葛蘭素史克 (GSK) 2006 Q2 法說會逐字稿

Thank you very much, and again welcome to the second-quarter conference.

I'm here with Julian Heslop, our Chief Financial Officer, and David Stout, our President for Pharmaceuticals, and they will address you in a minute.

Let me just make some general comments on what turned out to be a very strong quarter for GlaxoSmithKline.

Our sales again in Pharmaceuticals reached 10%, and that is on the back of a strong U.S. performance and our EPS were up 15%.

We raised the guidance.

For some of you, we did not raise enough, but we raised it to around 12%.

We are very confident about the second half, but we are also conservative in the way we provide guidance.

That is why we have kept beating the guidance I don't know eight quarters in a row now.

But if you look at the fundamentals of the business and the future of the business, it was pretty much good news all around.

Let me try to explain that.

If you look at the trend of some of the key products and the progress in the pipeline, it has been a very good quarter.

Let me remind you about the pipeline, some of the highlights, and David, of course, will fill you in on our key franchises.

In the case of Entereg, we have now filed significant information with the FDA.

This has been going back and forth in the regulatory review, but our later submission is very solid.

We have a double-blind study of 624 patients, showing that in bowel resections the drug accelerates recovery, and patients can be let out of the hospital faster.

We think this is very strong evidence to support this product.

I like Entereg because it has significant potential.

In the U.S. alone there are 500,000 bowel resections every year, and I think that the date for FDA review is somewhere around November.

The user fee date is November 9 to be precise.

So we are looking forward to hopefully good news by then.

Allermist was filed in the U.S., Europe and very soon will be filed in Japan which is unusual, but we have done the studies at the same time in Japan, and that is a good achievement for our folks in development.

Just on Allermist, besides a very slick and user preferred delivery device, you see that the product produces on top of good efficacy in nasal symptoms, a unique benefit on ocular symptoms.

None of the other products in the same category has received a claim for efficacy and ocular symptoms.

We certainly will hope to get one from the regulators, and I think this data is very telling.

In terms of ASCO, I'm not going to repeat all the good news that you heard for Tykerb, Promacta, Cervarix and MAGE-3.

On Tykerb we are just reminding you that now we are in a position to file in the third quarter.

On Promacta we had new data confirming the efficacy and the extremely good predictability of this product in liver diseases.

And then Cervarix, of course, the adjuvant as demonstrated again and again that it drives a superior immune response.

The antibody titers are way up there compared to, let's say, a formulation using aluminum alone, and also long-lasting protection, which will become more important in the future.

And the file has been prepared.

The trial is being -- ending soon, and everything is on track with Cervarix.

MAGE-3 I particularly like this because this is really the first proof of concept that for severely sick patients suffering from non-small cell carcinoma.

We are looking at some improvement in the outcome due to the application of a vaccine.

So it is a proof of concept experiment of extreme importance, and I think we will have all kinds of applications in the future, not just in lung cancer.

We are also doing studies as you know where we have seen some similar results in melanoma.

So this is opening a new chapter in the extremely exciting life of the vaccine business by allowing us to go into more experimentations.

Now additional news in the press release is the start of Avandia XR for Alzheimer's.

We had some very encouraging news in the Phase II.

If this was to succeed, I think that in terms of present value Avandia XR would be probably the most important asset in our pipeline, but we have to see if Phase III does confirm the very intriguing Phase II results.

And Redona is our DPP-IV.

We are behind other companies in this race for this new category of diabetes treatments, but we like our chances because of the profile Redona looks very good.

But it is early days, so we will have to see how Phase III develops.

And then finally, just a word on pandemic.

You heard the news, this is a very good result.

Frankly, it is the best result we could expect because this was a trial that was using a range of doses starting from 13 microgram, down to 3.8, and we have seen maximum efficacy at 3.8.

David will give you some details on the data which I think is excellent.

Let me talk to you about what happens next with the pandemic vaccine because I have seen some write-ups about quantities and price.

You don't have the elements to really assess the potential of this vaccine, but we will give you I think fairly a good range of possibilities by early next year.

The one element that is missing is, first of all, the yield of the production process.

We are industrializing the production process, and we will be able to say more about the quantities of vaccines we can produce by early next year.

And that will, of course, narrow the range of opportunities for the Company.

The second point is demand from the governments.

We have talked to governments.

We have been in discussion with many of them over the past year.

Clearly the data is of interest to them, but exactly at what pace the governments will commit to order the product is uncertain at this point but will be firmed up over the next six months.

And then, of course, we will be able to make some more comments on cross protection data with the H5N1 vaccine and other elements, including cost of making the vaccine and estimated price.

So for all those reasons, there is no point speculating about the financial outcome.

