葛蘭素史克 (GSK) 2007 Q4 法說會逐字稿

Hello everyone, and thanks for coming to this year end conference.

Before I start the presentation, I would just like to say a few words about the general picture.

I'm sure you read the press release.

Essentially what you see, if you read between the lines, is a company with very strong fundamentals, good product line that is being renovated.

There's lots of new products coming in, a very fast-moving vaccine business, customer health care business that is best in class, an R and D engine that works a lot better than a few years ago.

And then next to it, you have a short term problem which is one Avandia and also to some extent generic erosion, which we are reaching the peak of, it's going to get better in '09 and beyond.

That is the consideration the big picture.

I will, however, have also Julian present the detailed financials for '07 and '08, and then we'll do a Q&A.

We will have Andrew Witty, CEO elect, Julian and Christy Barker join me.

And we'll take all the questions from you.

So let know go into the presentation.

I really have two topics for you.

First of all, explain a little bit the underpinnings of our '07 results and our '08 guidance, and then I want to concentrate on really lessons learned in '07.

In other words, lot of things happened.

Lots of events affected the pharmaceutical industry in '07.

Most of them are not that meaningful, but a couple are and are going to change the environment forever, basically.

In other words, they have a long-term effect on the industry, on GSK, and I'll make some comment on that as well.

Let me start with '07.

There were certain things that you and I expected, and then there were certain things that were a surprise.

The things that came in as expected,(inaudible), vaccines, the big products all doing well.

And then the new contributors growing faster, (inaudible) the Boniva, the Arixtra .

That is helping us, and those products are going to be in our product line for the long run.

So that was kind of where we anticipated the year to go.

What was not expected is, of course, what happened with Avandia.

We lost 22% of the revenues of Avandia.

And this had a narcon effect on gross margin that was not always picked up in your forecast, and that was not surprising if you do not know the nitty-gritty of what makes up gross margin.

But when you lose the most profitable of your line, it has a disproportionate effect on the cost of goods and the gross margin, so it did happen in '07, and we'll comment some more about this in the future.

What did allows us to still make the guidance, in fact, to reach the upper hand of the original guidance, despite this billion dollar loss on Avandia?

First of all, the consumer turnaround was a tad stronger than we anticipated.

You see the revenues up 14%.

Alai was a clear success.

It's not only a year on the market, and generated GBP 150 million.

We had a good turnaround as expected of Aquafresh in the U.S.

on the basis of new line extensions, and everything clicked, so that was a good surprise.

The second one is we were able to produce more cost savings than maybe some of you anticipated.

We have had a long history of successful, continuous improvement and operational excellence; and as you can see, '07 was no exception.

We've been reducing SG&A as a percentage of sales even in the years where our sales gross is minimum, we're able to do that.

We work at it on an ongoing basis, and of course, that's going to continue in '08.

The other thing that was a good surprise for some of you was essentially how we did with our campaign to sell pre-pandemic preparation products such as Relenza, and our RH-5 vaccine, altogether GBP 400 million of revenues.

Incidentally this is going to continue in '08.

We are still in conversation with many governments, including large countries.

So there is some more potential there.

For '08, why are we issuing a guidance of, mid single digits on the negative?

Well,, first of all, the shadow of Avandia will continue in '08.

But there is the price to be paid, because remember, from January to May, we were selling full boat Avandia and dropped because of the U.S.

market issue, and that will drag on particularly in the first part of '08.

Secondly, we have products going generic, as expected, but it's the peak of generic erosion, '08.

And if you look, and I'll show you a slide in a minute, if you look at '07, '08, '09.

'07 was pretty heavy, '08 was the highest, '09 comes down a notch, '10 is much better.

So we do have to take that into consideration.

And this is actually a list of the products we are talking about, Welbutrin XL, as we did lose the 300 milligram in '07, but the 150 is still exclusive and at some point that is going to to go generic.

And then among the big ones, Lamictal IR is going to stock in '08 and just a small piece of Imitrex.

The others are not that big.

But if you were to calculate all this, and we've done that, you will see there's a peak of generic erosion to be expected in '08.

So for your forecast, it is an important reminder.

Now, on the other hand, we have gross drivers that are going to continue to propel the Company.

I just want to give you a brief look on Advair.

We have a number of good news on Advair.

First the new guidelines which favor products of that kind, that is good news for Advair and Sybicort, vis-a-vis the others, the Singulair and so forth.

Secondly we have filed in October some new clinical data showing the Advair reduced the number of exacerbations in COPD.

Now if the FDA gives us a claim, that will be a unique claim in the COPD market.

That's about 48% of our sales in the U.S.

So it's a very important segment.

We're doing well in COPD, not as well in asthma.

Secondly, there is also going to be help in terms of overall global gross of Advair through the launch in Japan , which will produce significant growth in '08.

On the other hand, we have noted market softness in this category starting in the fourth quarter, and I think the origins of this market softness have a lot to do with the extremely mild flu season we have noticed in the U.S.

In fact, the flu index that is used by the officials is half what it normally is on a normal-year basis.

So that reduces physicians visits, and of course, bronchial problems are very often associated with flu, and people go back to their physicians and get treatments.

Well, that didn't happen to the same extent in the fourth quarter and the early part of '08, although, of course, this is going to go away as we enter the spring season.

In terms of new products, I'm not going to give you too many new details here.

Just take a look at this slide.

All those products are likely to have a financial impact, a positive financial impact already in '08.

We might slip on a couple with the FDA, who knows?

But the great majority of those products will start to make an impact.

So we have the start of product renewals.

As we lose some older products, we are replacing them with a number of opportunities, which is quite large, and of course, some of those opportunities are gigantic, like Cervarix .

Most of the products on the slides are all big and products like [Pricurb] and Promacta have a long way to go and a great future.

The other factor on Cervarix I wanted to give you a brief update, is that we are now in the phase where we're going to start to be able to impact the market.

We are approved in 51 markets.

We have launched in 27; but frankly, without reimbursement, it's not much of a launch.

So we have to go through the cycle of obtaining reimbursement.

But in the places we have reimbursement, in other words we exist, and we can take on Gardasil, we're doing very well.

That's a tiny part of the market.

I'm not going to comment too much, but I'll just address some of what I've seen in the press.

The reality is, when we take Gardasil on, in five or six times we have had to do that, we have won five out of six.

So I cannot believe the comment in the press made yesterday at the marketing conference.

The scientists will tell you the rest.

I think we have a very strong offering.

We're excited about the head-to-comparison with Gardasil .

This is not a small study.

It's a thousand patients.

Most patients are in the age bracket that is approved in Europe and U.S.

