葛蘭素史克 (GSK) 2007 Q1 法說會逐字稿

Thanks for standing by, and welcome to the GSK Q1 Results Conference Call.

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

There will be a presentation followed by a question-and-answer session.

(Operator Instructions.) I must advise you that this conference is being recorded today, Wednesday, the 25th of April, 2007.

I would now like to turn the conference over to your speaker today, Dr.

J.P.

Garnier.

Please go ahead.

Thank you very much and welcome.

I'm going to give a brief summary and then I will be followed by the usual suspects, that is, Julian Heslop, our CFO, and David Stout, our President for Pharmaceuticals.

Well, as you saw, this is a pretty solid quarter from a financial standpoint, EPS up 14%.

Of course, the currency wasn't kind to us.

The British pound has really surged ahead and in fact has gained on pretty much every currency in the world--yen, Euro, dollar.

But what comes up must come down, and over the long run, I really don't think it matters so much for us.

We do have a strong business, strong product line, effective cost control, and we are ahead of our guidance, which is always a good thing.

Now, in terms of the key products, we have, as you have seen, a broad pharma portfolio.

I'm not going to repeat the results of the various growth factors from the Advair and the Avantias and the others.

And David, however, will spend some time telling you why this is going to continue to propel us, despite the fact that we are facing a tough year in terms of generic erosions.

I mean, we are getting sort of a triple dose.

Some years we lose one product.

This year we lose basically three.

We still have the lingering effects of Flonase this quarter, plus Zofran, plus Wellbutrin.

So it's a tough year, and despite that, our revenues were up thanks to the growth drivers and the contribution of new products.

We also had a good surprise with consumers.

They continue to outpace the market.

In fact, they're growing twice as fast as the over-the-counter market, and the results are good, whether you look at all care, OTC, all nutritionals.

And there's more excitement ahead of us with the launch of Alli.

Alli is the first diet aid which is approved by the FDA for launch in America without a prescription.

So this is going to be an exciting time in June and beyond.

I also want to talk about the pipeline, because I think that's much more important for the future.

We are on track in terms of five key launches for '07.

Coreg is on the market, Tykerb is off to a very good start, and soon we will hear about Veramyst.

In fact, probably by Thursday or Friday, we should know something.

The PDUFA date, as you see, is end of April.

And then, of course, we are hopeful to get Cervarix approved in Europe by the second half, and Trexima PDUFA is August 1.

I am a big fan of Trexima.

I was very impressed with reading the clinical trials.

We think this is the best migraine agent available.

Hopefully, we'll get it through the FDA and start to launch it.

Now, this is not all that there is.

If you look at the substantial late-stage pipeline we have, I remind you that we have 31 major product opportunities.

And we cannot give you all the news on all the products, but basically, quite a few received some kind of a data, clinical data, filing dates, whatever.

I mean, news about them, and you see the list.

It was positive for pretty much all of them except for Entereg.

So, so far, so good.

And we will hear the details of the, particularly clinical data of some of those products as the year unfolds.

Now, one thing we do not discuss with you at the conference is the specific topic of life cycle management.

I just want to give you a summary slide which I think establishes why we're able to soft land many of our molecules by improving the brand itself through new delivery systems.

And as you have seen, we have launched Coreg CR in the U.S., and we are launching Wellbutrin XR in Europe, but we also filed some very interesting products.

I want to mention Lamictal XR, because this is not just a controlled release, it's a better product in terms of the titration schedule.

This product is much easier to handle.

Requip 24 Hours, well, that's for Parkinson's patients instead of three times a day.

So, you see, every one of those line extensions has the potential to help replace the molecule that is losing its patent, or at least replace a big chunk of it, and give us a soft landing, which is very important.

So more to come on that subject, and a lot of activity this year.

We announced an oncology seminar.

We have an expanding oncology pipeline, as you can see here.

And you'll hear about, frankly, the new products and some of the studies on Tykerb and Cervarix.

There are about 14 summaries and 20 abstracts presented at ASCO.

The bulk of it is Tykerb, but there are also some interesting communications on pazopanib and others.

So you'll hear a lot more about this on June 18, which will be in London, a symposium just for you.

In summary, we're off to a good start.

We continue to show strength with our product line and our pipeline, and I think the progress we have made with the pipeline is really evident.

In the last 90 days, we have either filed or received approval for a total of 10 new products--10 new products in 90 days.

That's an average of one filing or one approval by a major regulatory agency every nine days.

I haven't seen that often, and I think this is a good sign for the future.

On that note, I'm going to pass it on now to Julian.

Thank you, J.P., and good afternoon, everybody.

You'll see the turnover, if you look at the first slide, in the quarter was up 4%.

Pharmaceuticals was up 3% despite increased generic competition.

Consumer healthcare was up 9% and benefited from the CNS acquisition last year.

Excluding this acquisition, underlying growth was a strong 7%.

Cost of goods as a percentage of turnover was 22.1%, slightly higher than the 2006 full year margin of 21.6%, primarily reflecting the adverse impact of currency.

Last year's very favorable cost of goods margin was flattened by both the release of a GBP 65 million provision following the decision to retain the Montrose manufacturing site and the relative weakness of sterling last year.

SG&A costs were lower than the previous year, which reflected a reduction in legal charges--GBP 26 million in the quarter, compared with GBP 107 million last year.

Excluding legal, SG&A only increased 3%, still below the rate of turnover.

R&D expenditure was broadly level with last year when expressed as a percentage of sales.

Other operating income, GBP 207 million, compared to GBP 71 million pounds last year.

This quarter's income includes the carvedilol settlement and the more than doubling of royalty income to GBP 45 million.

Overall, for the full year, I continue to expect other operating income to be broadly in the range of the level achieved over the last two years.

Operating profit growth was 11%.