We got into the pandemic race 10 years ago because we were concerned about this risk, and we thought our Company could bring significant progress in this important protection of the public.

How much money we can make with this is undetermined and, frankly, is not the priority.

Now the priority is to do it right, finish up the vaccine, file the data with the regulatory agencies and support a large capacity model hopefully with good yields, and that is the effort that is going to go on for the next six months.

On that note I would like to remind you that all the factors of the future -- the pipeline, the pandemic, the strengths of the existing productline -- they are all showing very positive trend, and that bears well for the future of GSK.

The Company is very well-positioned.

Now let me move onto some of the financials with Julian.

Thank you and good afternoon, everyone.

Turnover in the quarter was up 9% with Pharmaceuticals up 10% and Consumer Healthcare up 5%.

Cost of goods as a percentage of turnover was 20.8%.

The improvement to last year reflects a more favorable regional and product mix.

SG&A increased by 8%, but if you exclude legal charges, this increase was only 2%.

R&D expenditure increased 20% in the quarter.

Excluding one-off items, this increase was 14%.

For the full year, we continue to expect R&D as a percentage of sales to remain broadly in line with 2005.

Other operating income includes the price for disposal of profit and royalties receivable, partly offset by a 69 million charge on the Theravance and Quest financial instruments.

My current expectation is that other operating income will be lower in 2006 than it was in 2005.

Operating profit growth was 13%.

At actual rates it was 12%, reflecting the adverse impact of intercompany settlement losses, which more than offset favorable average exchange rates compared to the previous year.

On the next slide, you will see that operating profit growth of 13% increased to 15% at the profit before tax level as a result of a lower interest charge.

Earnings per share growth of 15% was in line with PBT growth.

Looking next at items that distort profit growth, you can see that the benefit from increased asset sale profits was more than offset by higher legal costs and the Theravance and Quest mark-to-market charge.

Looking in more detail at Theravance and Quest, in Q1 we reported a 30 million profit, in Q2 a 69 million loss, and for the year-to-date, we have a 39 million loss.

The half yearly loss -- the half-year loss is mostly attributable to the Quest financial instrument.

Overall the items on this chart reduced profit growth by some 2%.

You can see from the next chart that we benefited from a stronger dollar for most of the first half of this year.

However, if the dollar continues at the current level of $1.85, we expect the reported earnings per share growth for the full year will be broadly in line with CER growth.

Finally, let us look at the cash flow.

Cash generated from operations is in line with last year.

The increase in operating profit was broadly offset by an increase in working capital, reflecting higher inventories.

Taxation paid included nearly 300 million pounds of withholding tax, which will be repaid to GSK in quarter four of this year.

Net debt at the 30th of June at 655 million was lower than the position at the start of the year of over 1.2 billion pounds.

I will now hand over to David.

Thank you very much, and for those of you following along with the slides on our website, if you would turn to the slide which is headed Pharmaceuticals Q2 2006.

Pharmaceuticals sales, as you can see, were up 10% in the quarter to 5 billion pounds, which is getting to be a bit of a habit as this is the fourth consecutive quarter of 10% growth.

Just a few words on Europe where you can see the sales were level with the year ago, and as we have said before, we knew that this was going to be a challenging year for the region because a few of our key products, specifically Zofran, Lamictal and Imagran are encountering generics, and we also had a weak flu and antibiotic season, which actually started last fall and carried into the spring.

The good news is, though, that Seretide, Avandia and our vaccines are doing very well, and I think with even a normal flu season this year, we should do a bit better during the second half of the year.

In our international sales, you can see we are up 6%.

As always several ups and downs, but Japan was the star here leading the way with 17% growth with Flovent, Serevent and Paxil each having a very strong quarter.

Turning to the U.S., you will see a very strong 18% growth in the quarter.

We were benefiting some from some wholesaler restocking during the quarter, and we were able to restore full capacity for Avandia to what we would think is a more normal level, and we also restarted shipments of Avandamet in June.

Now the estimated underlying growth, if you exclude some of these variations and the stocking levels, was more around 12%.

But just to remind you that this growth came despite the impact of generic Flonase in the quarter.

If you would turn to the next slide, U.S.

Pharma Environment, just a couple of words about Medicaid -- Medicare enrollment and how well it is doing.

I think you can see now Medicare Part D is starting to look like a success.

Almost 40 million people now have drug coverage under the plan, and of those people that did not enroll, a significant number will fit into the poverty category and would ultimately get coverage if they chose to sign up later.

As expected, this has not been the big windfall for us in terms of incremental sales, but I think more importantly the overall environment in terms of the public perception towards the industry has improved.

Of course, the tax on the industries are declining as more issues such as the Middle East, Korea and the oil prices have taken over the front pages, and this is a good thing.