Some of them are both 26 years of age, but it's a small portion, so it's a very relevant study.

Clearly anti-body tighter is a very good predictor of protection, and please ask experts, not marketing people.

They'll give you the answer, the right answer.

So we're excited about our entry into this market, with a product which I think will demonstrate better cross protection over time.

We're seeing some clear indicators that that is a fact, and it's just a very exciting opportunity, and there are so many people who can benefit from this product, and needless to say Gardisil will do great, because the market is gigantic, but so will Cervarix.

Cervarix is a very interesting product.

You have seen in the press release, we have filed the answers, we will file the answers to the FDA questions in the second quarter of '08.

So it's coming up, and then we'll continue the discussion with the FDA as far as timing.

I know you're going to ask, so we might as well take that question right on.

I don't know when the timing of the launch is going to be, because frankly the FDA is not going to give us an answer for quite a while, and they would want to go in front of the advisory committee first.

So as long as we haven't had an advisory committee, and we very likely -- not official, but we very likely will have one, it's going to be impossible to give you a reasonable forecast.

But the file is very strong as evidenced by the fact we have approvals in 51 markets.

The Lovaza opportunity I want to single it to you because I think it's a sleeper.

I think this product is going to do well.

And Quincy Barker,our president for the Pharma business is here, and he's a big fan, so I have a bias.

I think it's a great offering.

Here's why.

This is a product that is basically a natural product.

The only product approved by the FDA, a product with no warnings, and this is a product for people who take multiple medication, where every time you add a new pharmaceutical, you've got to worry, as a physician, you have to worry about potential interactions, side effects and the like.

Well, with Tricor, the competing entity, you do have to worry about warnings and things to watch out for.

Not with Lovaza.

The start of Lovaza is spectacular as you can see on the graph.

When you look at the first 30 weeks of sales of Lovaza, it's on a trend, an uptake very similar to Tricor and I remind you Tricor is selling right now $1.2 billion.

So we have a long way to go.

We have got big legs on this product Incidentally we're tripling the sales force effort following the acquisition of Reliance.

So we'll have 1,500 reps to promote the benefits of Lovaza, which are already well accepted by U.S.

physicians.

Consumer health care is a strength for us right now.

The product sales are good in basically all categories.

You see that the revenue growth last year was 14%.

Of course, that includes Alli and also a little bit of product acquisition that we're undertaking in late '06.

So that number is not indicative of '08.

It will be down a notch, in all likelihood, because you won't have as much growth coming out of Alli, although we have some.

Nevertheless, if you look at the fundamentals, we are out pacing the OTC market with the kind of trends we have on our basic product line, and this is a product -- this is a company that is best in class in this space because of the combination of rapid sales growth and very high operating margins, at 21% and very sustainable.

We have increased promotion dramatically this year, and we still generate a 21% operating margin.

So we're excited about this business, and I think it has good strong head wind, and we will be able to continue to perform.

Also in '08, we'll benefit from the OE program.

You are well aware of this restructuring, savings up to 0.7 billion pounds by 2010.

Of course, that's including the manufacturing fees, which comes last.

It takes a while to close down plants, replace the sourcing and all of the rest of it.

We have closed many plants in the last seven years.

I think over 30.

And we're going to continue to concentrate our manufacturing, out-source and globalize access to raw materials.

And therefore, this is clearly a source of future revenue for the company, this effort to rationalize and concentrate the network.

On the other hand, we'll benefit right away on savings on restructuring the sales force.

The U.S.

done basically Chris, and we'll see the same effort of some countries in Europe, where we have to go through a more elaborate formal process of consultation, but we expect half of the savings to come in '08, so roughly GBP 300 million of additional savings.

However, '08 is actually a more difficult year to predict, because we have never seen, since the beginning GSK, so many swing factors.

Now, there are things we don't know.

Remember, last year we didn't about about Avandia.

So, I am not going to tell you we are so great at predicting the world.

But,I can predict that the Avandia forecast is difficult, because who knows if we are able to recoup and regrow Avandia, not right away, of course, but let's say starting mid year next year.

It's a possibility.

We're seeing more and more evidence that when you treat type II diabetes patients, it doesn't matter which products you take.

You get small, very faint cardiovascular signal no matter what product you take.

That's what the FDA said.

That's what the accord showed yesterday that was very interesting.

They completely exonerated Avandia because they did a sub-analysis.

There were 2,000 patients on Avandia, not a small group, and showed the negative effect on cardiovascular and modality was due to all products.

It wasn't do to Avandia.

It's very interesting thing to see that when the dust settles, the science and a real understanding of how type II diabetes drugs work is going to be, if you see the future, there is a chance that we are able to restore Avandia.

But we have taken a realistic viewpoint on our guidance on Avandia, because it could go either way.

Europe, the rest of the world, clearly, they haven't had the media onslaught that we have seen in the U.S., and therefore, they've maintained the market share in most cases, if you exclude North America, both markets are doing well.

Europe was up last year, and despite Titan label we hope to continue the franchise successfully.

Another swing factor is how much we're going to sell of the pandemic vaccine.

We don't know.

You don't know and we don't know.

Because governments are very unpredictable.

We received some orders we didn't really expect right now, and then some countries that have made some commitments to absolutely, absolutely buy from us right now haven't come through.

Not that they bought something else.

It's just the natural process of convincing a large share of the government to go for this program, however, I think that this program has legs, it has done well in '07.

I hope it will, you know, exceed our expectations in '08, but it's early days, and we have to take a stand on this, which is not easy to do.

And the last part is Cervarix launches .

How successful, how quick are we going to pick up business with Serrix.

It's also a matter of discussions and depending on which scenario you pick, it could be more or less than what we put in our plant.

At this point, a little too early to make a really good forecast.

I'm very confident, but that doesn't mean that we should be optimistic to the point of crazy forecasting.

So we have to see.

The U.S.

situation doesn't affect '08, but it affects '09 a lot, because we didn't expect to get Cervarix approved in '08.

We have know that before we closed our budget down.

There are more swing factors for '08 than I have seen for a long time now.

In terms of the outlook beyond '08, I think it's clear.

The situation I was describing is actually on this slide.

The shadow of Avandia is going to be gone by '08, one way or the other.

This either will turn into a positive, or it will be just a cash cow that slowly declines or stay flat, something like that.

We don't know at this point.

There is clearly a fork in the road.

Generic exposure is peaking in '08.

Still pretty significant in '09, and then it gets better, but the worst year is '08, and then the new product contribution goes the other way around.

We have launched seven new products last year, '07.

And they're going to start to throw in some seriously sales growth to us, and that is going to accelerate, and we have many more to go.

