葛蘭素史克 (GSK) 2007 Q3 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen, and welcome to the GSK Q3 results call.

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

Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require operator assistance during the conference, please press star followed by zero on your telephone keypad.

Just to remind you all, this conference call is being recorded.

I'll now like to turn it over to today's chair person, Dr.

J.P.

Garnier.

Please begin your meeting, sir, and I'll be standing by.

Thank you very much.

Hello, everyone, I'm here with Julian Heslop, our CFO, and David Stout, our President of Pharmaceuticals, and we'll give a brief presentation followed by Q&A as usual.

Let me start by talking much more about '08 and beyond.

Then '07, I think, the situation is clear for '07.

If we look at the plus and minuses for '08, you see that generic erosion definitely will continue, although '07 is not exactly an easier for us with Zofran and Coreg and Wellbutrin X sale.

But clearly the rate of generic erosion will slow down as we go forward.

Avandia is a question mark, it all depends on how we come out of the FDA and what physicians feel about the drug.

Right now they're very supportive of Avandia, but clearly there will be a change in the label, it's a matter of what kind of a change.

If the FDA decides to mimic Europe, I think we'll be in good shape.

If you'll recall, Europe has come out with a change in label that reconfirms the value of TCDs in the treatment of diabetes, and then has a descriptive on Avandia which we feel is balanced.

So it's more unknown than anything else, a big swing factor for us for '08 particularly.

But then we have growth drivers which of course help explain why despite a significant loss in Avandia, we were able to hold the sales line pretty much even with last year, so despite the generic, despite Avandia in '07, the rest is performing quite well.

And some of those gross factors like vaccines are really booming.

Vaccines were up 50% this quarter.

That's probably above the average kind of growth rate but remember, that doesn't include Cervarix.

And Cervarix is a tremendous opportunity.

I was looking at penetration rate in the target audience, even though Gardasil is probably going to break 1 billion, all that's been done is 9% penetration.

The potential out there is absolutely huge.

And I'm not just talking U.S.

On top of that, we expect new products now, there is a bit of a slowdown at the FDA.

I was looking at stats on the NDA's going through the FDA, I think four out of five get an approvable letter now.

Our average for '07 is a little better, we got two out of four.

So there will be delays, no doubt about it, but we have a very full pipeline and we'll make some very brief comments on that.

I think the news coming from the pipeline in this quarter were all good.

And then finally, to rebalance a little bit the future, we are now in a position to basically accelerate what we've been doing all along.

And you're very familiar with our efforts to reduce our infrastructure and become more efficient as a company.

Well, now we have a chance to expand a little bit beyond the classic G&A, and manufacturing to also include R&D and selling.

The reason we're able to do this is because we've worked very hard in those topics to extract additional efficiencies and synergies.

Let me make a few comments about the first one, the sales force, in a minute, in the meantime, I remind you of our culture at GSK.

Basically, we are good at standardizing and outsourcing when it's not a core activity that we want to manage ourselves.

The arbitrage that is now available through the global world in which we live is a phenomenal opportunity, and we are taking full advantage.

And here's just an illustration of all the programs that we have completed between 2001 and 2007, and all of them have paid off in terms of savings to the Company.

This is an example of those savings, even in the years where we didn't have significant growth in revenues, for instance, the year we lost [Paxilamentin], every time we were able to improve the SG&A ratio, I expect this to continue in the future.

This is really what it's all about in terms of this expansion of the operational excellence program.

We're going to have an impact on selling, on manufacturing, on R&D, and also, and I won't talk about it, but it's the one we've been pursuing all along, on reducing bureaucracy, improving our processes and just being more efficient in everything we do.

In terms of selling model, the key takeaway is that actually it's not just a cost savings program, it's a redistribution program.

We are expanding specialty teams, oncology and vaccines, and if you look at the schedule of new products, that's not hard to understand.

We are investing and expanding our sales force in some of the new economies, such as China and of course we started to test alternative selling models way back.

But more intensely in the last year.

And this test was pretty extensive.

We had 15 separate pilots in 13 countries.

This involved over a thousand of our sales representatives, and we had plenty of time to see the effect of whatever changes we made in those various sales, and to draw, in some cases, very clear-cut conclusions.

And that's just an example in two cases, Advair and Avandia, where, as you can see, there's no difference really between the traditional or the way we're selling today, and a new pilot that is more cost-effective using fewer people and yet you see that we're able to basically stay the course and generate about the same volume of business.

So this is just an example of to show you that this was done quite scientifically.

Now, in terms of manufacturing, we are going to be able to reduce our network and simplify it.

Here, the strategy is basically simple in terms of the concept.

What we want is protect our new products.

We don't want anybody to have control over our new products.

For commercial reasons, but also for ethical reasons.

We don't want people to make our oncology products because if they go wrong, and there's an out of stock, we're killing people.

So for practical reason, we tend to want to have control of our manufacturing on all the new products, until they become multisourced.

At the time they become multisourced, it's less important to us whether we make the product or whether we buy it.

And if we can buy it cheaper than we make it, then of course that's what we're going to do.

We think that over the next three years we'll be able to make significant inroads, which means that first of all the percentage of our primary cost is going to be different in three years, in terms of outsourcing, we have an internal target.

But the point is, if outsourcing is going to grow, particularly when you look at the share of the multisource business we're still manufacturing, and we have a number of products going generic, which are now fair game for potential outsourcing.

So that's what it's all about with manufacturing.

More efficient network at the end of the day.

In terms of R&D efficiencies, we have to talk first about where we're going to super invest.

Of course, we're maintaining many things in place, but we want to accelerate our investments in a number of directions.