Moving on, earnings per share growth, at 14%, was some three percentage points above operating profit growth, reflecting the benefit from the lower tax rate and the share buyback program, partly offset by higher interest charges.

You can see that the quarter was adversely impacted by currency, with a hit of 12%.

This reflected the strength of sterling against most major currencies, but in particular, the dollar, which was 1.96 for the quarter, compared with 1.75 last year.

If you look at the next slide, this contrasts the U.S.

dollar in the first quarter with last year.

You can see, assuming that rates remain broadly at current levels, that the adverse currency impact should be worse in the first quarter than for the rest of the year.

If you assume Q1 average exchange rates apply for the whole year, then the adverse currency impact would be around 6% for the full year.

And this means an average 4% for the next nine months.

Now turning to cash flow.

Free cash flow for the quarter was just over GBP 800 million.

The reduction on the previous year reflects a number of factors, including higher payments for end license product rights and the impact of currency movements.

Just under GBP 400 million was invested in product rights, including payments to Roche in respect to our consumer healthcare weight loss product, Alli, and also payments to Genmab, Xenoport, and Fabre Kramer, following the end licensing of products from these companies.

We also invested GBP 233 million on acquisitions, primarily on Domantis, a leader in developing the next generation of antibody therapies.

Lastly, you can see the cash returns to shareholders in the quarter, comprising dividends and share buybacks, amounted to over GBP 1,200 million, compared to under GBP 800 million last year.

In conclusion, the quarter saw good pharmaceutical sales growth, given the high levels of generic competition, as an excellent performance from consumer healthcare.

In addition, we are on track to deliver our earnings guidance for the year and a higher level of cash returns to our shareholders.

I'll now hand over to David.

Thanks very much, Julian.

Let me just start with a quick update on the environment since our preliminary year-end results in February.

We've continued to spend a considerable amount of time in Washington to make sure that the new members of Congress are fully aware of the issues that their leadership's putting before them.

So far, we've had very positive reception, I have to say, to our efforts, and we have gotten past the first 100 hours.

In fact, I think we're almost past the first 100 days without any negative legislation passed in the areas of importation, Medicare Part D, and the like.

While in fact the PDUFA renewal legislation is starting to move along, and right now it doesn't have a lot of baggage.

Of course, there is still a lot to do, but I'm happy with what we've been able to accomplish so far.

And while the environmental discussions about pharma these days tend to be more about the challenges, there are a few positive elements in the industry in general and GSK specifically that I'd just like to take a few seconds to remind you about.

Breakthrough drugs and vaccines that make a difference do continue to get rapid approvals and good reimbursement.

Of course, Tykerb is certainly an example of that, and there are many others from other companies.

For GSK specifically, our areas of focus in R&D are also areas of interest for the government, such as cancer, diabetes, obesity, lung disease, dementia.

And, of course, the rush by the other companies into the vaccine space reinforces our investment there, and that this is a good place to be working, and we certainly are at the front of the line.

The recent purchase of Domantis and the license of HuMax CD-20 also support our growth in the biologicals arena.

And lastly, the industry's reputation, which has been under attack for the last five years, has shown signs of recovery.

And while it's still too early to declare victory, and there's still another big election, of course, to come in 2008, we do see a marked improvement in our image as a result of our efforts in areas such as patient prescription assistance, our response to the H5N1 threat, and of course, the rollout of Medicare Part D.

Let me show you just one slide from a recent Harris poll.

And here you can see the beating that the industry took from 2002 to 2004.

But for many of the efforts that I was just mentioning, you can see that our approval ratings are back to the pre-2002 levels.

The improvement seen in 2006, in fact, was among the top five out of 21 companies, and we're still higher than oil and tobacco, and we're even closing in on the cable industry.

So now let's turn to our performance in the first quarter on the slide headed "1Q07 Sales by Region." In the first quarter, pharma sales grew 3% to GBP 4.8 billion despite the expected generic competition to several key brands, so overall, we're very pleased with the performance.

In Europe, you know, we lost market exclusivity to Zofran, Lamictal, and Imitrex during 2006.

So again, as we expected, the erosion of the sales from these products continued in the first quarter.

If you look out, the growth rate for the region is expected to improve, as regulatory approvals for some of our new products that we've already mentioned, like Cervarix, Tykerb, Allermist, Wellbutrin XR, start to come through, and while we also expect a few sales from our H5N1P pandemic vaccine later in this year.

In international, sales grew 7%, which was actually 1% better than the growth we reported in Q4 last year.

Japan, of course, is leading the way here with 10% growth in the first quarter, and this does not include any sales from Avandia and Arixtra, which were just approved last week--I'm sorry, Advair and Arixtra.

Sorry.

This should also accelerate Japan's and the overall international performance as we move forward throughout the year.

The combined loss to generic competition to Zofran, Wellbutrin XL, Flonase in the U.S.

cost us almost GBP 300 million.

Now, as we move forward during the year, the impact of Flonase, which accounted for about GBP 70 million of the decline, will start to dampen, but from the year out, we'll still continue to see a significant impact from Zofran and Wellbutrin XL.

Now, if you exclude the genericized products, of course, the remaining business grew by about 16%, although of course we recognize that there's always going to be new generics attacking our business.

Yet hopefully, not with the same intensity that we sometimes see as we've seen, of course, with these three major brands all being hit at one time.

We move to the next slide, you see overall we do have net growth because of the performance of the products you see here.

And of course, our new product introductions that J.P.

mentioned will be critical to keeping the net growth moving forward, and we'll discuss some of those in just a few minutes.

These growth drivers comprise about 50% of our sales today, and you can see that they grew in total 15%.

I'll talk more about Advair and Avandia in just a few minutes, but first, just a few words about vaccines and Coreg performance, which may look a little bit anemic compared to our previous quarters.