But again, Medicare Part D is good news for us and for the patients, and we are very happy to see that it is working as it is intended.

I do want to make it clear, though, that this did not have a big impact on our U.S. sales growth.

So with that, let's move on to the next slide.

I mentioned a moment ago that Japan had a strong second quarter, and while Japan does not get a whole lot of attention, I think it is every now and then worth taking a look because it is the second-largest market in the world, and we are very well-positioned going forward.

This slide shows that several well established products in other markets like Seretide, Lamictal, Requip and Avandia have not even been launched yet, and we will be getting started soon in Japan.

These are all very significant growth opportunities.

I think the other important point that JP mentioned is it also shows that we are shifting our past practice by prioritizing our clinical work to get approvals in Japan much sooner.

So you can see the opportunities on the right hand side like Allermist, Tykerb, Cervarix and Entereg will not be far behind the rest of the world as in the past.

So you have two really positive events happening over the next three years and should be very good news for Japan, and it's a good place for us to be right now.

So let's move on to the next slide.

Here is our usual recap of our key growth drivers.

They now total 2.3 billion pounds, almost half of the sales in the quarter, and still grew almost 20%.

So another strong performance for the group as a whole.

You can see the one product that has slipped a little bit is Lamictal with 12% growth, but that is because of the generic erosion that we're seeing in Europe.

Lamictal's growth in the U.S. continues to stay very strong.

It was 31% for the quarter and driven by prescriptions for the bipolar disorder indication.

And for Coreg, of course, it has returned to the normal growth that we had seen before we had these supply issues coming out of Cidra.

On the next slide is a regional view of Advair, and as you can see, Advair's growth was solid in all of the regions.

Of course, the U.S. asthma and respiratory market continued to be impacted by the mild weather.

The patient visits -- patient visits for asthma in the quarter were down by 23%, and COPD visits were down 12% for the quarter.

So clearly the weather was not a big help to us.

If you exclude the Singulair prescriptions for allergy, the asthma and the COPD controller market has been flat compared to previous quarters and years.

I am, however, still expecting the growth for the rest of the year to improve, and let me talk a little bit about that if you will move to the next slide.

Here you can see that Advair's new Rx has been headed now in the right direction, and this really is the key, and I want to just take a few moments to talk about it.

Each of the last several years, the market in Advair has picked up beginning in late August and September.

When the doctor visits increases, the weather starts to turn.

The fact that we are seeing the share turn up in this what I would call off-season is I think attributable to recapturing some of the share that we lost over the winter months when the labeling questions were there.

So if we have a really good strong share position going into the fall, we should be in very good shape.

In the next slide, just to reinforce a few points, we have recently increased the amount of sales and promotional efforts behind asthma and COPD, which is I think what is driving our share, and this should continue for the rest of the year.

Also we are now launching an HFA meter dose inhaler product in August.

This will give physicians a choice, and while most have really come to prefer the dry powder inhalers, for those that want a metered dose inhaler, they will now have that option.

So we think this will be an added boost to Advair sales.

Also having a brand-new Advair product will help to reinforce Advair's strong image with the doctors.

Of course, last but not least, we are on track for filing TORCH around the end of the third quarter, and I am confident that in 2007 the label for COPD will be improved significantly as a result of this landmark study.

If we could now move to our second-largest product, our product family, the Avandia family where we had a strong quarter in all regions.

Avandamet in particular is doing very well now in Europe.

In the U.S., as I mentioned, we were helped by restoring inventory levels in the trade.

This boosted the reported growth, but the underlying growth for the family was around 12%, which actually understates the potential for the family, and I say understated because while the growth was helped by the launch of Avandaryl, we have not been promoting Avandia or Avandamet until very recently because of the supply situation.

Now that that is behind us, it has been resolved from mid-July onwards.

We have been back to full promotional efforts and should go strong for the rest of the year.

Of course, the FDA approval for Avandamet for first-line use was also great news in the quarter.

This will give us a competitive edge during the relaunch.

And just a word on the Avandamet share, even before we restarted our promotion, just the stocking alone into the trade, we already have recaptured one-third of the new Rx that we had prior to coming off of the market.

If we move on to the next slide, a quick update on our rising stars.

You can see again that Avodart, Requip and Boniva all had a very strong quarter in terms of sales growth, and each continues to gain market share in the U.S. area.

Requip for restless leg syndrome and Boniva sales are primarily from the U.S. as the launches are just now getting underway in Europe.

So this will help to reinforce the momentum for these products.

We turn now to the vaccines.

We had a strong quarter with 17% growth in sales.

The Infanrix family of combinations especially continues to do well in all of the regions. [Avirex] in the U.S. is benefiting from the combination of first getting the indication for expanded use in children down to 12 months and then second and perhaps more importantly getting the AECIP's recommendation for these children to be immunized for protection against hepatitis A.