First, is, of course, the late-stage pipelines, particularly oncology, which is an expensive area, but also neurosciences and the like.

Then we will continue to invest in vaccines, as we have a really first class pipeline.

And as you have seen, we're building biologicals, first of all with some in-licensing but also with our own molecules.

We just announced the in-licensing of an anti-CD3 agent.

And I want to remind you that Domantis is a potential game changing technology.

It could absolutely re-invent the monoclonal antibodies field.

That's a great opportunity we want to accelerate the effort, and continue to invest so that this promise becomes a reality.

And of course we will accelerate, also, our establishment of R&D in China.

There is going very fast.

So those areas require money.

And of course we have to do less of certain things.

For instance, because we have new technologies such as prices in place, we're probably able to rationalize some of those activities.

We're also looking for faster and better-quality decision-making everywhere, particularly in development and we still have very complex organizational networks.

That's understandable because the process itself is very complex.

But we think we have found ways to simplify and reduce some unnecessary complexities and facilitate decision-making, making sure it's speedy and high-quality at the same time.

And we'll have some savings coming out of support functions as well.

This is just a reminder that there's a lot of activity on the pipeline.

We have started to make some good launches in '07.

We have filed a number of products.

David will give you a little more on this, but the bottom line is, this is very busy time in terms of new products.

Remember, we are looking at potentially 25 launches over the next three years.

We have launched already 5 NCEs but we have more coming, and we need to be very focussed on delivering this flow of new products.

That will come right on time, frankly, to replace what we are losing to the generics.

We are announcing a neurosciences R&D seminar.

If you look at the spectrum of the diseases in CNS, it's quite remarkable because we haven't talked to you about this for quite a few years now but we have been very busy.

And today I think we are the only company with at least a clinical candidate, a candidate in clinical trials in every single disease that is listed on this slide.

And for eight of them, our clinical candidate is already in phase II or III.

So we have a number of bets and some of them are very exciting.

You'll see some first-in-class, in terms of science, going after approaches, and demonstrating proof of concept with an entirely new approach, and you'll see also some best-in-class, molecules like in schizophrenia that seem to have a very competitive profile.

So this is going to be a good day to showcase what our two sets have realized over the last few years.

And then, just one word on consumer, John is not with us today, but I will give him all kudos for another exciting quarter with sales up 16%.

Everything is booming.

I'm particularly happy with the acquisition we made of Breathe Right and Fiber Choice, this is turning into a very good bet that we placed a few of months ago, this business is small but growing very quickly, 24%, and we have not even started to expand it throughout the world, we're just getting started.

There's more to come here.

Then of course we have new launches of line expansion and new variations which have helped all our businesses.

We're gaining share with Sensodyne, Aquafresh, [Luquisadeholics], not bad for the less core items that are part of consumer healthcare.

But overall, an excellent performance.

And then, in terms of future, I think it's fair to say the news of this quarter have been very good on the global portfolio, it shows that we have products ready to takeover from the generics and from the Avandia losses.

We have an expansive pipeline, the reload is very good, the flow of products going from proof of concept to Phase II to Phase III is very satisfactory to us.

We are launching an expansion of our operational excellence program, which I think will help.

And we'll make the Company even more fit for the future.

And we need to be.

And last, but certainly not least, we have now designate Andrew Witty as our new CEO.

And you will get to know Andrew in the near future, we are going through the transition together, and I think you'll be very excited by the quality of leadership.

I also want to pay tribute to David Stout, and Chris Viehbacher, they have shown class and character during this very tough process, and it shows there's a great quality of management at GSK, at the top, and also throughout the ranks.

So, on that note, I'm going to pass on to our CFO, Julian Heslop.

J.P., thank you.

You will see if you look at the first slide that turnover in the quarter was up 1%.

Pharmaceuticals was down 2%, adversely impacted by generic competition in the U.S.

and lower Avandia sales.

Consumer healthcare, as J.P.

has just shown you, was up 16, reflecting the strong performance from the core business, including LI and further growth in the CNS products acquired last year.

The cost of goods margin of 22.5% was not distorted by one-off items and reflects a reduction in relatively high gross margin U.S.

sales of products such as Avandia, Zofran and Coreg.

It also reflects faster growth in the relatively lower gross margin consumer healthcare business.

SG&A costs were 3% higher than last year, and within this figure, pharmaceutical costs, excluding legal and restructuring charges, were some 5% lower, and consumer healthcare costs were 18% higher, primarily reflecting higher advertising.

R&D expenditure was 9% lower than the previous year, due to lower restructuring costs in the quarter, and excluding these, expenditure was 1% lower than last year.

Other operating income includes 57 million of royalty income and 22 million of asset sale profits, partly offset by a 32 million charge on the [quest collar].

Last year, other operating income benefited from higher asset sale profits of 63 million and a profit on the mark-to-market of the quest collar of 22 million.

If you move to the next slide, you can see that earnings per share grew 1% compared with a 1% decline in operating profit, which reflected 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 5%, and this reflected the strength of sterling against the dollar.

The dollar being 203, for this quarter, compared to 188 last year.

Moving on to the cash flow slide, you can see free cash flow of 1.4 billion, and you may recall that last year's free cash flow was adversely impacted by payments made to the IRS under the U.S.

tax settlement.

You can see that cash returns to shareholders in the quarter, comprising dividends and share buybacks amounted to nearly 1.8 billion, an 850 million increase over the previous year.

We concluded the quarter with net debt of 3.7 billion.

Turning now to the operational excellence restructuring, the new 1.5 billion operational excellence program will take approximately three years to implement, approximately 30% of these charges relate to noncash write-offs.