The vaccine growth is lower than usual for the quarter because last year this business grew 44%, which was helped by the timing of some tenders and some phasing of Avirex.

Likewise and similarly, the reported growth of Coreg is less than the underlying growth for the brand.

The underlying growth for the brand was actually about 25%.

Of course, this was because last year the reported sales benefited when the wholesalers restocked the product.

You remember last year in the first quarter, Coreg sales grew 53%.

For all the other products, you can see the momentum continues to be quite strong.

We turn now to Advair.

You can see sales totaled over GBP 800 million in the quarter, with 11% growth.

And again, we had growth in each and every region.

During the quarter, of course, the details of the TORCH study were published in the New England Journal of Medicine, so this was very good news, and that's because we know when doctors read the publication, they're very impressed, based on our market research.

Of course, we want to move faster with TORCH, but we do need to get this study onto the label before we are actually able to actively discuss the results with physicians.

So we were very pleased that the FDA has scheduled an AdCom meeting for May 1 to review the data.

Now, following the AdCom, the next step would be a final decision on label changes by the FDA in August, which of course we hope will be a positive decision.

The next slide, you can see that--many of you have already noticed that the prescription trends on a volume basis for Advair have been improving recently.

And of course on this slide, you see the trend for new prescriptions last year in the U.S.

We experienced an early and a fairly steep decline last year, and then we had the normal seasonal upswing around August.

But if you look next, you'll see that the new volume trend this year, compared with last year, and you can see that despite the slower growth of earlier in the season, which may be reflective of the early mild winter, we're now seeing the peak coming much later, which is a good sign that we're making progress with the brand.

You can see, in fact, for the last data point, we are up 9%.

The positive trend also coincides, of course, with the publication of TORCH and our first ever DTC campaign for our COPD indication.

And just one quick look at the Japan opportunity.

With the approval that I had mentioned earlier, we anticipate launching before the end of the second quarter with the brand name Adoair.

That's not a misprint.

As you can see on the slide, Japan's respiratory market is almost GBP 1 billion.

And unlike the rest of the world, however, where GSK commands a majority of the market, in Japan we only have about 17% share.

So I think the opportunity for GSK in Adoair is obvious.

The approval happens also to be some good timing, as in 2006, asthma-related deaths was identified by the Minister of Health as a major priority for their government.

So we should not only be able to grow our share, we should also be able to grow the market.

Just to remind you, we've also filed for the COPD indication back in 2006, and this will be equally important because of the 11 million asthma and COPD sufferers in Japan, more than half are classified as having COPD.

Turning to Avandia, you can see the family grew 19% to GBP 414 million.

Europe had a slight slowing to 12%, while international grew 37%, now that their supply of Avandia has been restored.

In the all-important U.S.

market, sales grew 17%, driven by price and a rebound in the volume following the publication of ADOPT.

In fact, you can see the impact of ADOPT on the next slide, as the growth curve looks like it's starting to return to the trends that we had seen prior to the supply issues.

In the most recent week, the volume was up 7% over the previous year.

Next, as I mentioned earlier, vaccines grew 6% versus an outstanding first quarter in 2006, where we grew 44%.

In this quarter, Infanrix continues to be our largest commercial vaccine and grew 15%, but our new vaccines, Rotarix and Boostrix, continue to become more meaningful, with combined sales of GBP 27 million for the quarter.

And I would remind you that we will be filing for Rotarix in the second quarter in the U.S., which is a significant commercial opportunity.

The other vaccine area is down, mostly because of the timing of some of the tender business, and because of a small, one-time GBP 6 million tender in 2006.

As we move through the year, the business in the vaccine should show better growth as we compare with a more normalized 2006 and with the anticipated launch, of course, of Cervarix, MEU, in some of our EU and some of our international markets.

Moving on, I just want to spend a few minutes to remind you of what is ahead for the rest of 2007.

And you can see here, these are the new product opportunities that J.P.

mentioned earlier and which we showed you at year end.

And on the left-hand side of the slide are the five key launches that we expect this year.

Cervarix is perhaps our single largest near-term opportunity, and with the U.S.

file now in, and the EU and the international files awaiting approval, we're focusing on better characterizing our clinical profile based on the 007 and the 008 results.

I would also add that we've also begun a Phase III program in Japan which would be very significant and would be our first vaccine entry into the Japanese market.

The 008 results, which form the basis of our regulatory registrations, should be published some time in the second half of this year.

The 007 study continues to mature, and we now have 5.5 years of clinical data.

Now, this is the longest study to date on any HPV vaccine, and we recently presented some of the highlights at the AACR meeting.

That's the American Association for Cancer Research.

And just let me remind you of what we've demonstrated.

You can see where, as expected, we showed sustained protection against the HPV 16 and 18 antigens after 5.5 years, both in terms of protection against persistent infections and CIN II lesions.

We also showed sustained levels of antibodies with almost 100% seropositivity.

And furthermore, we showed continued cross-protection against incident infection with cancer-causing types 45 and 31 up to 5.5 years after vaccination across the whole period.

The next slide, Tykerb, which was mentioned, was approved by the FDA March 13, and not just the shareholders were thankful, but also patients were very thankful, as we launched within a week of the approval.

Of course, we've said this is just the beginning, as we continue to develop new indications and generate new data.

We're also anxiously awaiting approval in the EU, and we have also filed in Japan just this month.

And while it is only the beginning, it is a good beginning, as you can see by this graph, where oncologists are already aware of Tykerb, with over 90% saying they expect to prescribe to their breast cancer patients.

Currently Tykerb is indicated for patients who have already received prior therapy, but we expect to expand this profile over time.

As already mentioned, data will be at ASCO, and we will review in detail all the development plans at our June R&D seminar.

Next, our third biggest opportunity is Coreg CR, where sales detailing began at the end of March.