And whatever we get is going to be a major positive contributor on our revenue line.

And of course, operational excellence, which I described will help starting already in 2008.

Just on what happened in '07, I think the major fact that is here to stay is this problem of balancing risk and benefits.

Clearly some agencies, including the FDA, have moved quite significantly to the attitude of looking at risk, first and foremost, except for maybe life-saving drugs, but looking at risks in great detail.

Greater details than in the past, in not being obsessed with [disabates], but as we've seen with Cervarix, saying we're not quite ready and expanding on their own guidelines to really make sure they have assessed risk to their satisfaction.

Now, they're influenced by the environment, by what's happening with public and all the cases we have seen from our Arcoxia and Zelnorm and many others and the (inaudible) and so forth.

This is not totally surprising.

I actually put a bit of a cycle together to explain to you why this is long-lasting.

This is not a bad year and the statistics even out.

This is here to stay.

I'll tell you why.

It's very simple.

If you're a scientist in academia, you can do hard science and try to make a name for yourself, or you can go and do it the other easy way.

Your mind database -- the database available are unbelievable.

Most pharmaceutical companies have their entire databases, including GSK, on the web.

It's fairly easy to poke at these databases, combine data sets in different ways until you find some kind of question to raise.

That's what the meta analogies do.

They don't give an answer.

They just raise a question.

It's either there, there, and there, and the problem is that in the past, meta analysts were discussed, basically, between scientists with not much interaction from press and the media.

Things have changed.

Those kind of desk researchers, they want to be known, they want their publications to get some play, and so forth.

The news is then digested by the media, and I can't expect the media to know the subtle point between hazard ratios and relative risk and the like.

I mean, if you think about Avandia, the signal was if you compare Avandia to placebo, out of ten thousand patients, five more in the Avandia group will have some kind of cardiovascular effect.

Five out of 10 thousand, versus not treating the patients, which is not exactly realistic.

When you compare that same Avandia to the type II diabetes, the signal goes away.

That's what the FDA put in our label.

That signal was publicized by newspapers in America, I think, there's a 43% increase in heart attacks if you take AVANDIA.

Imagine why patient angst would go up.

It's pretty easy to understand.

So the distortion of the media has created the effect, obviously.

And the other problem is there's no way for the scientist to be able to capture a question coming from a meta analogist, and have an instant answer.

They need to look at the entire body of evidence.

They need to look at all of the long-term studies, as did the FDA with Avandia and other products.

And then the FDA comes up with the final answer.

The problem is the final answer came up in November for us.

The media distortion starting in May.

What do you think happened in this vacuum -- Product damage.

50% of our patients called their physicians and say, "Doc, oh, my, I'm taking a product that might kill me." And even though the physicians want to fight back, because they do get it, it's very difficult when you're besieged by phone calls of people who actually put the butter on your bread, incidentally.

Sometimes you just accept what you say and you take them off the medicine.

Incidentally, this is not good for public health.

50% of Avandia patients were not put back on a type II diabetes treatment.

That means those people are getting hurt.

So, this event is not disappearing tomorrow.

It's always going to be with us, because as you can see, the fundamental parts of the mechanism are with us now, and we better be ready as a company to deal with this.

There are lots of lessons learned from '07 for the pharmaceutical industry.

You should do the meta analogy as we did with Avandia but demand this would be issued and be put into context by the appropriate authority.

That didn't happen in every country.

That's why we had a problem in the U.S.

where the FDA wanted to do the work first.

In Europe they sold it for what it is, and then the next day, I wouldn't say it was a nonevent, but clearly, as our sales curve shows, the fact we still have the same market share, the effect was very different.

The cycle, the visuals circle didn't really take place.

There are other consequences.

We have noticed lately that payors don't necessarily wait for the FDA.

Think about it.

If you're an insurance company reimbursing the Tia and Zelnorm, and products like this, including Avandia, you also get the phone calls from the patiently.

What are you going to do?

Say, "I'm waiting for the FDA, maybe in six months I have an answer for you?" So we have seen payors jump in and take a stand while the dust has clearly not settled and before the body of scientific evidence has been really reviewed in an appropriate way.

And that is also something that needs to be managed very carefully.

You could quickly lose former position for reasons which are not solid reasons.

And then, of course, the FDA slowdown, which you're all aware of, fewer drugs approved, four out of five NDAs get an approvable letter instead of the past, where one out of five used to.

And of course, also, you know, black boxes are becoming trivial.

It's just to be a very rare event to get a black box on your product.

If you think about it, they have tripled in the last four years.

So, now there's so many of them, dozens of them, that frankly they don't make the same impact with the medical professional, which is a pity, because sometimes we really need to warn our physicians.

So we have taken on -- we've already adjusted to this and are taking on the role of communicating some of the new physicians who is now waiting for FDA, because, as we have done with, we've sent physician letters because in some cases we want to alert them on what is likely to come out based on what we know about the product.

So, there are many implications on the way we run our business from the legacy of 2007.

Other consequences, there will be more demands for outcome studies.

You seen now, people were even questioning wether [MOBLNA1C] is a good indicator for diabetes.

Well.

it's very easy to say why don't you do out come studies and show us over five or six years, you can reduce the rate of gangrene and heart attacks and the like.

If we are to do that, that will be a long time before the product can hit the market.

We're going to have to deal with the issue.

I think that part of the answer is the development of new chemical entities and new biologicals is going to change.

We're going to see that there is a way forward.

In fact, some of it will be very good for us, and that is to master the uncertainties better, and to do that there's really only one way, is to slice the patient populations.

Not to try to put the drug on the market for all of the patients that could benefit, but focus on the easiest slice of patients, the ones there would be the least amount of controversy from a safety efficacy standpoint.

Then fully get the drug on the market, because there you'll have a more complete file and easier file for the FDA to react to, and then build up your product as an oncology drug.

Build it up.

Get another slice of patients, maybe more complicated, and by that time, you have developed a lot of knowledge about your drug any way, so it becomes easier to do the right development.

But you're not going to get instant block buster with this kind of technique.

Your going to get a progressive block buster.

Clearly, this is not going to happen overnight, but clearly focused on trying to meet some of the challengers I was mentioning early on.

R&D productivity becomes the end of it all.

It already was, but if you had any doubts with this kind of environment, we need not just new products, we need breaks with new products, we need added value, we need best in class and first in class, nothing else.

Line expenses are on the decline, there's no question about it, and thank God as GSK, we have reacted to this trend a long time ago, and I want to give you some update on what we are doing with our R& D department.

First of all, I have always said, to have an effective R&D productivity kind of organization, you need to work on the fundamentals.