As you can see, some 60% of the one-off costs relate to manufacturing, 20% to SG&A, with a balance of 20% to research and development.

The next slide shows the phasing of the cost savings, and you can see that over three years, we move to deliver 700 million pounds by the end of the three-year period in 2010.

Moving on, to look at the accounting for this, with effect from the fourth quarter of this year, we will introduce a three-column approach to the income statement.

The first column will show the business performance results excluding the one-off costs from the restructuring program of 1.5 billion.

We will include in the middle column the one-off restructuring costs, finally in the last column, we will show the total (inaudible) results for the Company, including the one-off restructuring costs, as required under international accounting standards.

The Company will provide earnings guidance in future on a basis -- on a business performance basis which excludes the one-off costs of the new restructuring program.

In conclusion, we expect 2007 EPS growth of 8 to 10% at constant exchange rates, excluding charges relating to the new 1.5 billion restructuring program.

We remain on track to complete our 12 billion pound share buyback program over a two-year period, and since the beginning, in August, we've repurchased 1.7 billion pounds worth of shares.

Lastly, we have announced today that we expect to pay a 2007 dividend of 53p a share which represents just over a 10% increase over last year.

I'd now like to hand over to David.

Thanks very much, Julian.

If you move to the first slide, sales of pharmaceuticals in the third quarter were 4.6 billion pounds, and 2% below last year.

Pulling sales down in the quarter was really a combination of the anticipated losses do to the generics for Zofran, Wellbutrin XL, Coreg, along with the unanticipated declines in Avandia, which, combined totaled about 460 million pounds.

To give you an update on what's happening with Avandia sales, if you move to the next slide, you'll see here that since the publication of the Nissen article, shares for new RX's and total RX's have declined by slightly more than half with some leveling in the last two months.

If you want to see the impact on the sales moving to the next slide, you'll see here the 48% decline in the U.S.

sales corresponds to the share loss that we just saw.

We're now waiting of course for the final decision on any labelling changes from the FDA.

Conversely, though, outside of the U.S., the impact hasn't been as dramatic.

In fact, the 11% decline that you see here in Europe is really more impacted by a sales claw back by one of the EU countries.

If you actually remove the impact of this accounting adjustment, sales in Europe grew by 4%, which is consistent with the prescription trends and our stable market share.

In the International markets, you really have an average of the groups of countries that are more like the U.S., in experiencing a similar situation, and those that are more like the European situation.

Now, of course, offsetting all of the generic Zofran, Wellbutrin XL and Coreg impact, part of the Avandia decline is the growth in our key assets.

If you move to the next side, you can see that we've picked up just under 400 million pounds in the quarter from some of our other key assets.

If you'll move on, you'll see some of this in more detail.

I have removed Avandia from the slide for obvious reasons.

And I've also taken Coreg off the list, as the initial loss of the IR sales to a generics will be greater than the Coreg CR growth, although I expect that Coreg CR will be added back to the list as we get it more established in the hypertension market.

The remaining group of products still contributed over 2 billion pounds and grew 21%.

I'll cover off Advair and vaccine in some detail in a moment.

Just let me say a few words about some of the others.

First, Lamictal growth continues to be driven by the bipolar indication in the U.S.

despite generics in Europe.

For Valtrex, growth is coming from our indication for reducing the risk of the transmitting genital herpes.

Of course, not all surprises are bad ones, I continue to be very pleasantly surprised by Requip's growth, which is being driven by the restless leg syndrome indication.

Moving down to Avodart, sales are growing very strong, as is the market growth in the U.S.

which was up 17% in the quarter.

Our DTC campaign's been very effective with patients and physicians who identify with this shrinking the prostate message.

We're also making headway with physicians based on the results of the combat study.

And if you'll recall, this is a head-to-head study versus Flomax, which was published in August, and demonstrated superior symptom relief over the long term.

Boniva continues to show very strong growth in the U.S., data showing the impact on bone mineral density with once a month Boniva is equivalent to the once weekly Fosamax, which, as you know, itself showed to be better than the bone mineral density impacts over Actinol, and this is helping to drive the growth.

And I've, of course, now added Tykerb to the list, which is just getting started but will be a big contributor for many years to come, and on an annualized basis is now running above $100 million a year despite this fairly narrow initial indication, which will expand over time.

Now, if we turn to Advair, which of course is our largest product, with third quarter sales were 835 million pounds, with a reported growth of 7%.

The U.S.

sales reported growth of 5%, but this is below our estimate of the real world growth which was 8%.

If you remember, at least year's third quarter we reported 17% growth in the U.S., but we noted that the growth benefited from stocking patterns and from a reverse adjustment in the tri-care business.

So this year there's a reverse impact on the growth rate.

Europe meanwhile continued its trend of high single-digit growth for the brand, and international growth with strong 15% growth is starting to benefit from the launch in Japan.

Key driver for Advair's growth has been the use and the treatment of COPD.

We know there's still a lot of growth opportunity in this market and we're continuing to work with the regulators in the U.S.

to further expand the Advair label around the COPD indication.

Now, in the U.S., Advair's growth in the asthma hasn't been as strong as the COPD but there are new NIH guidelines for the treatment of asthma that were just issued and they're very positive for Advair, and we hope to get a boost from this.

Let me give you a little bit more detail there.

Just to give you a little background, the NIH guidelines for asthma were first issued in 1991, and there have only been two full updates since then.

Now these guidelines carry a lot of weight in the medical community.

In fact, it was the second full update that led to inhaled corticoid steroids becoming the preferred treatment for asthma in the late 1990s.