We believe cardiologists wanted a once-a-day Coreg, and so far, we're very encouraged by the early prescriptions.

Now, it's early, but just after three weeks, more than one out of ten new scrips for Coreg are being written for Coreg CR by cardiologists.

And this is a great first step, because we know the cardiologists will lead, and the primary care physicians will follow.

Next, while Flonase is gone, Veramyst is on the way.

We have had several positive vibes from regulators recently, and this was already mentioned, we're hopeful that the next one will come hopefully next week when the FDA responds to our Veramyst file.

Now, if it is approved, we will be ready to launch in the second quarter.

We believe Veramyst has a very strong profile.

It would be the first nasal steroid to have efficacy against ocular symptoms.

This is a really big differentiator.

It's also fast acting and long lasting, as many of you may have seen in the abstract that we recently presented at the AAAAI meeting in San Diego.

And equally important, Veramyst is coming in a great new easy-to-use device that we designed in response to feedback from the patients.

And then again, just to reiterate, a quick update on Trexima, during the quarter we did file a response to the FDA, and the FDA this time did accept the response.

So we think the data file is strong, and we're hoping, as was mentioned earlier, for approval in August.

Let me just say beyond the big five, we still have some other opportunities for this year.

For example, Altabax received an FDA approval April 12, and we are already shipping this product in April.

Sales detailing is going to begin next month.

And this is the first new class of antibiotics in almost 20 years, so we will be launching in a virtually uncontested market category.

Right now, there are no other topical antibiotics being promoted.

Wellbutrin XR received its first approvals in Europe--in Netherlands and Germany--and is considered approvable in 20 other countries.

So we'll be rolling out this during 2007 as we settle on pricing.

We've talked about our H5N1 pandemic and pre-pandemic vaccines are in adjuvanted vaccine.

We expect our first sales to come in the second half of this year, and I think more importantly was the data that we shared on cross-protection against drifted strains in the first quarter.

This was very well received by flu experts around the world.

And finally, Arixtra received an approval in Japan.

Now, hidden in this approval--many of you may not have noticed--is the fact that we have gotten approval before Lovenox.

This is a first, and it gives us an even better opportunity than in the other markets, where we were launching Arixtra years behind Lovenox.

In addition to Japan, we've also filed a response to the FDA's approvable letter for acute coronary syndrome, and we also could be hearing from the European regulators very soon.

So in closing, you can see that we're going to be very busy for the rest of this year.

We need to continue to build the momentum behind Advair and Avandia.

We're also going to be focused, however, on building our future.

We want to make sure we're headed in the right direction with our key product launches and executing our pandemic flu strategy.

At the same time, we're going to continue to be actively engaged in the political process in the U.S.

and around the world to shape the debate on the value of our life-saving medicines.

So with that, I'm going to turn it back over to J.P.

and the q-and-a.

Thank you, David.

Thank you, Julian, and now we can start the q-and-a.

The question-and-answer session will now begin.

(Operator Instructions.) Your first question comes from Andy Kocen of Redburn Partners.

Please ask your question.

Good afternoon.

I have three questions.

First, and I apologize, the inevitable one of guidance, suppose the upgrade, despite the fact that you're keeping half of Wellbutrin XL sales this year and the Coreg deal.

If you combine those two, that adds the best part of 5% to EPS growth.

So were these two events linked into your assumptions for the full year, or are you just being very conservative on '07 guidance?

Secondly, on Advair, United Health recently moved reimbursement to Tier 3.

Do you see much impact on prescriptions from theirs or more plans following this lead?

What's your view on that?

And then the third one is on Advair Horizons, or beyond that.

Can you talk about, more about this project, now that you've got more clarity on the drugs you're taking forward?

You know, it's unlikely that you're going to get it to the market until 2010.

In the meantime, one of your competitors is looking to launch the same once daily combination, and there are some companies that are working on substitutable generics.

So what are you looking for in terms of the product profile, what combinations you're looking at, which steroids?

Any clarity would be very interesting.

Thanks.

Okay.

In terms of the guidance, you know, it's three months out of 12, yes, we are ahead, and yes, some good things have happened, and you've mentioned a couple.

We don't make, you know, a list of assumptions available publicly, so I'm not going to get dragged into what assumptions did we make, are we ahead of those?

We have said we are slightly ahead, clearly, but it's a little bit early to change the guidance.

So maybe it's being conservative, but lots of things could happen.

There are still many balls in the air, so we'll wait a little bit before we change our guidance.

On the last question you asked, about Horizon, no, we don't wish to describe all our programs, for obvious reasons.

There is competitive information beyond our plans that we don't necessarily want to share.

I would not also follow you on making the assumption that there will be a true once-a-day ready to go and launched before we launch Horizon.

Maybe there will be, but I wouldn't catch this one for a sure thing.

We have seen before, and we're still seeing to that day, many companies fail on the delivery system, not necessarily on the actives themselves.

It's a tricky business.

The requirements from the FDA are completely different from European regulatory agencies, and that's why I think Synacort's been on the market in Europe for many, many years, and we'll see how the prototype once-a-day drug will do.

But I wouldn't necessarily assume that this is going to happen.

On the Advair and United Health Care, I'd like David to take that one on.

Yes, just for clarity, this change by United does not take place until May 1.

And it is a small overall percentage of our business.

But of course we were disappointed with the decision, because we continue to believe that we've demonstrated the advantages of Advair.

This, I think, reflects more a shift in United and the changes they're making, and we'll have to see what it's going to do and how their customers will react.

I would also remind you it doesn't affect all of the United business, as many of their customers do not permit changes during the course of their year.

So they've done this with Nexium.

It didn't have a big impact.

In fact, they've done it with Lamictal Plus.

We noticed no big changes.

It's more of a burden on their patients and their customers, and we'll see if it's the right strategy for United moving forward.

