to ask the last question.

Mara Goldstein, CIBC World Markets

Thanks very much.

A question on the R&D spend, JP.

Since you brought it up and yet you said you'd like to be able to perhaps do more outside collaborations.

Do you manage that figure to a percent of the overall R&D budget or is it really just more opportunity driven?

And then, secondarily on -- on Medicare, since you indicated that you're comfortable with, you know, where the contracts and the [inaudible] coverage, should we expect that that will have a neutral impact on the P&L for next year or positive impact?

I'll leave the second one to -- to David.

This is obviously a race between better market share and -- and higher discounts.

But as far as the R&D is concerned, I -- I'm stating to you the fundamental strategy, but the timing at which point can we, again, increase R&D spend, this is all related to having more opportunities.

This is a very difficult game to discover new products as you know.

And if you look at it throughout if industry, you can see that -- you know, because of the high erosion that everybody still suffers in the clinical development pipe lines, we need to have many, many projects on the table at any point in time to make sure that we don't fall -- fall into a situation like some of our competitors recently where they are losing products and they don't have anything to replace them.

So for that reason we will increase R&D.

We will increase the number of bets.

We will increase the number of scientific programs we conduct.

That's the only way forward as far as we're concerned.

We truly want to be the most R&D intensive Company in the world.

And I think we're on our way to get there.

In terms of the medicare contracts this is again what we've planned for.

And I think we've been consistent all along that we expect the overall Medicare drug benefit to have a neutral to slightly positive impact on our performance in 2006 and beyond.

Thank you.

And this concludes our third quarter conference and we thank you very much for your attention and your interest.