Now, at the end of just this past August we received the third full update of the guidelines based on a complete review of all the scientific information available.

And, after revealing all of the evidence, the guidelines have reaffirmed that the combined use of a low dose inhaled corticoid steroid, [Analaba], which is basically Advair, is a preferred initial therapy in the treatment of moderate or severe patients.

The guidelines are also emphasizing the importance of patients maintaining control of their asthma.

They have also recommended using tools such as the asthma control test, that we've talked about before, and that GSK developed in collaboration with the American Lung Association just to make sure that the patients' asthma is under control.

You can see examples in this slide of how the new guidelines have already been incorporated into our aids.

And if you're wondering how much weight physicians put on these guidelines, you can see here some of our own market research completed this past June asking just that question.

You can see that more than half of all physicians indicated that they refer to the guidelines to determine what's appropriate treatment for their patients.

Now, of course, our sales organization is doing their part to disseminate the guidelines and here again is another sales aid, pointing out that the asthma control test, which we featured in our DTC campaigns, and our reps have been preaching to the physicians, is directly aligned with the NIH guidelines for determining if patients have their asthma under control.

The initial feedback from our sales force has been very good, have been very positive.

They feel like the guidelines have given them some credibility in the eyes of the physicians.

We move on now to the vaccine business.

In the second quarter, if you recall, we pointed out that growth of this business would significantly improve during the second half of the year because of the timing around our tender business and our flu shipments.

Of course you can see that has now been proven true by the 49% sales growth that you see in the third quarter.

And sales of almost 600 million pounds.

You can also see at the very bottom, that the year-to-date growth is 21%, and much more in line with the recent history and our expectations.

Also, remember moving forward, we'll now start to see sales from Cervarix, as we roll out our launches in Europe and in several other international markets.

You can see from the slide that growth though was strong across all parts of the portfolio.

Our hepatitis business grew 29%, helped in large part by the U.S.

where Merck had manufacturing problems with their hepatitis A vaccine.

The Infanrix business had a really strong quarter, especially in the U.S., where it grew 40% in the quarter and year-to-date growth is now 34%.

Moving down the list, I'm going to come back to flu sales in a moment, but Boostrix performance this quarter was helped by some shipments that were delayed in the first half of the year, and year-to-date growth now for the product is 33%.

Next year we're expecting to file in the U.S.

to expand the indicated age group for Boostrix to include adults.

Rotarix with sales of 23 million pounds for the quarter is building momentum.

We expect some new, very compelling data for Rotarix to be published before the year-end.

In the third quarter, of course, the FDA accepted the Company's file for Rotarix, so next year we'll be looking forward to a late end of year launch.

Of course, our portfolio of other vaccines benefited from the completion of many of our tender orders.

Now, let me give you a little more detail on the flu franchise.

Our seasonal flu vaccines, Fluarix and FluLaval had sales of 120 million pounds this quarter, versus only 55 million pounds last year.

Now a big part of this increase is due to our ability to ship earlier this year than we did last.

If you recall last year, sales were delayed into the fourth quarter because of difficulty producing one of the strains, and because we didn't get FluLaval approved until October.

So this year we're getting a much earlier start.

Now, that being said, we're also getting better pricing on the flu vaccine this year because we're shipping earlier, and we've also increased our production so that we still have the majority of our doses to ship in the fourth quarter.

In the third quarter, we also recorded our first significant sales for the pandemic flu, where we had 21 million pounds of sales.

Most of this was from selling the first tranche of the H5N1 vaccine to the U.S.

Health and Human Services.

In the fourth quarter, we expect to ship more to HHS, we should also ship our pre-pandemic vaccine to the Swiss before the year-end.

Of course in the third quarter we also announced an advanced purchase agreement with the U.K.

government.

I mentioned Cervarix a minute ago, so let me just give you an update for the quarter.

Cervarix achieved several major milestones, including most importantly, final European approval.

Followed by very rapid launches during the first week of October in the U.K., Belgium, and Germany.

Outside of the EU we also received approvals in Norway, Mexico, and Philippines.

And we shouldn't overlook that we filed Cervarix in Japan in September, this was not only the first cervical cancer vaccine filed in Japan, but it was also the first vaccine for GSK to be filed in Japan, and hopefully that's the start of a new trend.

Following the EU market authorization, we've also submitted Cervarix to the WHO for pre-qualification.

If you're not familiar with this, this is the first step of a process that was put in place by the WHO, which allows the approval from a recognized national regulatory authority such as the EMEA to speed the delivery of new vaccines to developing countries.

So groups such as the GAVA alliance and various UN agencies will use this status for their vaccination programs in the developing world.

And finally we'll be presenting some new analysis on cross protection tomorrow at the ACIP meeting.

While I'd live love to give you the data ahead of the meeting, I can't, but the bottom line is we're very confident in our vaccine.

It maintains the antibody responses overtime and we believe this will be a significant advantage for Cervarix.

We believe that he healthcare professionals will understand this, especially as it relates to the HPV18 antigen and its related HPV types.

So for my last slide, as J.P.

indicated earlier, I've included a recap of the significant regulatory activities for this year.

We've launched already four new products in the U.S., along with Advair in Japan, and now, as I just mentioned, more recently, Cervarix in Europe.

These of course will be very important for 2008 and beyond.

We also have nine additional new near term opportunities currently in the hands of the regulators.

The final word from the regulators, and several of these isn't due until next year, but it's certainly nice to know that we have a lot of shots on goal.

I'm not going to go into each of these now, as you've seen the press releases before, I'm sure you're very aware of them.