Okay.

Thanks very much.

Thank you.

Next question, please.

Your next question comes from Andrew Baum of Morgan Stanley.

Please ask your question.

Good afternoon.

A couple of questions, please.

First on Xenoport, the XP512, where you have some positive Phase III data there.

Perhaps you could give us some sense of the potential you see with the molecule across all the indications beyond RLS.

I know that you've given a similar figure in terms of Cervarix, which has been helpful to get an insight there.

Second, some timing on the additional indications beyond RLS, when you expect the first of these may come true for the drug, and then thirdly, ahead of the panel on TORCH, perhaps you could share with us some of the potential outcomes in terms of the panel and the ultimate label.

Okay.

On Xenoport, first of all, let me just say that this is a good development for us, and it shows us that our strategy to concentrate on end licensing late-stage drugs--which have been at least, which are less risky than early stage--at a reasonable price is paying off, because we made this deal only three months ago, and already we have a real positive study on the drug in RLS.

Clearly, RLS is an expanding and meaningful market.

We will introduce this drug as a unique drug.

It has no comparative in terms of the mechanistic approach of the disease.

And it will compete with the Requip with the others.

And whether we do combination and the like, we will have to see.

We have more work to do before we can answer that question.

Neuropathic pain, we are in Phase II.

If you look at the, if you like to speculate on chances of success, I mean, based on the molecule itself and the fact that it is a close cousin of a well known treatment for neuropathic pain, I think we have a very good chance to succeed in that program.

But the data is not going to be completely available for filing until the end of '08 or early '09.

So we're not going to see anything for a while.

We might have this product basically on the market before we're finished with neuropathic pain, for sure.

And we'll try to continue to expand it.

We have a number of studies that are progressing as we speak, including a study using half of the dose that was used in the current study that just reported.

So all in all, I think the outlook is good there.

On TORCH, I don't want to speculate too much, because we are in discussions with the FDA, but David, maybe you can add a--.

Well, and clearly, the range of options is there's no changes to the current labeling, which our growth is okay.

There is the possibility we just get the data put into the package insert, which would be great, because then we can talk to physicians about it.

And of course, the ultimate would be to have a change in the indications.

But again, this is why the FDA is having the AdCom, and we'll wait and see what happens.

Is it possible you can have the data included but yet not receive a approval for the high dose?

Anything's possible.

It's entirely up to the FDA.

They could decide.

That would not be the most logical solution, but they could decide to go that way.

We'll have to see.

But I mean, to be honest, it's either we get a positive or we stay where we are.

I don't think there's much of a down side.

Okay.

Next question, please?

Your next question comes from John Murphy of Goldman Sachs.

Please ask your question.

Yes.

Thanks very much.

Good afternoon, gentlemen.

I've got two questions, please.

David, there's some thoughts that maybe the producer bill may come up in front of the Senate next week.

I just wondered whether you had any thoughts on likely amendments to that, or what the most likely ones may indeed be?

And second to Julian, just wondered if there's any change to your thinking on balance sheet gear and even in light of recent events happening inside or outside the sector, and whether we should anticipate any likely alteration, either to the current buyback or the dividend policy going forward?

Go ahead, David.

Okay.

On the, in terms of PDUFA, I think most of the Senate, there's really two groups in the Senate.

There's some that want it to go through as a clean bill.

They want it to go quickly and--this is on both sides of the aisle, as a matter of fact--and they believe all the other issues should be discussed separately.

There are others that will, of course, try to put on legislation, things on importation, things on Medicare Part D, non-interference clauses, and the like.

And we're going to have to wait and see.

Of course, then they'll have to marry up with anything that happens in the House, where John Dingle has been very public and is on the record saying he wants a clean bill to go through.

So we can't predict what's going to happen.

We stay tuned and we watch very closely, and we're very engaged with the process.

Very good.

Thank you.

Julian?

Yes.

On the sort of the return to shareholders, we're continuing our policy.

We said that we would return free cash flow to them, but to the extent we made incremental, modest acquisitions, we would increase debt, and in a sense, you can see that in Q1.

That debt's now GBP 3 billion.

That's gone up by about GBP 0.5 billion.

We're well on our way to meeting our GBP 2 billion commitment for this year.

And in terms of dividends, we announced the change last year, as you know, when we talked about more sustained increases in dividends.

We did that for 2006, and I think you can expect us to continue that policy in 2007.

We do recognize the importance of dividends to our shareholders.

Does that answer your question?

Yes, that's great.

Thank you.

Thank you very much.

The next question, please?

Your next question comes from Tim Anderson of Prudential.

Please ask your question.

Thank you.

A couple of questions on Cervarix.

Wondering if you can nail down the timing for us to seeing the first cuts of the head-to-head trial versus Gardasil, and I'd be curious to get your response to critics who say that antibody levels are not really telling you too much.

And then the second question relates to the possibility of getting a six-month priority review?

The FDA regulations are pretty well codified in terms of when a product qualifies for priority review designation, and I'm wondering what you see about Cervarix that might qualify it for that.

Yes, okay.

Well, starting with the last one, I mean, look, it's up to the FDA to decide that.

Technically, there is a case where they could go in a favorable direction for us by noticing that some of the slices of the female population exposed to Cervarix were not exposed to Gardasil.

In other words, they have to, if we had the exact same group of patients, then there would be no reason to accelerate the review of Cervarix, but if you look at the label of Gardasil, it really applies to younger women, and you could make a case that for all the women, there's a need for such a vaccine, and we have the clinical data to back it up.

But that's here and there.

They can still pretty much do their own interpretation.

The way I look at it is if we were getting accelerated, it would be a positive, but I'm not sure that's going to happen.

And frankly, at the end of the day, this has been a long journey.

We've worked on this vaccine for 15 years.

You know, the difference between accelerated and non-accelerated is about three months.