It's no different from any other part of the company, and the fundamentals of R&D are on this line, its organization, the need to have an open architecture, because there is no way you can optimize science on all your programs inside.

In other words, some of your programs are going to be best in class, and for some scientific programs, you need to take an insurance company and buy some other programs, some competing programs in some cases outside the Company.

Technology, how to use it, what to do with it, disruptive technologies.

We have a very good framework.

Those three points, I think, are our strong suits at GSK.

What is left to do?

Well,, first of all, in R& D, you have this constant pull and push between functional areas, clinical development, pharmacology and so forth and the project teams, people who were project champions, a team of people to divide up products X, Z and Y.

That is hard to manage in an organization, and you end up with those cumbersome matrix organizations that try to do it all.

I think that there is a very strong feeling with Moncef.

And I know Andrew and myself clearly to break this camel's back once for all.

I think some of you have heard Moncef talk about it.

I think this is clearly going to be a big area of change in R&D and GSK.

The winning culture, we have put in place a very good framework in the industry.

Researchers get paid and rewarded on what they do, not on whether we make the EPS, which is contrary to most, if not all pharmaceutical companies.

We have done those things, but they're not sufficient.

We need every scientist to be passionate and engaged and free to work.

The set system always helps, but also comes down to the culture, the people, and I think there are some big ambitions with the new team to make that an even higher priority and not only continue in the work done, expand it.

And I am very excited about some of the ideas circulated on that.

So, that's it for the fundamentals.

Now in '07 we're no different.

We won biologicals.

They have a better life cycle.

They last longer.

You don't have to worry about generics the day after, and I don't think you will worry about generics for a long time.

That doesn't mean that will happen, but right now there is an opportunity that we fully exploit with our vaccine business, but we also wanted to beef up our effort in biologicals, therapeutic biologicals.

I do want to remind you of the [Mantis].

In a few years might become the best deal we have ever did.

This is a technology that we advance monochromes.

This a second generation monochrome.

You can copycat a vaccine, [Vitoxin], Ambrial and the others.

With this technology you are likely to come up with a better mousetrap.

If this works this itself will be a pipeline for GSK and a significant one.

Now we have work to do.

I have to give the caveats here.

We are not done yet, but we have had some good preliminary proof of concept experiments that reassure us that this technology is very exciting.

It will not take take a long time, collecting biologicals, is very different from ones on the market is not a simple affair, but I think it's a tremendous bet and I'm really glad we made the acquisition last year.

We have also, in license we tried to accelerate our presence in biologicals, so that is why we have licensed quite a few products we have seen over the year, and are continuing to invest in our own product line.

New set, not surprising, this is the world in motion.

As a new scientific opportunity comes around, we create a set around it, and we have recruited some first-class leaders.

There will be more changes in the mix and the number of sets.

The cost set is smaller and beautiful in drug discovery, small and empowered is beautiful in drug discovery.

And I think this model has some room to improve further and make us even better.

I am shocked that the rest of the industry has not copied us.

I actually know why, because it's a very difficult transition to go through, as you'll remember.

But in any case, it's a real competitive advantage, and we think some of the product increases we have noted, which is very visible now, definitely is attributable to this structure and the legalese, the freedom with which scientists and the transparency with which they operate.

We wanted to globalize R&D.

Not a big deal, but you need to do it.

We have a chemistry center in India, which I would like to see expanded.

I think we can't beat the price and the quality there.

We opened for business in China.

We are thrilled about the quality of of scientists we are recruiting there.

We are neuroscience in China.

This going to be a very exciting technology to follow.

We have small teams in Singapore, Eastern Europe.

We are pretty much all over the place, and that's the way it should be.

We've got to get access to the best science in the world, wherever that is.

And then also in terms of externalizing, we've done a number of deals, no different from other companies.

The only reassuring thing is whether we take those deals right or wrong.

And there's an easy way to look at this, is to say, Well, let's take a look at the deals we made five years ago, not this list.

Let's take a look at the deals we made five years ago, four years ago.

How many of those deals are still alive?

How many of those are still progressing?

In my case, 75% of our deals from five years back are still alive.

That's a very high number.

But you see, for instance, the [Exalexis] at the bottom of the middle occur.

Of course, the [Exalexis] deal was done years ago, but this is a count that they have delivered to us, this proof of concept in hand.

So there are other engines working for GSK, and it's starting to show now, and starting to make an impact on our point line.

We also picked up marketing products, some geographically importantly, not all global.

Lovaza is U.S., Aliviais Europe, [Zagaret] is for the time being, international, and there are a couple of consumer products which are global.

Finally the proof of the pudding is how good is your pipeline.

I want to go really quickly.

You're very familiar with this.

The vaccine pipeline is terrific.

On top Cervarix , probably the biggest opportunity we have faced ever as a company, we see six new all-significant at least very interesting from a public health standpoint, most might not be a big bagger dollar and cents wise, but it is a vaccine for malaria and change the world in many parts of the African and Asian continent.

So this is very strong, and we have to manage that growth very carefully.

So we extract maximum mileage out of those terrific projects.

Oncology, no need to talk.

We have 15 faze redevelopment program.

We built the program from basically scratch in the last eight, nine years, and we're building Tycurb, and we're very pleased with the start, and we'll comment on that situation.

Cardio and metabolic is interesting.

This is where we have a mix of best in class and first in class.

Our GLP1 is a very competitive offering.

We're not done.

But so far what we have seen we'll like it a lot in terms of efficacy, safety, convenience.

You know, if we come out after [Biata] and the others, we want the best offering.

Otherwise there's no point participating in this market segment.

So we are very excited about this.

On the other hand, RRPL 2 product is potentially a transformation product in this field and we will be filing very important clinical data in a major publication.

We were hoping to show it at the ACC but didn't make it on time.

We're still reviewing the data by the way, so I not going to comment on what's in it, but from what I understand, the scientists want to publish it in a major publication, and we have other exciting products as well.

Neurosciences, again, you followed at the workshop what we're doing there.

My take on it is we are very interested in molecules, but more important are able to attack the very gigantic markets of C&S, Alzheimer's and schizophrenia and so forth.

In the past we were in clearly smaller market segments.

This is very exciting for the future.

Altogether, if you look at today, where are we today?

Well I have said last year, we had, in the best case, if the FDA cooperates, 25 potential key launches.

This is not small stuff and small-line extensions, 25 key launches, and so far, if you follow this core count, we have passed 7 already.

So, we are on the road to 25.

We might not, we will not make 25.

I'm sure there will be some delays from the FDA and the like.

But it is a substantial workload, and frankly, we'll have implications on how we can make sure every single product we put on the market, you know, is very successful, and we extract the maximum advantage from those products.