During the third quarter we also received three approvable letters and we're working on filing responses to each of these.

But the most importantly, there are two very critical filings that we expect to make before year-end.

First, as promised, Promacta, which our oral drug for patients with low blood platelets will be filed in the U.S.

before year end, and second, Synflorix, which is our pneumococcal vaccine, designed to protect against the 10 most important pneumococcal sero types worldwide, will be filed in the EU and international markets.

And remember, because of Synflorix's unique design, it also provides protection for acute otitis media caused by non-encapsulated H flu.

So these are two very important products, and they'll be big contributors to the future of GSK.

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

Thank you, David, thank you, Julian, and we're going to now open for Q&A.

Our first question comes to Tim Anderson, please state your question and announce your company name and location, please.

Thank you.

Tim Anderson at Sanford Bernstein, in New York.

A couple of questions, on Cervarix, can you update us on how you plan to position Cervarix versus Gardasil, if prescribers or purchasers were to ask you why they should use your product versus Merck's, I'm wondering what your answer would be?

The second question refers to your reference to new selling models, I'm wondering if you can give us some specifics on what exactly you're doing with your pilot projects and primary care areas in developed major markets like the U.S.

and Western Europe, in terms of what you see is working and not working in the future, I think a lot of companies are trying to figure this out and change is probably needed here.

So again, my question is specific to the big primary care areas?

Tim, I'll take the second question and let David talk about Cervarix.

We do not wish to share the details of the conclusions and the pilots.

Suffice to say that we tested a number of alternative variations on the theme of face-to-face selling, and suffice to say that the -- what works best, it varies per geographic area.

There's no universal answer here.

Not that we expected one.

And then it also is important to reality this to your product line.

Certain product lines, we could still increase sales force and get some incremental benefit.

Some product lines are past the point where intense effort is no longer required.

Even in a high noise level environment.

So, there's a lot of complexity.

I think with a works well for GSK might not actually be transferable to -- directly to other companies.

But we're not going to give lectures on this because a lot of it we consider is proprietary.

We have done very good quality testing to get to those answers, so that's where we're going to stay.

So David, on Cervarix, please.

If you remember, Tim, from the beginning we've said we designed Cervarix to be a cancer vaccine.

We think that's the most critical part.

As you develop any kind of vaccine, you recognize the more antigens you put into a product, the more chance you develop for problems with interference among the different antigen types.

We think, based on our unique adjuvant system, along with the fact that we focused on these two antigens, the data will continue to play out that we have better cross-protection as we get to the related sero types in the 16 and 18, and that we'll have a longer duration of protection.

We can build economic models that will show that if you can get even a 5% better cancer protection covering greater sero types, that this more than offsets any cost advantage to which is basically a cosmetic issue with genital warts.

Thank you.

Our next question from Kevin Wilson.

Please state your question and announce your company name and location, please.

Yes, Kevin Wilson from Citi in London, three questions, if I may.

On Advair, David, you have talked in the past about COPD being the larger driver or the key driver.

So the question there is, what will happen with the 250-50 COPD data that I think you published recently?

And how do you relate your comments today on the guideline change for asthma to that growth pattern for Advair, the question is, is that growth pattern in your guidance going to change?

Secondly, on Avandia in Japan, where are you in that process?

In the past you've talked about its importance given what's happened this year.

Can you update us on that?

Finally, for Julian, what level of charges for this new operational excellence program do you expect in the fourth quarter?

I'll take the first two, then pass it over to Julian.

So, the Advair on the 250-50 this was a study that was just, I think, presented in an abstract this week, was a post-marketing study that we had done in the U.S.

as part of a regulatory requirement.

Again, it supported the idea that it's a broader label, it would indicate a broader label is appropriate for Advair around the COPD indications.

Where, again, we showed a significant reduction in exacerbations.

Now, if you contrast this to the torch study, torch was really a very different study that looked at mortality as a primary endpoint.

Of course we picked a higher dose because we wanted to give the patients a greater opportunity for that.

So in terms of the COPD, we think it's still going to continue to be a big driver for us.

There's a lot of opportunity there.

And now, on top of it, we have the asthma guidelines which will give us more fire on the asthma side of the equation.

So if we don't give specific guidance about how Advair's going to grow but we do firmly believe that it still has a lot of growth in it.

In terms of Avandia in Japan, we continue the development.

We've done a lot of work that the Japanese regulators have asked.

We expect to file sometime in 2008/2009 time frame, I believe, of course the Japanese regulators, it's a little bit slower over there, so we don't expect approval until probably -- well, the approval, there were some additional studies that we had to do.

That will be sometime probably in the 2010 time frame.

And Kevin, in terms of what charges in 2007 (inaudible), this is all subject to consultation, any number I give you will be wrong, so I won't.

I think it will be significant, but I don't want to give you a number now which will mislead you.

Thanks, Julian.

Our next question is from Graham Perry, please state your question and announce your company name and location, please.

Thanks for taking my questions.

Firstly, a question on the margin outlook for 2008 given the restructuring program.

If we look at around 350 million pounds, that's about 150 basis points on operating margins that you have to offset some of the off pattern exposure.

Do you expect any of that to emerge as incremental on your margin over 2007, or is this just all going to offset the operational deleveraging from patent loss and Avandia declines?

Second, a question on the timing of your restructuring announcements, just with this coming ahead of the Avandia label and to what extend does this reflect your pessimism of the labelling outcome and inability to stabilize market share once its issued?

Thirdly, on Tykerb, it's annualizing at [64] million pounds, this implies still a limited penetration into the approved indication second line (inaudible) patients.

