葛蘭素史克 (GSK) 2006 Q3 法說會逐字稿

Thank you for standing by, and welcome to the GSK Q3 results meeting analyst and investors conference call.

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

There will be a presentation today followed by a question-and-answer session. (OPERATOR INSTRUCTIONS).

In order that we may accommodate as many callers as possible today, can I please ask you to limit your questions to two or three.

I would like to advise you the call is being recorded Thursday, 26 of October, 2006.

I would now like to hand the conference over to your speaker for today, Mr. JP Garnier.

Please go ahead, sir.

Thank you and welcome to all.

I am here with David Stout, President of Pharmaceuticals, and Julian Heslop, our Chief Financial Officer.

They will address to you some of the aspects of our business and our financial performance.

I'm going to make some very, very brief remarks, first on the strong financial results.

You have seen the sales and the EPS up 21% in comparative terms -- I think that's ahead of expectations -- and also the very positive financial outlook for the Company, in terms of the guidance that has been raised to reflect the current trend of our business, but also the doubling of the share buyback and the increase in the dividend.

We feel that at this point, having put aside some of the risks to our cash position such as the tax settlement and the like, we're in a position to give back to the shareholders without having to incur additional debt.

So, this is kind of the plan for the future.

In terms of the key product news, I'm trying to pick and choose in there what's really important, because the some of the news are more important and will have more impact on the future of the Company than others.

The ones I selected for you -- and that's my personal opinion -- is first of all, Tykerb and Cervarix basically on track.

I know Cervarix we aimed at December, we estimated.

But this was not a trial driven by the clock, where you normally can forecast pretty accurately; this was an event-driven trial.

Therefore, we do our best to guess when we are going to spot those cases of infection.

They come at a different pace every month, and we guessed okay but we didn't guess completely right.

That's why we had to slip into next year to finish the file.

But the good news is we now have enough cases; the clinical trial is officially ending soon.

We start to put the file together.

There is considerable amount of data on -- we certainly are going to study it so that we position it for a unique profile on the issues we have discussed with you before, whether it's cross-protection or age bracket of people benefiting from -- of females benefiting from the vaccine.

So, this is a very important phase, and we are very encouraged by what has been happening so far.

Of course, Tykerb filing in the US and, more importantly, I think the relative enthusiasm of the FDA for the file is giving me great confidence in the future of this compound.

Coreg CR is not going to win us the Nobel prize, but it's a tremendous commercial opportunity.

It's not just a line extension, which is always nice, and we have done well with those in the past; it's a product that opens up the antihypertensive market, which is probably 5 or 10 times bigger than the current entry market for Coreg, which is congestive heart failure.

So we couldn't really compete in the antihypertensive market because of the BID schedule of Coreg, which makes it far less convenient than all the once-a-day drugs.

Once-a-day is a must in the antihypertensive market.

That's what we have now.

So we are very excited, and we will launch in a big way this drug in the early part of the next year.

Then, FluLaval is an approval that is important for us.

Not only it increases immediately the amount of flu vaccine we can sell in the US but, more importantly, it unlocks a key element of our capacity for pandemic.

As you know, we are hot and heavy negotiating deals on pandemic.

You heard about Switzerland.

We signed another one with an Asian nation that doesn't wish to be identified.

We are in the last steps.

Between now and Christmas, I expect that we will probably sign a few more in Europe and elsewhere.

Now, one more thing.

Promacta -- I know there is a lot of news on Promacta.

The bottom line is ITP -- the Phase III trial is very interesting, because not only we confirmed Phase II in spades, we met the primary endpoint of increasing the number of patients with a 50,000 platelet count.

But, more importantly, we also showed a clinical effect in terms of comparing with placebo.

We showed that the bleeding rate is far less.

We can't tell you much more.

Don't ask questions about the data, because I can't answer them.

We are going to have to go to Medical Congress and unveil the news.

But we have kind of given you, certainly, the headlines.

The headlines are good.

Those indications are important -- good data on liver as well.

Chemo -- we have got to go back.

But, contrary to what analysts have said, chemo is an intermittent treatment.

It's not necessarily the biggest one, in terms of market tensional potential of Promacta.

As far as the filing is concerned, we have said all along we are in discussion with the FDA.

The fact that we have shown now in a Phase III trial that we are, in effect, on the clinical endpoint is meaningful.

Whether that's going to be enough, I don't know.

Pazopanib -- good surprise.

The renal cell carcinoma drug performed extremely well.

This was an advanced renal cell cancer trial, and the independent review board told us that, because of the very high efficacy of the drug, we had to put the placebo patient on the drug.

So they interrupted -- they didn't interrupt the trial, really, but they changed the design and said, look, you've got to cancel the placebo arm; it's unethical.

This patients are not benefiting from pazopanib, which is showing a very, very interesting profile, very interesting.

Probably the next Tykerb for us.

Then, the new generation flu -- that is commercially very meaningful, and I'll tell you why.

This is a huge market where there is one problem with the classic flu, and that is that the elderly folks, people in their 70's and 80's -- their immune system goes down a bit, and many of them are not fully protected by classic flu vaccine.