This is a survey we apologize.

Some of you don't like to see benchmark studies, but I think benchmark studies are very important, particularly the benchmark studies which have existed for a very long time, because at minimum, they show you how you're progressing.

When I presented this to you seven years ago, I showed this to you.

We were at next to last.

So allow me to brag, the last two years we've been number one.

Now, this is a survey that only measures a number of products.

It doesn't try to make an assessment on the value of the products.

So it's an incomplete piece of information.

So, on that criteria, and of course, they give you more points to late stage molecules as they should, but on that point we're number one.

But if you look at the other significant benchmark study in our industry, which actually measures present value of the pipeline with the appropriate,risk assessment attached to it, and replacement value of the pipeline versus the sales you have, GSK also finishes first in the comparison of all pharmaceutical companies.

So we're not happy.

We want to do more, but I think we're off to a good start.

The bottom line is simple to understand.

We have strong fundamentals, diversified business, a fabulous vaccine business, best in class consumer health care, pharmaceutical business which is clearly going through a tough time because we have Avandia and generics, but where the engine is going to be new products, the pipeline is in good shape, R&D is in great shape, but all this is said and done, we're facing an even tougher environment than a year ago when I talked to you.

Clearly things have moved one notch more.

It wasn't easy to start with.

It's getting harder.

So in a kind of challenging and fast-changing environment, you can't fight the government agenda.

You can't find the environment .

You have to fit to the environment and take advantage and ride the wave, and I think this is why expect the challenges that we have initiated in the last few years, in fact, if anything to accelerate, because we need to stay with the program.

We need to keep up the efforts to make us by far the best R&D organization in the world, by far the best company in the world, and there's a lot of work to be done to get there, but I am very encouraged by this combination of being strong in tough times.

Good things happen to strong companies in the worst kind of weather.

So on that note I want to thank you, and I want to also open the next presentation with Julian Heslop, our

Thank you, JP.

I'll focus on most of my presentation.

On business performance results which as you know exclude the restructuring costs relating to the program we announced in October.

So I'll focus on business performance, but I will cover the total statue results on one slide.

As usual, I will talk in terms of growth versus last year at constant exchange rates.

We turn to the first quarter, the last quarter of the year.

Turnover with level and pharmaceuticals were town 2%, and consumer health care sales were up 11%.

Cost of goods as a percentage of turnover was unusually high during the quarter, and that reflected a relatively high vaccine and consumer health-care sales mix.

But also, a number of one off items, particularly stock write-offs.

If you exclude stock items from the 25.6%, it drops to 24.2% of sales, 24.2%.

SG&A costs decline 13%, benefiting from continued cost reductions, and also higher one-off costs last year.

R &D expenditure was broadly in line with the previous year.

If you look at other operating income, GBP 119 million, GBP 65 million of that was royalty income, and GBP 51 million the mark to market on the Quest Collar.

The Quest Collar is an irony because economically it protects half the value of our quest holdings, worth about a billion pounds.

It is protected so when the price moves up and down, half the value is protected and doesn't move at all.

Unfortunately, because we equity account for quest, the accounting bodies require us to market this instrument and move it accordingly.

So it's a disconnect between economic reality and accounting.

It was favorable in the quarter.

Lastly, if you look at the CR growth and the sterling growth, you see they're broadly the same for the first time for many quarters.

This chart does contrast the business performance results which you see in the left-hand column.

It shows you in the middle column, the restructuring costs of 338 million.

Those costs, two-thirds of them are redundancy, one-third asset write-off, and to the right in the third column, you see the total results, simply the sum of the first two.

Moving on and back to business performance for the full year.

Turnover increased 2% for the year, pharmaceuticals were level, and remember the decline in Avandia sales and the intensive generic competition in the U.S., which basically result in that level of performance, and consumer health care, turnover was up 14%, benefiting from the introduction launch of Alli, our weight loss product, and also the acquisition of C&S.

The cost of goods margin increased in 2007, and reflected a number of factors; but particularly that higher consumer health-care and vaccine sales growth.

Secondly, the generic competition to a number of very high margin U.S.

products, and thirdly and very importantly the very high loss in margin of Avandia sales.

We expect to further increase in the cost of goods is a percentage of turnover in 2008.

The Company delivered a further reduction in SG&A costs to the percentage of sales, although part of this improvement was a result of lower legal charges.

R&D expenditure was 3% lower than the previous year due to cost saving programs and also due to lower restructuring costs.

We continue to be good at improving our productivity and R&D at the same time as we improve our activity and R&D, the net effects meaning we control our R&D expense pretty well.

Other operating income was GBP 475 million for the year, and the increase compared to the previous year was largely driven by an improvement in royalty income, which went up by GBP 122 million to GBP 216 million.

Royalty income now represents 45% of other operating income.

For 2008, we expect our operating income to be broadly in line of that achieved in 2007.

Turning to the earnings per share, we start with interest.

Interest was higher for the year, and that is pretty much the result of the enhanced share repurchase program.

That's the key driver of the increase in debt.

Earnings per share, 10% CR growth, and that benefited from the lower tax rate, but also benefited by 1 percentage point from the share buy-back program, and that 1% point benefit is net the interest cost, the related interest cost that arose through buying the shares.

You have clearly to take the two into account.

For 2008, we expect the tax rate to be slightly higher than it was in 2007.

This chart summarizes our earnings guidance for 2008.

We always expected the generic hit in 2008, but what clearly surprised us were the events in 2007, with JP referred to, with Avandia, which impacted not only 2007, but will also clearly impact 2008 with the full year effect.

Overall, we believe that the earnings guidance we have given best reflects the swing factors facing the company in 2008.

Moving on to cash flow, taxation paid was at a more normal level in 2007.

You'll recall, within 2006, we made the tax settlement payment to the IRS.

If you look at capital expenditure, the increase is fundamentally driven by increased expenditure on intangible assets.

There are two parts to that, more in licensing with the related payments in R&D, and secondly, payments made in respect of Alli to Roche.

The increase in net debt during the year of 3.6 billion which you can see at the bottom of that chart is pretty much the same number as share repurchases.

The two pretty much equated to each other, free cash flow basically funded the dividend, pretty much funded acquisitions, the share repurchases drove net debt up to GBP 6 billion.

In conclusion, for 2007, the board has approved a dividend of 53p, 10% up on the previous year, we repurchased GBP 3.75 billion of shares, and GBP 2.5 billion of that related to the new share buy-back program.

We planned 6 billion of share repurchases in 2008, and both for 2007 and the 2008 numbers are exactly in line with the commitment we made last year.