So what do you see as your current penetration and what are you doing about enhancing it further?

Okay, on the margin, clearly there will be significant improvement in terms of the cost-saving program if you look at the manufacturing cost savings.

Now, they come not at the beginning of the three years, and that's what I think you have to pay attention to, there's a timing element, there're site closures, and some of the elements of the cost saving come toward the end of the cycle.

But I would say that the picture is that the change in mix, which is a change in product mix and also in geographic mix, after all, this quarter U.S.

is not growing as fast as Europe and international.

So, therefore, we also suffer a negative effect there.

But overall, that kind of effect will be compensated by some of the moves we are making, and also the introduction of new products which are typically high profit products.

So you have to look at beyond '07 and even into '08 where gross margin will be negative, a slight negative, and then making a comeback as we go forward.

On Avandia label, no, we were going to do this program simply because we were looking for the programs to be ready to be executed.

Particularly in manufacturing and selling.

So we were a little bit dependent on when the pilots would end and where we could draw the conclusion.

That has all happened.

In fact, if you wanted to get an outlook on Avandia, I mean, the European label is a positive.

It restores the value of those medicines in diabetes, it profiles Avandia in a way that is, I think, fair and makes the product still competitive.

So if I had to pick, I would say well, that should be an optimistic fact.

But the idea is very unpredictable.

And frankly, I'm not going to try to guess.

But regardless, we're going to do this operational excellence.

So, and then, whatever label we get, then we'll make an assessment of whether we can really get Avandia going again.

That's why I presented earlier a question mark on Avandia for '08, because I think nobody could guess whether it's going to go the way [Costar] did, which is they made a turn after six, nine months, and were able to, in fact, grow back to where they came from after a pretty significant safety scare, or whether it's going to be a product which really stays where it is and becomes a bit of a slow erosion-type product.

We don't know that, we will not know for a while.

Then on the last point, Tykerb I'll let David handle it.

I'm actually surprised at the negative comment on it.

I think right now, at the 64 million, remember, this is only the second full quarter on the market.

And at 64 million pounds, we're actually running ahead of consensus and where most people thought that this was a very narrow indication that we wouldn't even do $100 million a year with it, and already we're in the second quarter we're ahead of that run rate.

So, I'll remind you that when Herceptin first launched, it's sales were quite slow at the beginning.

In fact, we're not running too far behind where Herceptin was, despite the fact that they had a full pool of patients sitting there waiting.

It wasn't until they had the Adjuvant indication and Adjuvant data that really the sales took off.

So, we're very please.

Yes, I agree, David, I think that Tykerb you can't really multiple two quarters and get the year.

It's in full growth.

And we're getting, more importantly, very good quality feedback from oncologists, and we can't wait for Europe to be fully labelled and fully ready to go because there's a great appetite.

In a very restricted territory in Europe, we are already generating 5 million pounds and we don't even have formal approval, it's just that the product is available.

There's a real demand in Europe because the system is different.

They don't have [infusion] shares in every private practice oncology office in Europe, and they are much more likely to send the patients to the hospital.

So I expect a good pickup there.

But the future will tell.

But Graham, I think you are a bit pessimistic, we hope to prove it to you more clearly next quarter.

Just one quick follow-up on the comments on the Avandia labelling.

You've previously talked about an expectation as class labelling for both Avandia and Actos, has anything changed with your discussions with the FDA relating to that expectation?

We don't have any expectation because we really don't know and we can't really influence the FDA beyond what happened at the advisory committee.

I think it's fair to say that if you read the advisory committee proceedings, you can see that the bottom line is there's an enormous pool of data on Avandia and very little on Actos.

We have 90% of the data generated, they have 10%.

So, we can see a lot more in a picture with 90 pieces of the puzzle that are magnified than the tiny puzzle where not very much has been done in long-term clinical trials.

So I cannot predict what the FDA will say on Actos and whether there will be class labelling.

I think that was the wise thing to do, to give a class labelling on congestive heart failure and the future will tell again.

I can't make any predictions.

Nobody can do it, not even the Wall Street Journal.

Thanks very much.

Our next question comes from John Murphy, please go to your question, announce your company name and city location, please.

Good afternoon, it's John Murphy, Goldman Sachs.

J.P., just to tick up on the last question linked into margins, you've talked about a tough quarter you had, but in pharma you had a fantastic margin of 37%.

For many companies growing very, very fast, they can't get close to that level.

So just wondering, again, whether the cost savings program announced is is going to allow further expansion from that level or just to offset some of the pressures you foresee over the next several years or so.

I think for '08, as I said, I would not give an indication that gross margin's going to improve, simply because you get the full impact of some of the generics, you get the full impact of -- it depends on Avandia.

If we make a bit of a come back, let's say in the second part of '08 with Avandia, then all the bets are off on margin.

Because that has a big impact.

But I'm just taking the more conservative route that, let's say we stay where we are in Avandia, so there's still a net loss '08 versus '07, I'm taking into account the generics, but I'm take into account the fact that in '08 you won't have the bulk of the manufacturing savings.

So that's for '08.

And then '09, everything turns around the right way for us.

So I think you have to look at it as sort of a cyclical effect on the gross margin.

We have always been able to improve the gross margin.

When I look at the products that are going to be introduced, some of them are pretty high margin, some of them are more middle of road like Cervarix, but all in all, I think '08 I would be conservative and '09 more bullish.

Thanks.

Just two quick product questions as well, maybe for David.

Can you give us any update at all on where things are with Geperione at the moment?

And, any antidotal comments, perhaps around Coreg CR and the sort of feedback you're getting from docs on that?