Looking forward, we have also now this morning just receive word that we have received approval for Priorix-Tetra for protection against measles, mumps, rubella and varicella in Germany and should begin shipments soon.

This, of course, will help our sales in Germany for the rest of the year, and we will also be filing to get approval in other markets throughout Europe.

Just some other news in vaccines in general.

Our Rotarix negotiations in Europe for reimbursement are well underway.

We're also expecting FluLaval, our flu vaccine from Québec, to be approved very shortly. [Mentrex], our meningitis vaccine, has been launched in the UK, and lastly but certainly not least, Cervarix is on track for a year-end filing.

But I think as JV mentioned the really big news for today are the results of the H5N1 trial, and I did want to take some time to go into some more details.

So if you look at the next slide, just a bit of a description about the pivotal trial.

This trial was run in Belgium in 400 healthy adults aged 18 to 60 years of age.

We did test as JP had mentioned for different doses were given from 3.8 micrograms up to 30 micrograms.

Now half the subjects were given the vaccine with our adjuvant and half without, and that was the placebo-controlled.

Two doses were administered 21 days apart, and the key end points were immunogenicity end points as outlined in the CHMP guidelines and the FDA draft guidelines.

So let's take a look at how the results came.

On this slide you see the actual CHMP guidelines, and the FDA guidelines are very much in line with these.

They are just slightly more stringent as the lower level of confidence has to be above this point as well.

Now let me talk you through what each of these means, but the first thing you need to know is that immune response is measured by something called the HI titer (indiscernible), hemoglutenation inhibition titer, which is a mouthful, and I will just refer to it as the HI titer.

But it indicates the level of antibodies against a specific virus strain.

So first let's just start with the seroprotection rate, and seroprotection rate is the percent of people who had an antibody level above a certain threshold.

In this case, that is an HI titer of 40.

Now the CHMP criteria for that is at least 70% of the people have to be above that titer.

If you look, we go to the next slide, you can see that even on the lowest dose -- this is at the 3.8 micrograms dose -- we more than exceeded that by achieving more than 80% of the people hitting the seroprotection, which clearly exceeds the criteria.

And while there are no head-to-head comparisons with some of the protection rates that we have seen in other H5N1 or with other H5N1 flu vaccines, some of the other data that has been shown, the best result that we have seen to date was a 67% conversion at a 30 microgram dose with another product.

Now the next criteria is the so-called seroconversion rate.

Now this is slightly different in that this is the percent of people who actually seroconvert, meaning that they have had at least a fourfold increase in the pre versus post vaccination HI titer.

So, in other words, seroconversion measures the impact of the vaccine.

Here the CHMP criteria is at least 40% of patients.

Of course, you can see on this slide that even again with our lowest dose, we more than doubled CHMP criteria.

The third criteria is the so-called seroconversion factor, which is really just a measure of the average volume of the response rather than percent of the people meeting in a certain threshold like the other two criteria.

And the seroconversion factor is the ratio of the average HI titer post to prevaccination and represents the average antibody levels before and after vaccination.

And again, as you can see, our adjuvanted vaccine far exceeded the guidelines.

This is well over the 2.5 times seroconversion factor that is required and up at 25 factor.

It is exactly where you would want to be.

So you can see that our adjuvanted vaccine at the lowest dose we have exceeded all three of the CHMP criteria, which is very impressive, and these also would surpass the tougher FDA criteria.

By the way, those given the vaccine without an adjuvant did not come close to meeting the criteria.

So the key here really is the adjuvant.

So these data, just to remind you, are just in, and they are preliminary results.

So they may change a little bit as we clean up the date, but the magnitude of the result will stay the same.

We're extremely pleased as you can imagine that these results signal that our approach and our novel adjuvant appear to be working incredibly well, and it means we will hopefully be able to save millions of lives around the world.

As we have said, further data from the trial and others will be available in the third quarter, and we expect to be able to manufacture the vaccine by the end of the year and have regulatory filings at that same time.

So, in summary, these clinical trial results are very important.

Developing an H5N1 vaccine to be prepared for a pandemic is still a work-in-progress, but we do feel confident now that we're headed in the right direction, and this is a breakthrough that is very important, and we have a superior adjuvant technology for vaccines.

So with that, I will pass it back to JP and you for Q&A.

Very good.

Thank you, David, and thank you, Julian.

Let's start with the questions now.

(OPERATOR INSTRUCTIONS).

Max Herrmann, ING.

Just three questions.

Firstly, on Promacta (indiscernible), can you give us a little bit of an update on the filing timeframe for the product and whether the FDA or the regulators will accept the short-term data for filing?

And then also just to get a bit more of an understanding where exactly you lie with regards to your product and Amgen's?