This new generation flu, Flu Plus, is showing better coverage, higher T-cell response, better antibody reaction.

Again, we will issue all this in upcoming Medical Congress, but we are very confident that we got it.

We are going to do all the Phase III next year, so this is a major opportunity for us, and we will use this extensively.

So you see, on balance, even though there were a couple of disappointments on the pipeline in terms of value, I think that there is not even close.

Sepsis was a longshot.

It's a unfortunate it didn't make it.

The DPPIV is a mixed blessing; we are so much in the back of the pack, we'll have to see what happens next.

I'm not too optimistic, but in any case, I think those news were relatively modest compared to the positives.

Can I just now ask Julian to take you through the financials, and I'll be back for the questions.

JP, thank you.

Turnover in the quarter was up 7%, with pharmaceuticals up 7% and consumer up 4%.

Cost of goods as a percentage of turnover was 21.7%, which was broadly in line with last year.

This reflected a number of factors, including favorable price and regional mix changes and the adverse impact of higher charges related to restructuring programs.

SG&A costs excluding legal charges decreased 1%.

We continue to benefit from previous restructuring programs and the tight focus on cost control.

You can see in the slide I've split legal charges from the rest of SG&A.

R&D expenditure increased 11% in the quarter, driven by higher restructuring charges, partly offset by lower asset impairment write-offs.

Excluding these two items, expenditure increased 7%, in line with turnover growth.

Other operating income was GBP91 million, around half of last year's level, due to a reduction in asset sale profits and lower gains on the Theravance and Quest financial instruments.

Overall, operating profit growth was 19%.

You can see from the next slide the profit before tax growth of 21% benefited from lower interest charges.

At actual rates, it was 15%, reflecting a significant weakening in the dollar compared to the previous year.

Earnings per share growth of 21% was in line with PBT growth, as a lower minority interest charge compensated for the higher tax rate this quarter.

The next slide sets out, as usual, the impact of legal and restructuring costs, asset sale profits and financial instrument movements on the results.

You can see that lower legal charges this quarter were broadly offset by higher restructuring costs and lower asset sale profits.

Overall, these items had no impact on the profit growth for the quarter, nor did they impact the increase in the profit margin.

Restructuring costs increased in quarter three, as the Company commenced implementation of a series of restructuring projects, particularly in manufacturing and research and development.

I expect a similar level of restructuring charges in the fourth quarter.

The next chart shows that the US dollar was a key driver of the adverse currency impact on the reported results this quarter.

It's also worth noting that Sterling's strength also led to adverse currency impacts in most parts of the world.

If rates continue at current levels, I would expect an 8% to 9% adverse currency impact on EPS growth in the fourth quarter.

Overall, my expectation for the full year is that currency will have an adverse impact on EPS growth of around 1% to 2%.

Free cash flow for the quarter was adversely impacted by a gross payment of $3.3 billion to the US Internal Revenue Service under the agreement which settled the transfer pricing dispute.

We expect to discharge the remaining liabilities this year.

Overall, the net cost to GSK will be $3.1 billion, which covers not only the gross federal and state payments but also the benefit of tax relief on the payments made.

Net debt at the end of the quarter increased to GBP2.1 billion, primarily as a result of these tax settlement payments.

I would like to conclude with comments on dividends and share repurchases.

We have reviewed the dividend policy that has been in place since the merger and have concluded, based on our earnings growth to date, that a more progressive policy is now appropriate.

We have therefore announced today that we expect to pay a 2006 dividend of 48p and a 4p increase on last year.

At the same time, we expect dividend cover to improve as well.

In respect to share repurchases, given our continued strong cash flow performance, we have also announced a new GBP6 billion share buyback program, and we expect it to be completed over a three-year period, including GBP2 billion over the next 12 months.

I will now hand over to David.

Thank you very much, Julian.

For those of you following along with the slides from our website, if you would turn to the slide that is headed Q3 2006 sales by region.

As you can see, total sales in the quarter were up 7% to just under GBP5 billion.

Now, leading to growth was the US business, where we had another strong quarter with 14% growth, which was led by our key growth drivers and what we have been calling our rising stars.

I'll cover these products in some detail in just a few minutes.

But just to remind you, this growth has included the ongoing generic erosion of Flonase, which began in the first quarter of this year, and of course, as you know, Zofran, which loses it market exclusivity in the US in this, the fourth quarter.

I'm sure you have already included that, however, into your models.

Europe continues to be a very tough environment for us, as market growth itself has slowed to under 5% this year.

For ourselves, we were level to our performance of a year ago.

Patent expirations last year and this year for Lamictal, Imigran and Zofran have held back growth in Europe this year.

While the patent expirations will continue to have an impact on our European business, our new product launches such as Tykerb and Cervarix and our vaccine business should give us more moment moderate growth in the near term.

In our international markets, we had some delays in the shipments of vaccines, along with some destocking in Japan, which held growth back to 3%, which is below the year-to-date growth of 7%.