Yes, on the Geperione, we're still waiting for the FDA, so it's in their hands, we've heard nothing, so I can't tell you one way or the other on that one.

In terms of Coreg CR, there are a few dynamics with Coreg that are different than some of the other switches.

This is a market where the incident number of patients is much smaller than the prevalent.

So we're having to wait for the new patients to come in.

But, again, the feedback is very positive from the physicians.

I think we just have to be a little more patient than say we were with the Wellbutrin XL, where you have rapid patient switching, where patients go on to different antidepressants very quickly.

So I'm not concerned at all with Coreg CR over the long term.

Thanks a lot.

Okay.

Thank you, John.

Next question, please.

Our next question comes from Mike Castor, please go to your question, sir, announce your company name and city location, please.

Mr.

Mike Castor, your line is open.

Once again, Mike Castor, your line is open.

Are you able to hear me now?

Hello?

Yes.

We can hear you.

Okay, good, thanks.

Sorry about that.

Two questions.

First on the HIV franchise, can you talk about what's happened with pricing since the generic introduction of AZT and what will happen with subsequent generics?

And also whether the royalty burden that you currently bear on 3TC will continue after '09?

And also, I'm wondering if you can comment, I've heard some other companies in Europe, some software companies and consumer product companies report slightly weak sales in the third quarter, and to the extent that you've got mature consumer products in Europe, have you seen any change in patterns there that would suggest any impact on the European economy?

Okay, thank you.

On the European consumer healthcare front, no, we're having a very dynamic quarter.

So we can't say we would confirm that.

You know it varies but oral care and OTCs are strong.

So that's the answer.

To your second question, Mike.

On the first one, on the HIV pricing, we've seen no difference in the pricing just because of the introduction of generics.

This is no different than when we see generics being introduced in (inaudible) therapeutic classes.

Things are going well.

In terms of royalties beyond 2009 on 3TC, I really don't know, I'll have to get back to you.

Okay, thank you.

Next question, please.

And our next question comes from Steve (inaudible), please go to your question, announce your company name and location, please.

What you said about Avandia and the increase for analogy, the release clearly says lower Avandia sales in 2008, I'm confused as to why you would say that now, particularly ahead of the label.

And your comments really do suggest that the Company has no new studies or initiatives to turn things around anytime soon, so I'm a little perplexed as to why that language would come now ahead of the label?

Secondly, on Lamictal, when should we anticipate generics in 2008 and will you launch an authorized generic?

And lastly on HFA albuterol, the Company has claimed over time that it would increase its efforts but it's not at all evident.

Has Glaxo abandoned that effort?

Thank you.

On Avandia, remember, we were a full-blown sales the first five months of the year.

That's the only reason, that if you look at the future and you said, okay, let's say the label is not a case of the assets, whatever it is, and we start to go back to the marketplace, by the time the sales go up even in a fairly realistic scenario, mimicking other examples that have happened in the past, you have to build yourself up back to where you were in the first place, that is the May high point level, and then exceed it possibly.

Well, if you do, that trust me on this, the simulation shows you that even in this fairly positive scenario you can't quite compensate for the fact that for five months we are going to look at sales which are double what they are today.

So that's the only reason.

But listen, we've been wrong before on forecasting product sales, so I hope you're right, I hope we can execute an even more optimistic scenario, but I can't take that as a main planning hypothesis.

And, therefore (multiple speakers) --

On the Lamictal, in the release, we showed -- we stated that in mid-2008 you should see generics on Lamictal.

And we don't comment on our authorized generic strategies.

In terms of the HFA albuterol, we had manufacturing issues, so we're -- we've been playing catch-up, but this is still a very important opportunity for us and we haven't given up on it.

We haven't given up, in fact, if you look at our share, it is somewhat small base, granted, but it is growing, so we're definitely going to be back in this market.

All right.

Next question, please.

And our next question comes from Brian [Modoff].

Please state your question, announce your company name and city location, please.

Deutsche Bank calling from London.

A question on the operational excellence program, please.

You've told us that you expect to look at total annual pretax savings of up to 700 million pounds by 2010 in different parts of the business.

I'd just like to ask, is that all cash or are there some accrual elements, some cash outlays that would normally have been expensed that had might be capitalized?

My thinking is related to the move to manufacturing changes and a move to multisourcing.

Any thoughts there, please?

Thank you.

The noncash element of the 700 is under 10%.

So it's a very small proportion of it.

Okay.

And this is basically an expansion of a program.

But a much larger and because of site closing and the like, there was a need for provision.

Next question, please?

Our next question comes from Andrew Baum.

Please state you question, sir, and announce your company name and location please.

Andrew Baum from Morgan Stanley.

Just one question and [I'll exit].

Perhaps Julian might hazard a guess as to the outlook for legal costs anticipating a rash of Avandia suits as we work into 2008.

What do you think is reasonable for us to include within our forecast?

I never predict legal costs, Andrew, because I'll always be wrong, they'll be what they we'll be.

We believe in Avandia, and we will certainly contest any legal action on it.

We don't see that as a particular issue at this point in time.

But it's impossible to predict what it will be.

As you know it's been coming down over the years, but I can't predict.

No reason to think it will go up, but who knows.

The good news is our book of outstanding litigation is getting thinner.

It's still thick, but it's getting thinner.

After years of efforts and many cases which were settled, if you look at all the patent litigations on Paxil and [Augmentin] and so forth, which was contributed to some of those costs.

But on the other hand, again, we will take it as it comes and even though we have no particular concerns, we don't want to make a specific forecast at this point.

Next question, please?

Our next question comes from Luisa Hector.