I know they announced also completion of enrollment in their Phase III ITP trial of AMN-503.

Also, the second question on diabetes, Redona.

Can you tell us a little bit more about the Phase II data and maybe a bit about the HbA1c control you are seeing how it compares perhaps with Avandia or the other DPP-IV?

And also if not, when the data will be presented?

And then just if you can, shed anymore like light on Imitrex and the patent situation there and what sort of timeframe you expect on the court case and a potential decision.

Thanks very much.

Thank you.

On Promacta we're giving no update because we don't have a final statement from the FDA whether the ITP short-term use is a fileable indication or not, so I cannot give you anymore.

Just to compare with Amgen, let me remind you that our drug is all.

There is a peptide.

It is an SQ kind of product, and there are also many differences in terms of the clinical profile, and we think, frankly, that is not necessarily important to us.

We think we have the better profile product.

But clearly we need to do work in multiple indications, and we will come back to you when we have any news.

On Redona we have not really publicized our Phase II results, but you can imagine they were good; otherwise, we would not go into Phase III knowing that this is a very busy sector of research, a bunch of products ahead of us.

Some of them are at the finish line, so we better have a very strong profile to compete with them.

In terms of what we can see so far, we think this is a good chance for us.

So we will publish the Phase II data in the near future.

I'm not sure when, but the important parties at Phase III have started on Redona.

In the case of Imitrex, I think that I don't know more than the update, which is I don't think there is any particularly recent news -- I'm asking my colleagues here -- on the Imitrex patent.

Just to remind you that there are basically two strong compound patents, the so-called 470 patent, which expires in June '07, and the other one, 845 which expires in February '09.

In any case the '07 patent has not been challenged, so the challenges from [Readies] concern the '09 patent.

And at this point, there is legal action going on, but nothing particularly earth shattering or new that I could tell you.

Thank you for your questions, and maybe we can move on now to the next set of questions.

Andrew Baum, Morgan Stanley.

I have three questions for you, gentlemen.

First, on the guidance you alluded to the fact that there have been some disappointments by consensus.

It was not higher.

Even when I factor in an earlier entry for generic Wellbutrin and Zofran, I'm still struggling to get to 12% based on either my or consensus forecasts.

So I wonder whether you can help us then understating other factors that may cause you to have some concerns and explain the level of guidance given?

The second question relates to Trexima, whether we could have an update there in terms of some of the issues and timing for that product?

And then finally, are there any circumstances that you would seek to end license the Wellbutrin [salt] and/or the Wellbutrin combination from Biovail given your franchise?

Okay.

Thank you.

On the guidance I think it is fair to say that this is not a precise 12% guidance, around 12%.

I cannot comment on your methodology.

I think that there are moving parts.

I will mention a couple.

One is we had some one-time events which were favorable in the first quarter, so you have to deduct them from the underlying growth.

But, of course, we also had some positives, so I'm not going to try to defend this guidance to death because, frankly, is a conservative one.

And if your forecast gets you somewhere else, I totally understand, and that might not be wrong.

I just cannot comment on the way you look at our business.

In terms of the guidance, I think it also depends on how much restructuring, how much legal costs is going to happen in the second half.

We don't know anything here.

We don't know, and we probably have taken a bit of a careful stand on that.

So there could be good surprises.

It is always possible.

So that is where we are.

But I have to say again I can only comment on making the fundamental of the Company strong.

And on that count, everything is positive.

You have seen the pipeline news.

You have seen the performance of the product and market share gains, including Advair.

You have seen some of the legal developments.

I mean everything is looking quite nice, and I'm not even throwing in yet pandemic because I'm not putting any money on pandemic until we know more about yields, quantity, pricing, government, signing on the dotted line.

So I think the outlook of the business has improved over the first six months, and that is why the second half is not necessarily a concern to us.

We just have a very conservative guidance.

Fair enough.

Trexima, I have no news.

We are in discussion with the FDA.

There is a whole range of alternatives.

I hope that we are going to come up with some update very quickly.

As soon as we have a final, of course, decision from the FDA on what needs to be done if anything, we will have a communication with you all.

But we're not in that situation yet.

And then you want to say a word, David, about --

Just on the Biovail question, this may be more of a Biovail question, and as usual we don't comment on any negotiations that we have currently with licensing opportunities.

Thank you, David, and the next question please.

Jamie Rubin, Morgan Stanley.

Since PDP bids have been submitted for 2007 implying that the HMOs or carriers have a sense for drug acquisition costs, can you help us to understand the pricing you expect for senior drugs entering 2007 versus 2006?

Sure.

As we start this second round, I think the only fundamental that has really changed going into the next round is there has been some winners and losers in terms of the plans out there.