We think that 7% is more reflective of the run rate in the region.

We had some slow growth in Canada and Australia, which are being offset by good growth in Latina and several of our Asian markets such as Korea, Taiwan and China.

Our vaccine business continues to be the major growth driver in the region.

Of course, let's not forget that Japan continues to be our single biggest market opportunity, as there are very few generic risks there, and many significant new product launches coming.

Now, if we can, let's take a look at some of our key growth drivers on the next slide.

You can see again together this group totaled GBP2.3 billion pounds and grew 15% during the quarter.

I'm going to cover Advair, Avandia and Coreg in more detail in the next couple of slides, but you can also seen here that Valtrex and Lamictal had outstanding quarters as well.

Let me also remind you that we should be filing Lamictal XR for epilepsy in the current quarter.

Our vaccine sales are distorted by some delays in our shipments which I had mentioned around international and some of our other markets, and these will now spill over into the fourth quarter.

Also, our FluLaval vaccine, which was approved in early October, will be shipped during the fourth quarter, as our vaccine sales should get back to more normal growth.

On the next slide is a regional view of Seretide and Advair, and as you can see, overall, our sales exceeded GBP800 million and was growing 14%.

Europe continues to be the Steady Eddie here, with good growth delivering 12% increase.

Our international markets grew 7%, primarily being affected by the big markets in Canada and Mexico.

The biggest opportunity in international, however, remains in Japan, which is the second-largest market in the world, and we still have not launched Advair.

We now expect to launch however, in Japan in 2007, and this should be a big boost to our international Advair/Seretide sales and to our overall global growth.

In the US, which is our biggest market, of course, growth of 17% reflects an improvement in price an mix, as well as some variation in wholesaler stocking and a portion of that reversal of the TRICARE provision that was referred to in our earnings release.

If you look at the underlying growth excluding the wholesaler stocking and the TRICARE reversal, the growth is closer to 9% to 10%.

Now, let me just take a few slides, if you would, to take you through the prescription trends and why we're confident that Advair is going to continue to be a major driver of growth.

As we have said many times before, Advair growth is very seasonally affected, with the growth occurring from the early fall to the late spring and then following back during the summer periods.

As you see here on this slide, during the 2003-2004 season, our growth began in September, as always, and it peaked at the end of March.

About half of that growth was then lost during the summer months until the 2004 and 2005 season began.

Then, again, we saw the steady growth beginning in September.

This time, it peaked in late May before falling back again, and again we lost about half of that growth.

If you look now, picking up on the 2005-2006 season, you can see everything started out normally, with the growth beginning just great in September.

But unlike the previous years, our growth was interrupted less than halfway into the season, when we received a letter from the FDA requesting changes to our labeling.

That's something we have discussed with you at some length in our previous calls.

Compounding the slowing was a mild winter that led to a decrease in office visits for asthma and COPD.

I'm not going to try to forecast the winter weather patterns, but I think a more normal winter should increase office visits for these two conditions.

So for the 2005 and 2006 season, when we fell back, we ended up pretty much where we began the season.

So as we go into the 2006-2007 season, we're starting out pretty much where we started last year.

So, when you look at year-on-year comparisons, we are going to look flat until we get beyond the November timeframe.

What's important is that we started off the season, as in the past, with good trends through September.

We expect this to continue, and hope that we will not have the disruptions that led to last year's issues.

Now, let me share with you some of the reasons for our confidence, and why we expect Advair to continue to grow through the season.

Here are some of the key initiatives that will continue to contribute to the growth in both the near and the mid-term.

Of course, the MDI launch, the metered-dose inhaler launch in the US, is already underway.

We began our trade stocking in early October.

We know that, while the majority of patients either prefer or they have gotten used to the Diskus device, there are some patients and physicians that prefer a metered-dose inhaler, and now they have that option; they have the flexibility with either dosage form.

We have also expanded our selling efforts, and to really capitalize on the COPD indication, we now have sales force that are completely focused and dedicated just on that indication.

This is new information, so while COPD uses have been growing very well, I think we can accelerate the growth even more taking this new direction.

Looking forward, we have filed the TORCH data in US and Europe, and we hope that this is going to strengthen our label.

This would, of course, be very important to our sales forces if and when it gets approved.

I think we were also very pleased to the comments from the American College of Chest Physicians at their press conference last Monday on the TORCH results.

As I mentioned earlier, we're expecting to launch in Japan in 2007.

We can now move on to Avandia.

The Avandia family, which also includes Avandamet and Avandaryl, grew 11% overall.

As you can see, Europe and international really are now making significant contributions to the family's growth, and they account for over 25% of the business and are growing 26% in quarter.

This growth occurred, by the way, despite some of the supply issues that we had in international markets of Avandamet.

While we have reported sales growth of 6% in the US, the underlying growth here was really closer to 12%, as wholesalers were destocking some of the inventories that they had put in when we restocked the trade in the second quarter.

While 12% growth in the US is okay, we're not satisfied with it and we expect this to improve.

So if you move to the next slide, let me cover why we're convinced that Avandia's growth will accelerate.