Together these actions reflect our continued drive to improve cash return to shareholders.

Firstly and mostly, through a preface dividend policy and lastly through share repurchases.

Now I'd like to hand back to JP.

Thank you very much, Julian.

Before we start the Q&A, I'd like to introduce Andrew Witty to you.

Andrew, of course, is the CEO elect, and many of you are familiar with Andrew, but I just want to say something about Andrew.

I think he is very modest.

People have said he's young.

Yes, he's young, but he's very experienced in what matters.

He has a very good understanding of Asia and other great countries which, of course, is importantly.

He has experience of the all important U.S.

Pharma market, because he's worked there, and he has the ability to implement change, which as you have seen is necessary.

And the proof of the pudding was, of course, some of the significant changes he made in what is essentially the least change-friendly part in the world.

No, that's not the UK.

That's Europe.

So, Andrew has really demonstrated that he has the skill-sets to run a major pharmaceutical company.

Frankly on top of that and more important to me, he has leadership clout.

When you talk to people around the company, they know that Andrew knows how to extract value from his team.

He knows how to spot talent and promote it.

He has what it takes to align, essentially, an organization of 110,000 people to get things done without, you know, having incidents or bad management practices dominate as we've seen in other big companies.

So I'm very glad to be able to pass on the baton soon to Andrew, and I'd like him to introduce himself to you, just say a few words, and then we'll start the Q&A if you don't mind.

Well, thank you JP, and it's a pleasure to have the opportunity to talk to you briefly today, and then obviously in the future, there will be plenty of more occasions I'm sure.

Before I start, it would be remiss of me not to acknowledge JP's great leadership of the company since the formation of GSK.

And other the period, I think, JP you delivered an average of 12% EPS, over a long period of time, of course, and, you know, that takes -- that takes a lot of do when you actually think about what the portfolio of the company looked like back at the beginning or the portfolio looked like now, trance formation of the R&D organization, the pipeline.

I think you deserve an enormous amount of credit for that.

And I'd like to thank you for your personal support of me in the last few months as we've been working in the transitional period.

Many of you have been wondering what I've been doing since the announcement was made in my appointment.

Transitions can be sometimes short.

They can be sometimes long.

This is ideal for me, because it has given me the chance to really get around our organization.

And really make sure that before I take over, I have the chance to talk to talk to a lot of people inside the company and a lot of our stake holders on the outside of the company.

So, that as I start to put together the plans that I want to take forward, I've really had the chance to inform that thinking in a much greater way than might normally be the case.

In fact, if you go back over the last two to three months, I've only spent about three or four days in the Brentford office at GSK.

Many of you have been to Brentford, so you know that is not the hardest thing I have had to do.

But, I have been all over the world.

I've been in Japan.

I have been in Singapore.

I have been in India.

I have been in the Middle East.

I have been in the U.S.

every two weeks since my appointment.

And that's really the way it's going to be, I'm sure.

It's the way this job has to be.

This is a global company.

And it has been an excellent period for me just to get a sense of what our people are like, where the issues are at, and more importantly where some of our opportunities are going to stand going forward.

You're not going be shocked to hear that I'm not going to announce today a new strategy for GSK.

I'm still taking the time to assemble how we develop forward.

But, I do want today the take the opportunity to give you a sense of where some of my perception and where some of the direction of my thinking is going.

Let me start, first of all, with what I think is absolutely fundamental when you're looking after a company the size of GSK and the place that GSK fulfills, and that's obviously the environment.

We operate in a highly regulated environment in the eye of society, in eye of the media and on the front of many government ministers' agendas, frankly, and so it's naive of us to believe we can do anything in isolation of what's going on around us.

We have to be focused on the environment and make sure we're understanding of it.

It's self-evident and JP already touched on it, that the environment got tougher and tougher more quickly over the last few years.

And I for one, don't believe for a minute that many of the changes we've seen are simply going to reverse and go away again.

The changes are real changes.

There are shifts in payer power, for example.

payors are far more powerful today than they used to be, frankly.

They have more information.

They have more ability to control physician behaviors.

All of that's changing the commercial environment in which we operate.

The regulators are changing and JP described very well, I think, the kind of trends which are going on inside the regulators, leading to slow downs and approvals, greater focus on risk, we need to recognize that.

We need to figure out ways in which we can navigate that new reality.

The pressure on us as a global company to make sure we stack up and do our part to access medicines in developing markets and, in fact, actually develop the drugs that are needed for neglected disease.

We can't avoid that, and JP has led from the front from the very beginning in terms of our commitment as a company to do the right thing and invest properly in the development of diseased and developing worlds.

All those things are going on around us, and we need to recognize that.

What we need to do is make sure as a business we to continue to develop our operating plan, our business model, to make sure we fit better with those new realities.

That will have to lead to all sorts of things.

It leads to new selling models.

And it has been well publicized over the last couple of years at GSK we have done an enormous amount of work exploring new ways of selling.

Those types of pilots and less sons we learn have now to be implemented because, clearly, a new selling model is required in large numbers of countries around the world, an for different types of customers.

We need to be able to ensure that we engage with our payors properly, through being able to demonstrate the value of the medicine more clearly, be open to flexible relationships with payors who is may blink at the initial idea of price of the new medicine.

Those are the sorts of changes you'll see happening.

And as you know GSK, over the last few years, we've been assembling our thinking and doing the work to get ourselves into a good position, to really make sure we can make the right move at the right time.

A key among all of that is really the role of R&D and in all of the countries I've worked, and I've had the chance the lead our businesses in four continents now, I've never once met a politician or a payer who has ever said to me we want fewer innovative new drugs.

They all want new drugs.

They want new drugs that meet fundamental unmet medical need, which carries a great burden for their system.

The challenge is for us to deliver them.

The challenge is for us to make sure we have an R&D machine which really gets it right, and get it right in the eye of the customer, in the eye of the key stake holders.

And that's clearly what we've been focused on at GSK since the formation of the company, and the development of the sets and the progress we've made in the pipeline has made tremendous progress there, an area where you can take it from me, we will never stop.

I don't think we'll ever be happy with the level of what we're capable of doing in R&D.

Even though last year we got approval, more than anybody else in the industry, for four new chemical entities, three small molecules, one vaccine.

Even though last year we put six more moleculed new molecular entities into registration.

Even though we put eight more new chemical entities into full development, it's not enough.

We have to keep on really pushing ourselves organizationally.

And the way which we diversify our focus on different types of science and the way we reach out to people outside of the company through our externalization efforts.

All of those things have to be constantly pushed and pressurized through the organization.