And, of course, if you have got a stronger patient base, you've got a stronger negotiating position.

But again, even within most of these plans, most of these HMOs, there's multiple plans that are being offered, and of course, we always tailor our offerings to the generosity or lack of generosity, if you will, of the plans.

So these are the same basic things that happen every year.

It is a constant tweaking of the market rather than any fundamental changes.

In terms of the size of the rebate, though, do you expect a meaningful difference in '07 versus '06?

You know we don't like to comment about the magnitude of rebates.

Everyone is individualized, but again I think in general there is more tweaking here than there is any fundamental changes.

Mark Tracey, Goldman Sachs.

Just one for each actually.

David, are there any half dates that R&D seminars planned, and if so, which drugs could you flag as sort of the nearest to the top of the pile to be profiled?

Julian, I think JP was at a conference recently where he sort of gave a bit of a steal on SG&A outlook.

Maybe you could give it from the CFO's perspective, how you see SG&A growth in the medium-term.

And then lastly, for you, JP, I mean at the moment May '08 could be your departure date.

So next year could be your final full year.

Assume that the streets are not as bothered about '06 guidance, it seems that the street has got a pedestrian sort of 5 or 6% earnings growth for '07.

I know you're not going to give me a forecast now, I know that.

But maybe you could take us through JP's view of the key sort of '07 moving parts so we can work out whether the 5 to 6% is a sort of rightful number to sort of send you off with or whether maybe there are different dynamics that we're not appreciating?

Well, you really know how to hit where it hurts.

On the R&D day, we will come back to you on that.

We are looking at whether we can do this.

It would not be a wide R&D day, more of a therapeutic focus, and we have plenty to talk about.

So we will make an assessment and come back to you on when and how and what.

We're not quite ready to do that now.

I will leave the SG&A to Julian in a minute.

Actually now would be a good time, Julian.

Okay.

In terms of SG&A, there are two constituents as you know, one being legal charges and the other being all the rest.

It is a brave man who predicts legal charges, and I'm not brave so you'll forgive me on that one.

In terms of the rest of SG&A, our strategy has always been to hold SG&A below sales growth and hence give some leverage in terms of operating profit growth as a result.

That is why every year we have this restructuring that we do more often than not towards the back end of the year, and that continues to be our strategy.

That is one of our strategic ways of improving our overall performance and that will continue.

Does that sort of help you?

That is great, Julian.

Thank you.

On the last question, outlook, you're right, I'm not going to give guidance.

Let me just talk about the macro factors and some maybe GSK specific switch or not factors.

Number one is, I think the market in the U.S. will continue to be healthy going into '07.

I do believe that even though David said Medicare is a small impact, I think that is going to maybe grow and be more of a positive factor.

I think Europe will continue to be difficult, and the rest of the world is always fairly positive for us and for others.

In terms of the product flow, I think we will get most of our new product launches, some will be delayed.

You cannot avoid that.

I mean because we always plan for a sort of best case scenario.

But the one that matters for '07, '08 are likely to come on time.

I think that in terms of the generics, there is great uncertainty.

That is probably where you have more of the swing factors.

We don't know for some of our line extensions such as Wellbutrin XL and others, we don't know exactly when those things are going to go off in the sunset.

And that will influence to some extent the results in '07 and possibly in '06.

However, if you look at the big picture, I think Europe will do better in '07 because they had to take the brunt of those generic inroads in the early part, and I think as we make comparisons year-to-year, the underlying growth for Europe is essentially Avandia and Advair and possibly the opportunity to launch Wellbutrin XL and so forth.

Those are all good news kind of products compared to losing Lamictal and losing Immunex and so forth.

In the U.S., again uncertainty on the switch factors as we discussed.

Overall I think that if you look at the fundamentals of the Company, you cannot see anything that is really worrisome.

I think everything that matters in the pipeline is moving forward and moving well.

I think some of it is coming out now soon.

The vaccine business will continue to deliver great news on the R&D front.

I know of a few programs which have since are going to payoff.

So you talk about me leaving you, right, when I leave, I won't worry about the last piece of guidance.

I will worry about whether I left the Company stronger than when I found it, and I think on that count whether it is pipeline or underlying growth or just efficiencies of the way we manage the business.

I think we are in very good shape.

I look at very positive outlook mid-term and near-term.

Thanks.

No rush to see you go.

Graham Parry, Merrill Lynch.

I have got a few, please, and just to confirm again for the record that the guidance excludes any impact to generics.

Secondly, if you could just give us a dollar number for the Avandia stocking and perhaps a feel for Avandamet stocking and perhaps a feel for where inventories sit now?

So could we see any washout of any built-up inventory going into the second half?

On Zofran I was just wondering if you could comment on MGI Pharma's comments that it is expecting the launch of an authorized generic before the end of this year when the patents go.