I think first and most important is we really need to regain physician confidence in our ability to continue to supply the market.

This is both at a trade level and with samples.

Two discontinuations of trade shipments of Avandamet is not acceptable to physicians, and quite frankly, I can't blame them for their response.

That's why we painfully, painfully waited until July to relaunch Avandamet, so we would have the adequate levels when we returned to the market.

We are back now, and day by day, we're winning physicians back.

But it's going to take some time to win them all.

We can win them back, though, given the strength of the product and the new indications and the new data that is emerging.

Avandia is being used earlier in the treatment of diabetes, and with Avandamet's first-line indication and the approval of Avandaryl on Tuesday of this week for first-line treatment, we expect that the trend is going to continue.

This is being supported also, by the way, by treatment guidelines that call for earlier use of TZDs in combination medicines.

Of course, nothing is more compelling than outcomes data, and we are now starting to get the output from our investment of six years ago in the big landmark outcomes trials.

At the end of the day, it's the outcomes that are most important to physicians and to patients.

In September, the results of the DREAM trial were presented at the European Association for the Study of Diabetes conference.

This was a huge study, over three years and over 5,000 patients.

The results showed that, as we had expected, Avandia does significantly reduce the risk of patients progressing into type 2 diabetes.

Most of the key opinion leaders were extremely excited about these results, and they feel they are very supportive of Avandia and the treatment guidelines being changed.

Of course, the prediabetic market is not all that big at this moment, but we expect over time, as the disease awareness grows, that this will increase.

Perhaps more importantly, we expect that there's a halo effect around the product as these results become more fully understood.

We will file to have this DREAM data added to the label during the first half of next year in both Europe and the US.

Of course, we're not going to have to wait very long for the next big study to report.

This, of course, is the ADOPT trial, which is a four-year study.

Again, this is a study in thousands of patients.

But this is a study that is much more applicable to the current market, because these are actually type 2 diabetes patients.

The results of this study will help doctors answer the question, which drug should I prescribe first?

Now, we are scheduling a GSK webcast on the same day that the results will be presented for the first time at a medical conference in South Africa, and that's on December 4th.

We will have the chance to review the results and the implications for you then, as well as have an outlook for the entire Avandia and diabetes market, along with our projections for the market growth.

DREAM and ADOPT are the kinds of studies designed to show doctors how their patients will do over long periods of time, which is really what they are interested in.

Long-term, thorough trials are what change doctors' opinions.

We can move on now.

JP has already had a few comments on Coreg; let me just add to that.

You can see the growth of Coreg continues at a very robust rate.

While the patent for Coreg does expire next September, we still believe, as JP mentioned, there's a lot of room for improvement with Coreg.

As you know, Coreg's Achilles heel has been it's twice-a-day dosing.

We have succeeded despite that with our CHF and post myocardial infarction markets with this handicap, but if you ask the patients, they certainly would prefer a once-daily product.

In the antihypertensive market, a once-a-day regimen is almost a requirement for use.

So, as we mentioned, it was with great joy that we received the FDA approval for Coreg as a once-a-day treatment in all three of the conditions, in both CHF, post-MI and hypertension, just last Friday.

We expect that this will be well-received by our CHF and post-MI patients.

As you can see on the next slide, it really does open up that antihypertensive market opportunity that JP described.

Despite what your preconceived notions might be about beta blockers in hypertension, they are widely used in the treatment of hypertension, but they are generally required that they are once-a-day.

I would expect that the once-a-day Coreg and hypertension will be very well-received by physicians and patients, and represents a tremendous opportunity to not extend the Coreg franchise but to grow it as well.

If you look at the next slide here, the three products that we've talked about and I called our rising stars in the past, I think they have almost elevated beyond rising stars to stars in their own right.

If you look here -- and I do the quick math for you -- at GBP154 million in the quarter, these three products have a current run rate that exceeds $1 billion a year, and growing in the high double digits.

Now, you know why we have been excited about these three products.

More specifically, looking at Requip, Requip contributed GBP70 million pounds for the quarter.

You can see here the prescriptions for restless legs syndrome represent currently about 60% of the US sales and continues to grow very strongly.

Many of you doubted the potential of this syndication, I doubted the potential of this indication, and there was a lot of debate within the Company.

But clearly, our marketers knew what they were doing, and it has been a success for us.

We just filed the first of our two next-generation products with the FDA.

First is the Requip CR, specifically designed for the restless legs syndrome patients, and a once-a-day version for our Parkinson's patients will be filed before year end.

Looking quickly as Boniva, you can see our market share gains have continued.

This is a very big market, as you know, and we have a product with very clear differentiation.

We will continue to be very aggressive in going after this market.

Lastly, if we can go to the last slide, this summarizes the near-term opportunities we have and the lunches that we're getting ready for in the US and around the world.

In previous presentations, you heard a lot about these individual products, so I will try to keep my comments relatively brief.

I have already talked about Coreg CR.

Allermist, to remind you, has the potential to be the first intranasal steroid proven to help with the ocular symptoms, which are very common and a very significant product for many people.