Please state the question, and announce the company and city location, please.

Good afternoon, it's Luisa Hector at Lehman Brothers.

Two questions, please, I was wondering if you could comment on Advair whether you're seeing any impact from Symbicort in the U.S.?

And then, going back to J.P.'s other comments about the FDA with four out of five drugs getting an approvable letter at the moment, I just wonder if you could give us an update on your view as the regulator environment clearly seems to be getting tougher.

Would you expect that to remain the case for some time in the future?

Thank you.

Okay, thank you.

Obviously, Symbicort is just getting started, because right now they're not making much of an impact.

If you add all the Symbicort prescriptions to the Advair business this quarter, Advair would go up one additional point.

So it's not very much.

In terms of the regulatory environment, well, you know as much as I do.

But in our contacts with the FDA, in the tone of the letters we receive, there's clearly a super agenda item called safety.

And I think it plays differently in different divisions.

I mean, after all, if you're approving life-saving drugs for people who are in very bad shape, the safety risk and the safety concern might not be of the same intensity as if you were on the verge of approving a drug that's going to be used for chronic disease which are not life-threatening.

So we're going to see that -- the hurdle has been raised, there's no question about it.

What is unclear is exactly how should we modify our drug development plans to meet this higher hurdle.

And we hope that there will be clarifications.

And this is more the FDA than any of the other regulatory agencies.

And we find that the regulatory agencies throughout the world, most of them use science and clinical data to make decisions, and the lobbying and the political around the agencies is minimum.

In the U.S., the difference is obvious to everyone who reads the paper every day.

So we hope that the FDA will be left alone to do their job, and if they do, we will be fine.

But I would say from a practical pragmatic standpoint, what does it mean for us today as we speak?

It means that as we are working on 25 launches over the next three years, some of them will be delayed that probably wouldn't have been delayed if we had those 25 products even two years ago.

But such is life.

And as far as raising the bar, we absolutely are ready for it.

And particularly in surveillance.

I think it's very important now in every file to have a very descriptive risk management program.

I think that's a good thing personally, and I think that companies such as GSK are very ready for this challenge.

And have been working at this for quite a bit.

So on that note, I'm going to ask one more question and take it as the last.

Our last question comes from Michael Leacock.

Please state your question, your company name and city location, please.

Thanks for taking my question, it's Michael Leacock, here, ABN in London.

Two questions really, if I may.

Firstly on R&D, J.P., and I think you said in the past that you're looking towards R&D as a percentage of sales, in the long term rising, I think up to 25% was the figure you hinted at.

Yet we've seen R&D costs stable, minus 4% down for the nine months.

I just wondered whether you were not tempted to put some of your operational excellence savings back into R&D and whether your view on that has changed at all?

And secondly, for Julian, in the past you've taken restructuring charges, they were running at, I think about 140 million, 200 million, I think, last year, on an ongoing basis.

Are all of those charges now going to be clearly delineated operational excellence charges or will there still be an underlying background change going on?

Very good question, Mike.

On the R&D, again, the aspiration is that we should be more R&D intensive.

Now there are several ways to get there.

The first way is to reduce SG&A and reinvest in R&D.

That's what we've been doing all along.

Even though right now and in the immediate past, R&D as a percentage of sales was not gone up, that is -- we're doing far more with R&D than before.

We are placing more bets, we are driving more products through the pipeline.

If you think about it, we're nearly the double the pipeline size and we certainly haven't doubled R&D since the merger eight years ago.

The reason this has been possible is because we have made significant efficiency improvements within the process of R&D.

So we're doing more for less.

Remember the first company to export clinical trials in a big way, the first company to do data capture.

All those programs have saved remarkable, large amounts of money.

If you look at next year, by the way, even though we're saving money in R&D and we're saying so, that we are doing this program of eliminating duplication and so forth, that's going to raise some money for us.

We also are investing in some parts of the R&D at a faster clip than sales growth.

For instance, the R&D China, the biological space, oncology programs and so forth.

So it's a mix of the two, and I would say flat-flat, average, I would say flat on sales for a little while.

But I think that the environment is going to force pharmaceutical companies to raise their game in R&D, and if we have a productive R&D and we're still working at improving that, why not invest more?

So it will be at some point, if we're successful in shrinking a little bit our resources used for selling, and reinvesting them in R&D, we'll be in very good shape.

Clearly an aspirational statement, but one that I hope will become a reality in the future.

And there's very good science up there that we would like to buy.

And if you look at the expansion of our balance sheet into those kind of deals, what you see in terms of R&D expenses is an understatement of the effort.

We are actually having access to more programs than simply the R&D line seems to indicate.

On the other hand, in terms of your second question.

Michael, you're right, the operational excellence existing programs have averaged between 100 and 200 million every year.

I expect to take further charges against business performance earnings, that's the first column, in quarter four, in respect to existing programs that are still running, since they will carry on being charged into that first column.

And the new program is so significant, hence the introduction of the middle column, that's the rational for it, it would distort our performance if we weren't to do it.

The consequence of focusing all our efforts going forward on this new program, I would expect there to be negligible charges in the first column.

We will focus our efforts delivering this new program.

It will take all those efforts.

But certainly as far as the fourth quarter of this year's concerned, there will be further charges in the first column in respect to programs still running that would size it on before this new program is implemented.

Does that answer the question?

Thank you very much.

Yes, and Mike, just to complement, and that tale of costs related to existing programs will go over next year as well.

Thank you.

Thank you.

Thank you very much for attending this conference and we'll talk to you in a few months.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference, you may all disconnect your lines.

Thank you.