So we'll see what happens.

Antibodies?

Please ask the experts.

I mean, that's, I don't know who is briefing you on this, but the antibodies level, particularly when they are long-lasting, are extremely indicative of the coverage, and breakups occur when the antibody level goes down too far.

So--.

And the timing of the results for that trial?

Well, we had to have mid-'08, we'll get a first cut.

Okay.

Thank you.

Next question, please?

Your next question comes from Steve Scala of Cowen.

Please ask your question.

Thank you.

I have three questions.

First on Synflorex.

Why was the EU filing not identified as an upcoming event?

Are you still planning on filing in the EU in 2007, or is this a missed opportunity for Glaxo?

Secondly, regarding the CFC to HFA Albutyrol market.

Given that Glaxo was a pioneer, why have you not seized this opportunity more aggressively?

It did seem to me kind of like a no-brainer way to a significant increase in sales for at least Albutyrol.

And then lastly, I assume that Glaxo looked at Medimmune.

I'm wondering what was the key reason why you didn't move forward with it.

Was it price?

Was it growth prospects?

Is it current business, or was it perhaps you thought the pipeline was overstated?

Well, okay, let me take the last one.

I'll ask David to comment on HFA, and we'll come back to you on synthroids in a minute.

We did look at Medimmune.

We are very familiar with the company.

We have various commercial agreements with them.

We know very well what they have in their pipeline--which, by the way, a lot of it is in licensed, not necessarily a new technology base like Domantis, which we really, really, really liked and therefore acquired.

And, frankly, there are few late-stage compounds and, as you know, what hasn't gone in the clinic has about a 2% chance of success, and to go through the pipeline, you have, according to the industry averages, a 93% chance of failing.

So we again, I've said it many times, but we like late-stage, because at least there you're dealing with probable success rather than unprobable success.

So based on that, we didn't feel that was for us, and we didn't participate in the auction.

Also, to be honest, we have 31 projects in late stage of our pipeline defined as Phase III-plus filings, 31 projects.

Major projects.

I'm not counting additional indications and things like this.

So this would have added at least one to the 31, one being a replacement of their current product.

So for all those reasons, it wasn't right for us, and we passed.

Now on HFA, David?

Yes, on HFA.

First, Steve, I would agree with you that we didn't take advantage of this opportunity like we would have liked to.

The reasons for it were, first, we were off the market.

We had a manufacturing issue with our formulation, and right at the same time, there was a sudden, quick uptake as there was a shortage of CFCs available, and the uptake and shift to the HFA came just as we were having our manufacturing issues.

We're coming back now, we're gearing up, and we do have a unique differentiator.

We have a dose counter, which we think will be very positively received.

It's something that patients and the FDA have been asking for for some time, so we're ready to get back into the market.

Okay.

On synthroids, all I can say is we're on track.

We said we were going to file before the end of the year is over in Europe, and that stays in place.

We have not changed our guidance on the Synflorex, except we changed the name.

But everything else is working as planned.

Thank you.

Thank you.

Next question, please?

Your next question comes from Marcel Brand of Cheuvreux.

Please ask your question.

Thank you.

Three quick questions.

The first one, could you please comment a bit on the Relenza.

At least for me, Relenza sales surprised and what we can expect further presumably in terms of government agency sales?

The second question is related to Avandia.

Could you explain why it has taken so long to send a "Dear Doctor" letter?

Not only for you, but also for Actos, for which we have also seen, for example, of 5,000 patients, 31 over three years, and I guess the DSMV of both Acada and your company have picked up that safety signal much, much earlier.

And then the last question, and then also, of course, in that sense, what do you expect in terms of labeling and impact on the product going forward?

And the last question, could you please repeat your guidance in the other operating income expense line?

Thanks.

Okay.

On the Avandia fracture, no.

You're mistaken.

We, as soon as the data was known to us, we sent our letter to the physicians.

In fact, the FDA, we didn't even wait for the FDA's comments, except for approval of the letter, as we have to do.

So there was no delay whatsoever.

I remind you those are not classic fractures.

They're fractures of the fingers and the foot, typical diabetic patient type fractures.

But because there was a signal, and we're not sure the clinical significance of the signal, we did write to the physicians.

What Actos did later on, I don't, I can't comment on that.

You have to ask them directly.

And we don't think that there is necessarily any kind of circumstance that is going to change dramatically the profile of the product.

Because when you look at some of the studies on, for instance, bone marrow mass and so forth, you don't have a gradual decrease, and that's very important.

It's sort of an initial decrease, and then it plateaus right away.

So it's unlikely, based on that--it's not a certainty, but it's unlikely--that we see a worsening of the fractures after several years.

And based on the study that we have seen, it's kind of an odd finding, and we signal it, but I can't tell you much more about this.

But there was no delay in the publication and the communication.

Quite reverse.

It was actually quite exemplary.

We were talking about a day or two after we found out through the analysis of the data.

And this was a secondary analysis of the database.

This is why you might be a little bit confused on the timing, because it wasn't done by the investigators.

This is a secondary look at the database that the company decided to take on, and the investigators didn't do it and didn't wish to do it and didn't think it was meaningful, for whatever reason, so that's why there was a sort of a two-ways release of the data, one from the investigators, and then we scrambled around as soon as we found out to let them know, and then they incorporated some in the publication, actually.

But that's the only, that's the only circumstance that could have confused some of you.

But in fact, as soon as we found out, we did continue with our transparency policy.

Relenza--David, you want to say something?

Sure.

On Relenza, we quintupled our production capacity for Relenza over the last two years.

There was an initial flurry by governments to put in stockpiles.

Of course, in recognizing the limitations of Relenza relative to Tamiflu being an inhaled product versus an oral, they put in lower stockpiles.

But we did sell out pretty much our capacity in '06 and have for most of '07.