We're hoping to launch this product in the second quarter of next year.

Tykerb has been filed, and we hope to get a priority review.

So this launch is potentially not too far away.

Of course, we continue to expect clinical data supporting Tykerb will build significantly over time.

Cervarix -- based on all the clinical data we have had, we're confident that the analysis of the 008 data will support a very strong file, and we also will be talking to regulators about requesting a priority review in the US.

Trexima -- in response to the FDA's approvable letter, will be submitted before year end.

If all goes well, we should be launching the new gold standard for migraine treatments around midyear next year.

Data supporting Arixtra in acute coronary syndrome is also very strong.

This is illustrated by the FDA granting it priority review.

I think you all know how big a commercial opportunity Lovenox is, and Arixtra did very well against Lovenox in the ACS indication.

So, this could be a sleeper for us.

A quick word on Entereg for POI.

I remind you the PDUFA data is November 9th.

Lastly, the H5N1 pre-pandemic vaccine, different from the Flu Plus that JP talked about, is much more important than just a commercial opportunity.

But we do expect to realize sales next year from this initiative, as you saw from the Swiss announcement earlier this month.

There are some unknown variables on this, including the yield, and governments making firm commitments, so we want to give you a more detailed update on this at our year-end meeting in February.

So, with that, JP, I will turn the meeting back to you for Q&A.

Thank you, Julian.

Thank you, David.

Let's start with the Q&A.

(OPERATOR INSTRUCTIONS).

Matthew Weston, Lehman Brothers.

A couple of quick pipeline questions, if I can, given today's news.

If we take some of the negatives first, on Cervarix, I would just like to know your reaction on Gardasil sales to date -- I think the market was quite surprised as to the magnitude of sales in Q3 -- and whether or not your delay out to filing in April of next year is really going to limit your ability to capture that early population of people that adopt vaccination quickly.

Secondly, on Redona, could you just give us some indication as what went wrong in the tox studies -- what should we be looking for?

Then, just on some of the more positive drivers within the pipeline, on pazopanib, can you just tell us whether or not you feel there's going to be any ability to file on the data that you currently have in renal cell carcinoma in Phase II, or do we have to wait for the Phase III to report?

Also, any update in other tumors?

Then, quickly, on the MAGE-3 vaccine, you say you've got positive Phase II data, and Phase III will start.

If I recall correctly, the interim data in Phase II showed a trend to significance that failed to hit the primary endpoint.

Does this mean that we have actually hit the primary endpoint at the final analysis?

Then, the last one, ADOPT -- have you seen the data?

I realize, with DREAM you didn't get it until a couple of days before the announcement.

With ADOPT, is it different?

Have you seen the data, and is that why you're confident as to positive results?

Well, so much for the advice to keep it to three questions.

It's one.

It's pipeline.

I'll try to answer.

On Cervarix, no, we're not concerned.

This is really a small delay, and the market potential is humongous.

The sales of Gardasil so far are actually just scratching the surfaces along adoption rate in various markets.

Remember, the delay only affects the US market.

This being said, we have previous experience; we launched our hepatitis B vaccine, I think, two years after the leader and took over market leadership within 18 months.

I think that there's so much room for both vaccines that, once again, the success of Gardasil is good news.

They are going to have to prepare the market, get reimbursement from the payers in the US.

Then, we will be there when the market is a bit more mature.

In the meantime, Gardasil will sell and some patients will get treated, but we're talking about a 10 to 12 years curve in terms of the growth curve.

As we have seen, frankly -- again, hepatitis B is a pretty good model, if you want to compare takeoff and the time it takes to reach equilibrium.

Redona, we were in the back of the pack, and we hit a long-term tox finding.

So we have to check whether that long-term tox in animals is meaningful, and is something to worry about, and that's why we voluntarily interrupted the trial to be very safe by precaution.

As soon as we are done with the analysis, we will find out whether this is a program that should be restarted or not.

Pazopanib -- very exciting data.

We have Phase III ongoing report in 18 months.

I don't think that we can say anything about filing on the existing Phase II data, because the trial is not even over.

Remember, this was an interim analysis after 12 weeks.

So a little bit difficult to answer that question.

MAGE-3 -- we have very encouraging results.

This was a small study in terms of statistical significance.

I don't know exactly whether that's even important in the determination of the decision to go to Phase III.

We look for an indication.

I think that, certainly, the Phase III and the Phase II ended probably equal or better than the interim results.

But I can't really answer your question, because I don't know, frankly.

Then, the ADOPT -- yes, we know about the data and we will be, as I said, giving you a chance to hear it from the scientists by connecting with this Avandia in focus day -- which, by the way, will be more than just talking about ADOPT.

We are really bullish on Avandia.

We want to tell you about our vision of this market, of the DPPIV, of the, frankly, the range of forecast of Avandia.

All those things are important.

This is a big engine.

This is not a product that is going to stall anytime soon, and we are prepared to back it up in a way that's going to be a big driver for the Company for years to come.