Because future, as far as I can see in the environment that we can see right in front of us, is that the winning strategy has to be one which brings wave after wave of new molecules, which really fundamentally meet unmet medical needs.

JP said the days of the line extensions are receding, not going away completely, but are receding in their relative importance.

We need to make sure that as an R&D company, we really get that message and make sure that our organization can deliver.

I'm confident it can, and there will be plenty of more opportunities to talk to you about how that looks in detail.

But it's not just about R&D.

For a company like GSK, we, of course, have to get R&D right, but we also have to go after sales growth.

And as an organization going forward, the focus on sales growth is something we really want the ensure is maintained and built.

Now, how do we get that?

Well, clearly, a big piece of our business is the classic pharmaceutical company, and that's what we've been talking about so far and I just talked about for the last two or three minutes.

But we have many other parts to this company.

We have the vaccine business.

We have our buyer pharmaceutical business.

We have our consumer business.

All of these businesses represent significant channels of growth opportunities for us going forward.

And that's an area where we're really going to focus our attention in terms of how we build up those businesses.

Again, great progress made, six new vaccines to go in the next couple of years.

Within five or six years we expect a fifth of our overall R&D activity to be in bio pharmaceuticals, excluding the vaccines by the way.

Very significant progress in those areas.

The consumer business, I think, has really demonstrated that it is a real deliverer of sales growth in the organization, and we've demonstrated it, as owners of that business, we know what we're doing.

That we can grow as fast as anybody else in the sector.

And we can deliver margins higher than anybody else in the sector and that really represents a powerful engine in the organization.

In addition the businesses, we need to start tapping other areas of growth, and just one for today is obviously the emerging markets.

An area where already 25% of pharmaceutical growth comes from the so-called emerging markets.

That number will only go up over the next 5, 10, 15 years as economies like China, India and the rest start to propel themselves into a different type of platform.

The great news for Glaxo Smith Kline is we're already market leader in many of those countries.

To give you one example, in India, a business I know particularly well, we sell product in that country which accounts for 20% of the global GSK product, ie, for every ten packs we sell worldwide two of them we sell in India.

We are already a very substantial business in that marketplace.

The challenge is now to make sure we ride the wave of economic prosperity in emerging markets to allow those geographies to also become engines for growth for the company.

So, for me to conclude, just simply to say there's a lot going on in the environment.

My objective is to make sure that we take all of the great foundations we have as a business.

That we really never give up looking for new opportunities both for serious medicines to fix unmet medical need and also seek out strong new growth opportunities, so that as the industry goes through what is an industrially tough environment, this company gets through that.

Navigating it in the most positive way positive.

So that the end of the changes, which we're seeing in our industrial landscape, this company is the strongest around.

Thank you very much, and I'm going to ask JP, Julian and Chris to come back for the q and a.

Thank you, Andrew, and please mention your name, as always and your organization.

We're going to take questions as soon as our colleagues are in place.

Take the gentleman there.

Yes, sir.

Thanks for taking my question.

My name is Marcel Brand from CA Cheuvreux.

Three questions if I may.

The first one, why was the guidance for 2007 so low?

You mentioned Avandia was obviously the surprise, but you failed to mention Coric which probably also did less well than expected and also Advair volume growth was also much less than expected.

That brings me to question two.

Why is the guidance on 2008 so conservative?

You're guiding already 350 million savings.

Other operating income expenses is going to be continuously high because of royalties.

You have significant share buy-backs, and if I understood your presentation correctly, you don't share [Sernovis] view on Cervarix.

And then the third question is on (inaudible - highly accented language) this is important information, the imaging study data.

Since this material is non-public, can we expect release of headline data before publication in the journal.

Thank you for your questions.

When you say our guidance was wrong, it depends what you compare it to.

You talk about Coric.

Our internal forecast was actually on track with what happened in the marketplace.

I can't comment on other people's forecast, but as far as our forecasts are concerned there was not one product that deviate too much from what we expected.

On the other hand, I think in my presentation I did mentioned there were areas that surprised us on the positive.

That's how we were able to fill the gap of 9 points Avandia cost.

If you exclude Avandia in the comparison from the baseline and from what actually happened, the Company grew 19%, and I think the areas that I mentioned where we did better than we expected-- I'll just repeat them very quickly.

Slightly better turnaround, the consumer business.

In other words, consumer business beat our own forecast, better cost savings.

This is not a coincidence.

We accelerate the restructuring.

We--it took us--in urgency, we tried to close the gap.

This is not a passive exercise where we just wait for the business to go where it goes.

We did something about trying to fill the gap.

So you shouldn't be too surprised that this is a very good team in terms of execution that we're able to push the Company a little harder and a little faster.

But the cost savings was a big one.

And to be fair, we had a forecast which was much more modest on pandemic preparations and that helped us.

Those were the three variations.

For you, I did look at your consensus.

I think there were a number of products, no big delta anywhere in particular, but they added up to about GBP 200 million of sales that you do not expect us to realize, and if you think about pandemic, that might be just right there.

That would be the case, and there were also some, I would say, less aggressive numbers on SG&A reduction, and that kind of explained that the analysts were a touch below--I mean, the consensus of the analysts was a touch below where we ended up.

For '08, I don't want to qualify the guidance--as I said, and I tried to make that clear, there are many moving parts right now.

You saw the swing factor, they're huge.

Depending on where you aim on Avandia, on Cervarix , on pandemic your guidance is going to have a lot of fluctuation.

I think we should wait and see.

This is a management team that's going to really try hard to do better than guidance, but from where we are today as we speak, this is our best guess.

This is what a guidance is all about.

And then finally, on the last point, we have to finish cleaning up the data--obviously this is--there are a couple of trials.

The dose ranging trial will be published at ACAC.

As far as the imaging study, we have investigators.

They have to be absolutely done with data analogies, writing the summaries and so forth.

As I said, we are planning to file the magistrate for a significant journal, and at some point, I would say in, the future, there will also be a decision what happens to the drug.

What's the next step, or what do we do?

That will also clarify how we feel about the drug.

That will come in some months, but not too long, and that's all I can say at this point, sir.

We can't reveal a work in progress.

This is a complicated study in terms of giving a headline would be difficult because you need to have the full story, the primary end point, the secondary end point.

I mean, it's quite a complicated study.

And so we apologize for not being able to give you more precise information, but that's really due to the complication of the

Mike Hancock from ABN Ambro.

Three questions if I may.

First for Chris perhaps.

Could you give us an update on your individual selling models, I think you do some pilot programs, How is that going?

And related to that maybe, I guess, for Andrew.

We've heard a lot about the operation excellence program from last year.