And if you could talk about perhaps flex on your cost base when Zofran and Wellbutrin go in either '06 or '07?

Then finally on the H5N1 vaccine, could you just give us a feel perhaps for your strategy here?

Is it your attention to get governments to stockpile H5N1 vaccine for initial use in a pandemic to then be followed up by a vaccine for the actual strain which you would file through a mockup dossier?

Or is it the idea to convince them just to use H5N1 and hope for cross protection against the actual strain that is working there?

Then finally on the dose response in the study that you saw, did you see any and could you use even less antigen potentially?

Well, I have to say you take full advantage of the questioning.

Let me just move quickly through this.

Yes, generic risk is included in our guidance.

Frankly, if it was not, then you would be really concerned.

So we will cover any alternative generic if that takes place.

The stocking of Avandia and Avandamet, I just want to point out that it is not overstocking, it is restocking.

We were empty, and now we have a normal stock level.

In terms of value, I don't know what it is, but it is not significant.

It is a few percentage points.

On the corporate result, it is not that meaningful, and we're not going to have destocking that is for sure.

MGI and Zofran, David, do you want to say something there?

Could you repeat the question? (multiple speakers)

MGI is claiming that they have an authorized generic that they will launch at the time of patent expiration?

Of Zofran?

We have not announced -- (multiple speakers).

We have not announced any authorized generics.

So far we don't have a publicly Zofran authorized generic.

Flexibility on cost?

Well, if you follow the stock, you know that we are flexible on costs.

We find cost savings, but we don't do it just in the bad years or in the so so years or in the good years.

We do it all the time.

So don't expect us to have a stop and go and do things just because some drug is going generic.

We have a continuous improvement philosophy, and that is why we are able to do what Julian was mentioning, which is hold SG&A to below inflation even while our sales growth is going up 10% or so right now and will continue for awhile.

So that is pretty much the situation.

We are looking for cost efficiencies in many ways, and this is why we always leverage the sales line growth into a higher number in the bottom line.

In terms of H5N1, David, why don't you --

We're working with the governments here.

Right now the governments are trying to come to a consensus on where to go, and we have seen it everywhere from many governments who have traditionally in the past said we want to wait until a pandemic outbreak before they vaccinate to where people seem to be drifting now to the other extreme where people are saying, we want to vaccinate pre-pandemic at the right stage like a stage five, stage six, with two doses of a pre-pandemic.

So the ranges over there are shifting and drifting towards the two dose strategies beforehand.

But, of course, there is no obvious answer to this one.

The governments will try to have a common policy, and if not, they will go long and do their own thing.

I think there is a practical conclusion for us is that there will be stockpiling either way of H5N1 for the right reasons.

In terms of coming up with a pandemic vaccine if the mutation was going to take place and some very different vaccine would appear on the horizon, we will be assessing as we have said the cross protection data and probably share some of that between now and Christmas.

It all depends on the kind of mutation we're talking about.

If it is a mutation, that is way away from H5N1, well then at least we have a system in place ready to quickly gear up and scale up and using the [AVASO3] adjuvant, come up with a pandemic vaccine if that was needed.

If nothing happens, well then it will be more of a stockpiling game.

And on the dose response, we are very happy with 3.8 microgram.

We want to finish up this version and move on with this particular concentration.

(multiple speakers) -- many many questions.

Next person, please.

Kevin Wilson, Citigroup.

A couple of questions on pricing, one on consumer and one for Julian if I may.

On pricing, JP, you would not be alone in having put some of your prices up quite significantly in the U.S.

Could you comment about how well those prices are sticking and the strategy in the U.S.?

And perhaps, David, could comment specifically on the price component of the 12% underlying U.S. revenue growth.

Secondly, on the U.S. consumer business, what is going on in the profitability of the U.S. consumer, or is there anything going on that we should know about?

I noticed your minority charge was somewhat different than perhaps last quarter, and perhaps that indicates something happening in that U.S. consumer business.

And thirdly, Julian, I have been listening to you for awhile and the company for some time.

I don't remember intercompany settlement losses as a reason for things being slightly different.

Perhaps you could tell us a little bit more about what that is and whether it is a something that is a one-off or may happen again and why it happened?

Thank you, Kevin.

I can see you read this in great detail because in terms of the pricing of consumer product, we were able to be successful with putting in a few price increases that have been holding up, accepted by some of the tougher customers like Kmart and Wal-Mart and so forth.

So that is a done deal, and that will benefit us going forward.

On the pricing of Pharmaceuticals, I am going to ask David to comment.

Kevin, as you know, the published price increases we could only wish that those were the price increases that we actually got, given after the discounts and all, it is usually a much lower number.