We're now getting, we think, a second bite of the apple.

There's been a lot of negative press around some Tamiflu issues right now, and governments, they shifted their attention a bit to vaccines, but now they're also recognizing that it's going to take a two-pronged approach.

So we're recontacting governments also with some new data that we've been able to share with them, and hopefully, this will encourage them to increase their stockpiles of Relenza beyond 2007.

And the note?

So you expect the next quarter at a similar level as this quarter?

We don't give sales guidance, so bear with us.

And frankly, it's very difficult to predict, because governments, it's not a regular kind of use--.

But in terms of orders, you have a (inaudible).

Can you give an indication, maybe?

No, we can't, because we might get some additional orders.

We don't know yet.

Okay.

And other operating income, our guidance was that it will be broadly in the range of the level achieved over the last two financial years.

So kind of an average.

So three digits starting with a three.

Uh-huh.

Thanks.

Okay.

Thank you.

Next question, please?

Your next question comes from Gbola Amusa of Sanford Bernstein.

Please ask your question.

Thank you.

Good afternoon.

I have two sets of questions.

Our first on the Tykerb (inaudible) data coming at ASCO.

How definitive is that data, and by that I mean, if it's positive, what are the implications and next steps with regards to further studies, your commercialization strategy, and any potential effects on reimbursement?

And then secondly, last year we saw a new physician labeling rule at the FDA that requires new companies that get drugs approved after June 30 of last year to conform to a new format.

If TORCH changes the Advair label, does this trigger a format change?

And if so, will the safety discussion change or be repositioned somehow?

Very good question.

That's one we're not going to answer, because we don't know the answer.

It is not entirely clear whether a change in label for an existing product would trigger or not the physician label.

So stay tuned.

The guidance we are getting from the regulatory experts is not entirely clear.

On Tykerb, I'm sorry, but I'd rather not answer that question, because we want to keep the data fresh and new, and I think the fact that we are presenting to ASCO is the reason why we have an embargo on the content.

So I can't get into a description of what data and what we're going to do with it.

But I'm sure you'll be at ASCO, and we'll give you plenty of comments at the time.

You're just a little bit early here.

Thank you.

Thank you.

Next question, please?

Your next question comes from Michael Castor of SIO Capital Management.

Please ask your question.

Thanks very much.

As you developed the vaccine market, is your experience that some of the more commodity vaccines, the only vaccine that I've seen in the market that has really broken the paradigm has become established as Prednar.

As Cervarix and Rotarix launch into market with a competitor, they're somewhere in the middle, Prednar being a monopoly of the new vaccine, although they'll have some competition and I'm looking forward to seeing that versus more commoditized.

How do you foresee the market playing out?

Will the vaccines become slightly lower priced?

Will physicians have relationships with the vaccines that you're (inaudible)?

Just interested in any thoughts that you have.

Yes, of course.

I mean, first of all, I think if you want to look at the size of the market and the value of the franchise, you have to look at the slice of the population that could benefit from the vaccine.

Because at the end of the day, it takes a while.

Vaccines that, the uptake of vaccines is actually relatively slow compared to the uptake of a drug, because in the case of a drug, the patients absolutely need it, and they need it today, and they are suffering from a disease and therefore there is no waiting time.

When you're trying to convince people to prevent a condition, it takes longer.

People are not perfect.

That's why they smoke and drink and eat too many burgers.

If they were perfect, we would have a very quick uptake of our vaccines, but we have to convince them.

So typically, the uptake is quite slow.

I remember hepatitis, the first year, we reached maybe 1% of the population--and that was, by the way, considered a good score.

And you see with Gardasil, even though the sales are important, the sales are good for Merck, actually as a percentage of the opportunity, it's a fairly slow penetration, for the reasons I just mentioned.

So you have to keep that in mind, that frankly, it takes 15 years or so to actually reach saturation.

I've never seen a saturation actually being reached in any disease for any group of patients except for maybe infants and newborns, where you do end up vaccinating everybody.

So in the case of Cervarix, which I think people still underestimate, it's that typically any woman from the age of 12 to 55 worldwide could benefit from the vaccine.

And therefore, the potential, even compared to Prednar, it doesn't even compare.

It's much, much, much larger.

Now there will be competition, but that's beside the point.

If the market is 10 times bigger whether we have competition or not, it will be a very good business for both Merck and GSK.

And that's my prediction.

Now, on the pricing issue, it depends on the countries.

You have some countries where the whole market is a public tender, and their price competition plays, and then you have markets where the private market is the majority of the market, like China, for instance.

And therefore, there the price competition plays differently and there are other factors and marketing mix.

I hope this is helpful, but in the case of the public market, you see some depreciation of the price over time when you look back in any franchise.

That depreciation is more acute in Europe than in the U.S., because in the U.S.

there is not a winner-take-all framework for obvious reasons, because the number of producers has been reduced over the years.

The Congress, in its wisdom under Bill Clinton, decided that it was not a good, in the interest of the American public that the CDC would be the entire public market and kick out the other producers.

Because what would happen the next year is actually the price would go back up because there would be only one player left.

So for all those reasons, it's price elastic, but it's not a commodity, and even when the vaccines are fairly comparable, and of course, there is little substitution in the vaccine world, because you don't have chronic users.

It's like the funeral home parlor.

You get the client once, and that's it.

The client never comes back.

So for that reason, the marketing of it is of a different nature than with drugs.

Sorry for the lecture, but that's, I think, what you wanted to hear.

So let me move on now to another question.

Your next question comes from David Beadle of UBS.

Please ask your question.

Yes, good afternoon, everybody.

Two questions.

First one on Coreg CR.

Obviously, 30 days yet, but as looking at the prescription data from the U.S., Coreg CR appears to be adding on top of the standard (inaudible) version, and I know you'll be marketing it for a separate indication.