Clearly, ADOPT will be kind of newsworthy.

That's why we thought we would put this focus on Avandia connected to ADOPT, but it's just a small part of the story.

So, you will hear more about it on December 4th.

Jami Rubin, Morgan Stanley.

Mr. Rubin, your line is open.

Andrew Baum, Morgan Stanley.

A couple of areas -- first, on your diabetes franchise and then, second, on potential areas for productivity improvements going forward.

JP, you were very upbeat on the Avandia franchise just now, and yet at the same time, fairly dismissive of the impact that the [denoglitazone] suspension is going to make.

One of the key issues that occurs to me, at least, is the Avandia patent timeframe is limited.

You have, in the near term, a challenge from Teva.

Longer-term, the patent will expire of its own accord.

You don't have a DPPIV, and from my understanding, part of the strategy was to add to DPPIV on top of the Avandia base, and that seems to be not open now.

Finally, if you look at the Avandia scripts in the US since the relaunch, they seem to have been somewhat disappointing, for reasons that are not entirely clear.

So perhaps I could stop and just get a sense of how you're thinking about the franchise, in particular how you future-proof it, and then, in addition, some sense of what the issues are in the US market that are preventing a more impressive relaunch.

Just to be clear, I wasn't dismissive of the DPPIV.

I just said we're going to tell you about how we see the market and their sort of intrusion into the market.

So, being dismissive would be to deny their existence, or to think that they are not going to have an impact.

That's not my point of view.

I think they are going to be an important therapy, and I think it's going to benefit the glitazone indirectly.

So we will tell you more about this in December.

Frankly, we think -- and again, I don't want to take too much of the thunder away from Avandia.

But we think Avandia has legs and is going to grow, regardless.

It would have been nice to have a DPPIV, but it's an independent fact from running the Avandia and Avandia family franchise.

So, we don't seem to have one so far, unless we can resolve this problem -- which, again, could be a temporary setback.

Whether a combination of Avandia and DPPIV is a good thing or not -- we will comment on that as well.

Of course, we don't need to have our own DPPIV to do that.

But in the grand scheme of things, I think that the reality is that the DPPIV will be up and running way before our own horse is ready.

We have to take that into account and be very realistic.

Finally -- that kind of covers it in terms of -- ah, the US, yes.

Well, first of all, remember the growth in volume terms was about -- better than reported, certainly not 6% but more around 12%.

The reason that we're kind of picking up now, but maybe at a lower rate than you expected, is simply because we have no samples.

We're basically not promoting effectively this product line.

We are short in samples if not absent of samples for both Avandia and Avandamet.

So, we're just getting back to normal.

We haven't got back to normal on all aspects.

We are selling the product.

We have to put every single cycle of production on the material itself.

You know that to compete in this market without samples for a chronic medicine is not something that helps you, in terms of gaining market share and picking up more than your fair share of new patients.

So, I am not concerned.

I see the attitude of the physicians.

They have burned by those two successive out-of-stocks.

It's very embarrassing to get your patients to call you back because they need their repeat prescription and they can't find a pharmacist who delivers it.

So, we paid the price.

We're going to come out of it, because the one thing that is sure from our market research is our physicians -- they love Avandia, they love Avandamet.

They think Avandamet is the core medicine to be used in the treatment of diabetes.

That's not going to go away.

But we have got to get our act together, and we finally did.

The FDA requirement in Cidra just took us out of the game.

The product was booming.

Remember, the growth rate we were experiencing at the time -- there's no reason to believe we're not going to get back there.

It's a completely artificial artifact that we have a slower pace now, and I will make a slight bet with you that we speed up on Avandia and Avandamet.

But first, we have got to get supply situation and normalize the marketing of the brands.

So, hopefully, that is going to happen and that's, I guess, all I have to say for the time being.

Tim Anderson, Prudential.

This is Peter Ho for Tim Anderson.

Three questions, please.

On Cervarix, are you going to provide any potential cross-protection data in the near future?

On Redona, could you be a little more specific on the toxicity?

Was it a carcinogenicity?

What do you think this raises any questions in regards to the DPPIV inhibitors as a class?

Finally, on Advair, do you expect to achieve positive unit growth in the US in 2007, especially with the competing product coming to market?

I'll take the DPPIV and leave David explain the other two.

It's a long-term carc finding, so we are seeing tumors in some long-term tox at a higher dose, and we just need to stop and look at what kind of tumors and whether those are meaningful or not.

At first look, it doesn't look like something -- we of course, talked to the FDA, although they didn't tell us to stop the trial.

But when we talked to them, we actually asked -- well, not the FDA directly, but someone who has been at the FDA -- have you ever seen those kind of tumors somewhere else in the DPPIV?

It's very imperfect information, but I would say probably not.

But I can't be sure one way or the other.

In any case, we're going to have a conference once we have a better fix of exactly the extent, the [species], the range of dose and the like.

But it is a long-term carc finding.

Then, back to David on the --

Just on the Cervarix cross-protection, of course, we have -- based on our Phase II clinical trials, we were very helpful about some cross-protection data.