We don't have a specific number for the U.S. impact, but just to remind you that the AARP's review of the published price increases this year put us in the middle of the pharmaceutical industry.

So we are right where everybody is, and we take our increases as we feel appropriate.

I don't think that the price increases in the U.S. were significantly different from last year.

So if you try to assess volume growth and the like, you have to be careful because last year we also had some price increases.

But, as David said, 80% of our contracts are for payers who don't necessarily let us cascade down the price increase.

So it is a little bit hard to get specific.

By the way on the macro view, we benefited from 1% price increase worldwide, which is, of course, a mix between the U.S. international and customer.

Julian, on consumer if you could comment?

I think your question, Kevin, is, why is profit attributable to minority interest down from 31 last year to 22, is that right?

That is right.

Well, clearly as you saw in the release, sales in North America are down, but we have done some fairly significant divestments in the U.S.

So that is part of the answer.

But also we have minorities elsewhere.

For example, we have them in India, and last year we had a bad first quarter in India and a big sort of catch-up in the second quarter.

So this year there is less profit-sharing back to the minority.

So it is a sum of a number of things.

It is not just Consumer Healthcare.

In terms of intercompany settlement losses, we have those every quarter.

What they are is we basically build our selling companies in their local currency.

So, for example, we bill the U.S. in dollars, and then a couple of weeks later the U.S. settles that in dollars back to the UK company.

And the UK company has a Sterling receivable, it now receives those dollars back, and there is always a difference.

So when rates move in a quarter, you get that difference.

Sometimes it is a profit.

Sometimes it is a loss.

Sometimes it helps us.

Other times it hinders us.

Most quarters it has an effect.

This quarter it was very obvious in the sense that you had turnover moving one way, EPS the other, hence the explanation.

But it is always there, and if you want a longer explanation, I would be happy to give that to you anytime.

Steve Scala, Cowen & Co.

Two questions.

First, could you provide us any detail on the TORCH abstract that will be presented at the European Respiratory Society meeting?

Specifically what will we learn above and beyond what has been previously presented?

Secondly, could you quantify the magnitude perhaps in percentage terms of the royalty Merck will pay GlaxoSmithKline on Gardasil sales?

And if that is not possible, could you tell us if the number would be material to Glaxo if Gardasil generated 1 billion in sales?

Well, Steve, let me take the second one.

You are right, we do not go public on the details of our agreement.

There is a complicated metrics.

We receive royalty payments from Merck on Gardasil, but we repay some to [CML] and the like.

So I'm just going to pass.

Material, it all depends on your definition of material.

I doubt we would get to that stage of material based on what I know from the net effect.

But nonetheless that does not mean that the payments would not be substantial, but we share them with others.

So on TORCH --

I don't have a specific answer to your question, Steve, but the headlines are the same.

Typically what you're going to start to see are more the sub-cuts in the data, but we really don't have any of the specifics right now.

But I think people are just looking at again various ways to slice and dice the data for their own input.

David Beadle, UBS.

A couple of questions if I can.

Just on the pricing element again in the U.S. both for Flonase and Advair, the Advair prescriptions are pretty flat over the quarter, and it looks as though you have gained pretty much all of the price increases around 10% on the actual revenue reported.

I just wondered whether you thought that was sustainable going forward in terms of regular price increases with a potential competitor in the market next year.

And on Flonase similarly, there was quite a big disparity with average (indiscernible) of something in the high 80% declines of Flonase prescriptions.

You reported something around 10% lower than that, so I just wondered whether you had similar pricing elements on Flonase.

And then just a couple of quick ones on approvals.

Coreg CR's timeline, could you just remind us of when you're expecting approval, and for FluLaval, is there a sort of cutoff date as to when you would actually miss shipping for the beginning of the flu season, or could you pretty much get shipments out into the U.S.

ASAP after approval, bearing in mind other people have been shipping for the last couple of months?

And then just lastly, for David, whether you think there is any impact on Medicare volume usage in certain areas, which have seen quite a big impact of Medicare Part D, whether it is only been a small impact overall for Glaxo?

Do you think the doughnut hole emerging sort of towards the end of the year actually slows down some of the increased growth rates that we have seen in certain areas?

Okay, let me try to take these off one at a time.

In terms of the pricing, it is also not just the price increases that affect the growth in the quarter.

There is some shifting between the doses as we move to the COPD in higher doses.

There is some price volume mix going on as well.

But again, just to remind you going into next year and versus [Acimbacor] coming into the market, we think this was an extraordinary year in the sense that the very mild season, the really -- I mean these are big declines when we see 23% decline in office visits for respiratory.

That is a big decline, and we don't expect that to continue to happen.

And again, we have the COPD indication, and once the TORCH data is published and presented and gets into our labor, our field force can start moving on that, and that will help the COPD go.