Heading towards the patent expiry, are you going to try an agenda switch from the IR version, or are you quite happy carrying on with your focus on Coreg CR in the hypertensive arena?

Is there an update on the type of plus-taxol study in non-HR2-positive diagnosed patients?

With, obviously, I know, event-driven studies, there isn't a definitive endpoint, but we are moving now into the theory of where it is quite late.

And then lastly, probably a very quick one for Julian.

Employee the options exercising has grown about 40% from last quarter to this quarter, same quarter this year, and I just wondered if there's anything within that we can gather, or whether that's just the way the employees are exercising options at the moment?

Okay, let me take, first of all, the question on Tykerb.

The study will be presented at ASCO, so I hope that answered the question.

And Julian, the stock option, I think we had a big--this was the merger, you know?

Yes.

I mean, generally, share options expire, and they expire sort of this time of year.

So you can, or certainly our experience seems to be that we get more exercises in the first quarter.

Well, that's also including them to the share prices and movers in the share prices world relative to the auction price.

So I can't be more helpful than that, I'm afraid.

Okay, and then on the Coreg CR, I don't know, David, where you're getting your information on the strategy, but we are after both, of course.

Patients with CHF and post-MI will certainly benefit by the convenience of a once-a-day.

We're going to be communicating that and at the same time, it gives us the opportunity to move into the anti-hypertensive market.

So we're certainly going after both.

Right.

And no, I was just wondering, because at the moment it looks as though Coreg IR isn't necessarily twitching, and I know it's growing fairly quickly anyway, and that you're building on something on top of the Coreg IR.

Exactly.

And that's a bit of a problem because we are far from having peaked, so it's hard to see the substitution when you're growing the base business at 25%.

You know, they don't see the current underlying growth, 25%, so you throw in Coreg CR, and you don't know which is which.

Is it still the carvedilol tablet, you know, that is propelling the growth, or is it a switch?

And on top of that, you have the complexity of bringing in new patients that were not in the franchise because they are severe hypertensive patients.

And so we'll sort it out.

In a few months it will become much clearer.

But that's where we are.

And I'd like now one more question, please?

Your next question comes from [Mary Ann Tendenet] of Dresdner Kleinwort.

Please ask your question.

Yes, good afternoon.

Four questions, actually, if I could.

The first one on Tykerb.

Do you have any feel at all for how big the patient population could be of patients who have progressed from herceptin but are still on herceptin because there was nothing else up until now and who could now be switching to Tykerb and how quickly they could switch?

What I'm really driving at here is the GBP 4 million that we saw in the last two weeks of March in terms of Tykerb sales.

Is that like a run rate, or could that have been sort of insulated by some patients coming off of herceptin and right onto Tykerb?

My second question relates to Advair.

I'm just trying to get a little bit into the dynamics of the sale here.

Was there any fee stocking in the U.S.?

Because it actually looks like the average value per script seems to be going down versus the last couple of quarters.

And also, I'd just be interested in your insight as to what is happening in Europe and those countries where Synacort Smart has been rolled out.

Like what sort of share losses you've seen over what kind of time frame?

Another quick question on Avandia in terms of U.S.

share gains, what you see going forward there.

Because it looks to me like in the last several weeks, actually, the whole category you have accelerated pretty dramatically, and the Avandia shares are stabilizing within that.

Is that a fair observation?

Is that what you're expecting going forward?

And my final question is actually a quick one.

Just your R&D impairment exposure for 2007, because I do obviously realize that you don't do these typical high-risk deals, but it would just be good to know sort of what would be the R&D impairment charges in a worst-case scenario.

Thank you.

Okay.

I'll start with the last one.

The R&D impairment risk at GSK is tiny because of the way we structure our deals.

We don't expose ourselves with huge down payments on unproven drugs.

So there is always sort of a noise level of write-offs because, of course, most of the drugs we license don't make it.

That's the nature of the beast.

But because we know that, we don't accept significant down payments on early drugs, and therefore, we don't have a lot to write off when the drug fails.

So it's not a big exposure, and it hasn't been a big factor in the past.

In terms of Tykerb, you're asking very precise questions which we cannot answer at this point.

We just don't have enough data points to give you an articulated answer.

Clearly, there will be some off label.

Clearly, it is unsure now exactly what the size of the target population is going to be, but we just don't have enough, the sample is too small to really draw any conclusion.

The 4 million is not necessarily going right, because every week, we see the number of patients on the drug--in our own follow-up--double or triple, so the 4 million means nothing.

It has some element of stocking up, too, because you have, not a big distribution system.

It's going through specialty pharmacies and so forth.

But there's a little bit of stocking in there.

And I'm going to stop there and let David handle the question on Advair destocking and Avandia.

As far we know, no destocking that we've seen take place, and I think you might be just trying to draw too many conclusions from just a few data points.

In fact, we've seen a significant increase in our prescriptions for COPD, and sometimes that's coming at the higher than the 100-milligram dose.

So no big deal there.

In Europe, of course, we continue to hold our two-to-one advantage over Synacort, and we expect that to continue as well.

In terms of our Avandia share gains, it's coming where it has been coming.

We've gained some versus Actos, and we continue to eat away, as everyone does, at the sulfoni-ureas.

Okay.

Thank you very much for all those questions and your interest in our company.

We welcome those conference calls, believe it or not, and we look forward to the next one in a few months.

And just a reminder for all of you, mark your calendar--June 18--you will hear not just about Tykerb and Cervarix and the usual suspects, but also some of the newer drugs that are coming through the pipeline and are quickly reaching a stage of high interest inside GSK, and I have no doubt will be of interest to you.

So we look forward to seeing you in London on June 18.

Thank you very much for your attention.

That does conclude our conference call today.

Thank you for participating.

You may all disconnect.