Of course, we will be analyzing that as we look through the 008 trial, and we would expect to be reporting on that next year when that analysis is complete.

But we have great hopes there.

In terms of Advair growth in the US, I was trying to do as good a job as I could to explain that.

Let me take another stab at it.

Right now, we're comparing this year to last year, which we are starting at about the same point -- but last year, our growth was interrupted.

We don't expect that growth to be interrupted this season.

That's nothing in our crystal ball that says we shouldn't do what we had done in the four previous years, and that's [going to] continue to grow from this month or from September-October all the way through into next spring.

Added to that is we are hopeful to get the TORCH data into our label, both in the US and Europe.

Just remind you, you have heard about TORCH now for some time, but our reps can't actually go out and promote with the TORCH data until we get it into our label.

So, while we get excited about it early, the major impact won't be felt until later.

So, we're very confident about the growth going forward.

We know that the COPD indication is very big, a very big opportunity.

As I mentioned, we put more sales resource behind it as well.

Paul Diggle, Nomura.

We haven't heard anything of late about [Altavex], which I think at one stage, we were hoping to hear that it would be approved or filed late this year.

Can you update us on that, please?

Yes.

The PDUFA is in December, so we will have to see.

Until then, frankly, there isn't much to add.

Is that a delayed PDUFA date?

The FDA actually asked for a delay.

It's not that we delayed it; it's just that they were not quite ready.

So, they put it to December.

Alexandra Hauber, Bear Stearns.

First of all, on Streptorix, at the vaccine meeting last year, you said US trials would start in the second quarter.

It appears that they have not started yet.

Can you tell us when they start, and how that affects your plans for US filing?

Secondly, on Advair, you were phenomenally successful so for this year, particularly to get the price increases through.

How do you think that the launch of Symbicort next year will affect your ability on the pricing power in the category?

The third question is on Avandia.

It seems that there is an increasing body of evidence that long-time administration of TZDs actually increases bone loss quite dramatically.

Are you actually measuring bone mineral density in DREAM and in ADOPT, so that we can get further clarity on that issue?

Your last statement on Avandia I would disagree with.

I think that I can't answer your question whether we do measure bone loss in a long-term diabetic treatment trial;

I just don't know.

But we will come back to you on the side on that.

Then, I would like to pass on the Advair price sensitivity to David, and also the trials on Streptorix.

Streptorix, I don't have any update at this time.

We're still evaluating our strategies for the US filing and talking to the FDA.

On Symbicort launch and its potential impact -- just to remind everyone that we have the strongest package with Advair.

We have all the indications for both COPD and asthma.

We have the pediatric indication.

We have the outcomes trials, and we have all the dosing strengths and both an MDI and a DPI dosage form.

A big part of the platform for Symbicort in Europe is to try to get this initial maintenance therapy and used for acute therapy.

We don't think that's going to play very well, given the FDA's position on acute use of long-acting beta agonists.

So, we feel very good about it.

Anybody can always try to play in a pricing game, and we're just going to have to see where Symbicort comes in on price.

Mark Purcell, Deutsche Bank.

I just wondered if you could discuss, JP, in terms of your discussions on H5N1 flu vaccine priming, what level of coverage the various countries -- you were saying maybe some approvals by the end of this year in Europe -- what kind of level of coverage that the European countries are looking for?

Secondly, I think you discontinued a PDI contract sales force arrangement for 2007.

I just wondered where we are in terms of the number of reps in the United States, [whether it's meaningful] going forward, and what this means in terms of SG&A growth, which I believe you have stated would grow slightly below inflation going forward.

Lastly, on Coreg sales, I wonder if you could split them by indication.

Obviously, you have got the market share by indication.

I'm wondering if you have the sales at hand as well.

Let me go ahead and take all of these, if you want.

In terms of the H5N1, the coverage in Europe, it's really right now that the Swiss were the first to come out, and they announced that they would be purchasing 8 million, which, if you do the quick calculations, that's enough for one for everybody in the country.

I think people are still evaluating their strategies, and the range goes everywhere from wait until pandemic to one dose for priming to two doses for priming and coverage, with hope for some cross-protection.

So, I think these are part of the discussions that we're having ongoing, but all in all, the trend tends to be more and more to giving it to more people and more doses.

Let me just add to that.

We can't be specific, but as I mentioned, some countries are at the end of their review processes.

They will order, and then we will deliver in probably split doses 2007-2008 so we can stretch our capacity to fulfill orders for, let's say, the next two years.

Countries realize that when they order, they can't get the material the next week; it's not a classic situation.

But there are countries in Europe, major countries, who are thinking like the Swiss, and there are countries that are not.

We had an Asian country buying a partial coverage of the country, and we expect this is going to be all over the place, because the experts in the various countries who are advising the government do not necessarily agree on the best strategy.

But everybody realizes that you need a safety net.

There is no 100% safety net, but this one is as good as it gets.

So, some of them want to buy it.

Now, back to David on Coreg and sales force.

In terms of sales force numbers, depending on what you count in sales force, we're still in the 9,000 to 10,000 persons strong group, and we're constantly re-evaluating our needs there.

Our competitiveness and share of voice and cutting of the PDI sales force will not have an impact on us.

In terms of Coreg sales, I don't have it broken down by sales by indication.

You can probably get a pretty good, though, estimate if you just go in and look at that one side that I had presented, and look at the rough number of scripts.

The post-MI and the CHF are very similar in terms of the cost of the script, and the patients are both using it chronically, and similar for hypertension.

So, I was just being a bit lazy.

Then, just in terms of SG&A growth going forward, is it still your expectation it's going to be below inflation?

Obviously, you have mentioned a number of restructuring charges that are going to be made and new programs coming through.

I just wondered if you could update us on your thoughts in terms of that cost line?

I think it varies in terms of the countries, but overall for the Corporation -- I've said it before -- we are growing R&D faster than SG&A.

SG&A, every single quarter since the merger, has declined as a percentage of sales.

So it's more of saying we want to keep SG&A below sales growth.

Now, in some years, I was more specific and said we think for 2006 it's going to be inflation or below, which it turns out to be.

That has more to do with the fact that we have really SG&A and legal in the same line.

I think this is important, what Julian explained.

SG&A was down 1%, so really a good quarter for SG&A.

Normally, we are up 2%, 3%.

If you look at the first nine months, it's a better indication.

Legal was down because, frankly, 2005 was exceptionally high.

I don't expect 2006 or 2007 to become -- yet to return to the 2005 level.

We had many settlements.

Some were in that provision.

For all those reasons, there was a fairly -- I would say an outlier in terms of legal expenses.

Now, legal expenses are always substantial, but they have clearly come down to a more natural equilibrium over this year, if you look at the first nine months.

I think that's not a bad -- a trend.

I hope I don't have to swallow those words, because there are some uncertainties on when we do those settlements.

There's a lot of tactical moving parts there.

So, looking forward, we do have trials -- Tykerb launch and Cervarix launch.

But frankly, we also have some products that get old and don't need to be promoted anymore to the same extent.

So, we continue to maintain our -- I wouldn't even call it a guidance, just common sense indication that not having reviewed the budget for 2007, I'm not going to risk telling you exactly what is going to happen.

But the current guidance seems to me reasonable.

I don't see any reason -- let me put it this way -- too suddenly have a spike in SG&A day over the coming year.

Michael Leacock, ABN Amro.

On Tykerb, I wondered if you could give us any update on the APHRODITE study timing and on the timing of the paclitaxel and Tykerb results.

On vaccines, I wondered if you could comment on the seasonal flu.

Has your timing of delivery of doses changed this year, due to the different strains compared to last year's, and what your total flu vaccine capacity would be in doses?

Let David (multiple speakers).

Yes, [I'll take the vaccine].

This year, I think we were all hit by the seasonal -- the strain change.

It caused about a three-week delay of shipments.

That's a big part, as I had mentioned earlier in my comments, when some shipments were delayed from the third quarter into the fourth quarter.

A big chunk of that was the seasonal flu.

Our total capacity for this year should be somewhere in the 55 million to 60 million range.

Again, as you get further into the winter months, we haven't figured out what our cutoff point is just yet, but it's somewhere in that 55 million to 60 million.

I remind you, going forward, we intend to increase the capacity.

Next year, we should almost be doubling our capacity in our Laval facility in 2007, and doubling our Dresden facility in 2008.

This is going to give us not just additional seasonal flu capacity, but when we go to the Flu Plus, it will give us more opportunity.

For the pandemic flu, it gives us opportunity.

On the question on Tykerb, the next piece of results will be, I guess, the combo trial with Taxol fourth quarter, so coming up.

Then, your question on the APHRODITE trial -- this is the adjuvant trial, which is a very big trial that is being organized with NIH.

The start is toward the end of 2006, so assuming that NIH comes through, that we're also fairly close to the start of the trial.

Stuart Harris, HSBC.

While we're talking about the APHRODITE trial, can we just confirm -- do we have a Tykerb monotherapy confirmed in that study?

There seems to have been some confusion over the last six to eight months.

Secondly, will we get TORCH written up ahead of the formal addition to the US and European labels?

Will it be written up in a peer-reviewed publication?

Finally, what is that threshold that you think clinicians would see as exciting, as regards efficacy of Avandia versus the other two arms in the ADOPT study which would cause increased adoption?

The last question I can't answer.

We don't want to jeopardize publication and release.

So, if we give too many hints, you know how it goes.

So, sorry about that.

The trial APHRODITE, the latest version -- again, it has not been completely finalized.

So I would rather stay away from this, as it could still -- again, we're not the only ones who have a say in the design.

So I'll stay away.

Then, there was a question --

TORCH -- we intend to publish TORCH as soon as we can in one of the good journals out there.

So that should come before approval into our final label.

Thank you for all those interesting questions, and I wish you the best.

We will see you in February, I guess, next time.

Thank you very much.

That does conclude your conference for today.

Thank you for participating.

You may all disconnect.