Seems to be about 5% of your operating cost base that you're extracting, and I wondered how much more might be able to be extracted to reach that operational perfection?

And thirdly in, the shorter term, JP, for the FDA in this ping-pong match you've got between this late-stage and non-extensions, what can you realistically do to try and speed up that process and get these pretty vital XLs--ILs whatever they are through quickly?

Okay, Mike, I'm going to try the third one, because that's where you're going to get the worst answer of the three by far.

We're trying everything we can.

I mean, you have no idea how frustrating it is to get the casual FDA letters that say well we know we're missing the PDUF, we're not ready.

We don't have--literally we're getting letters with this kind of pong of you read between the lines.

Now the FDA does a very good job on most files, and they're very focused and very serious.

My advice as the review of Cervarix you're dealing with a huge file, and they want to see everything, and I have no problem with many of the products, but you were mentioning line extensions.

This is clearly not their priority.

So here you sense sometimes that they just--they just take longer than they should, but what can we do?

We can only try to press them and so far and so forth.

So we have no magic solution.

And we are looking--if you look at our track record for Cervarix , we made it on ONC, in fact GSK has more approval than any other company, in fact we had 15% of the NC approval, our company alone, and we certainly don't have a 15% market share.

So there are areas where you know you're going to areas where you're going to have a fair and quick review, it's life-saving medicine gets treated quickly.

First in class medicines get a lot of attention, not necessarily speed, but a lot of attention and good reviewers, but then there's everything else, which is 80% of the pot, and that is just sometimes moving slow.

But we hope we're going to unblock, for instance, Trexemic, I'm kind of optimistic.

There are a number of areas where we hopefully are at the end of the road and we're going to get our pull, but there's no magic solution and as you know all companies suffer from this ban.

Now I'm going to pass on the question that we raised for Andrew

Michael, in terms of the OpEx question, first of all, we'll never reach operational perfection, and I think the whole--one of the experiences of this management team is that we're never comfortable with it, which is why you see every year grinding away at the expense base of the Company.

Personally I think there is significant onward opportunity for us to improve.

I think as you see us continue to do more externalization, we do more global sourcing, the way in which we're changing our selling model, the way in which we're changing the relative importance, for example, of our advertise and promotion within our overall mix, all of those things are touching big, big lines at the expense base, and I think, over time you will continue to see us really address that, and make sure that as we have more product, more opportunity, we're not necessarily having to always ramp up more costs, because I think we can drive a tremendous amount of efficiency in the organization above and beyond the current program that's in place, and that's the spirit of the organization we've had for a few years, and it's one that I absolutely expect to continue and if anything on the shelf.

And on the field force and this applies also to other operating expenses it's not very difficult to actually costs.

What's hard is to actually reduce costs while actually keeping the same output and perhaps even increasing it.

So when we look at the field force, we have actually quite a few product launches to support.

So even while we're losing some sales to generics, actually when you're on the ground, you still need an awful lot of promotional support.

So we have been experimenting over the last several years on different selling models, and really what we've been able to do is take out about 25% of our primary care over the last couple of years, and the way we've done it is a couple of things.

First is, typically the way you organize a field force across America is really by density of where the physicians are.

The more doctors there are, the more reps you've got on the ground, and obviously you've all heard about access issues there, but those access issues aren't constant wherever you go.

If you're up in Oregon, they're pretty difficult.

If you're up in Southern Texas, there isn't an issue.

So we actually decided to deploy our field forces more along the bases of where the opportunity is, what access points might be like, what reimbursement might be like, what other demographics might be like.

And the other factor that we've taken into account is that our reps are actually looking for a lot more accountability.

So by redeploying and actually operating on a model that we don't think anybody else has out there, we believe we have been able to reduce our field forces without actually harming our competitive ability, without harming our ability to actually launch all of these new products successfully.

The other thing that we've always been careful about also--and we haven't always done this all in one go, is for me one of the most important factors, is we look at sales force restructuring is how many physician rep relationships do I disrupt, and we've been very careful about that, and even in this last go round last November, the vast majority of those relationships weren't disturbed.

Thank you.

The gentleman in the middle there.

Kevin Wilson from Citigroup, a couple of questions.

JP, you talked in the past about SG&A declining and R&D over time increasing.

Could you give us an update in the light of your 2007 take a ways from FDA, and where that goes?

And then to roll it over to perhaps Andrew, ask him about where he sees industry margins going long-term, because you're clearly talking about some significant pressures, but at the same time be efficient at R&D.

What message would you like us to take away about where industry margins are going to go?

And secondly, a specific question on Cervarix , would it be reasonable for someone looking at it from the outside for you to assume that you as an organization know a great deal about ASO 4 as an adjuvant, and maybe you didn't tell agencies around the world everything you know about ASO 4 at the moment that you filed that enormous package and therefore you might be in a position to respond if somebody asked you with a detailed review of the safety and efficacy of

Okay, in terms of R&D, as you know, we have had competing influences in R&D.

Our pipeline has grown significantly, it tripled in the last seven, eight years.

So costs associated with pipeline development have kept growing and growing.

On the other hand, during the same period of time, we have, you know, quite effectively attacked the cost of doing things.

Like a plastic piece of company, where you try to do the same with less or do more with less, and we've been quite successful.

If you think about just the outsourcing of clinical trials to low-cost countries that's a $600 million savings right there, on the size of our company.

So you're able to affect basic fundamental costs of functioning in R&D and the infrastructure cost in R&D , and of course, this money wasn't really put on the bottom line.

It didn't flow through to the profit line, because we spent it on the pipeline.

So as you have seen this equilibrium has worked pretty well, and I can't speak of what happens in five years' time, but so far, we're not overly concerned.

I think guidance for the next couple of years is stick to the sort of growth that would go with the sales growth.

In other words as a percentage of sales, I think the R&D budget is going to stay the same.

Now, I've said as sort of an inspirational wish to say, if I was starting a pharmaceutical company from scratch, I wouldn't say we're going to spend 17% of sales on R&D, which practically everybody does.

I wouldn't do that.

I would say, I'd like to spend more, because like in electronics, like in other industries, the bigger spender in percentage of sales tend to get -- all things being equal, tend to get major benefits, and in fact, all things are not equal.

We think--and based on the CMR survey, we're 200 to 300% more effective in what we do in R&D than the competition.

So there is a real competitive advantage element here if we can raise the money to build up R&D for the future, and that is going to be an issue faced by the next measurement team.

They're going to have to make some trade-offs between short-term earnings and long-term achievements.

But so far, Kevin you will give us credit.

We have grown 12% in a very tought period of time.

I lost my three best drugs within years of being a CEO.

So we are good at delivering for short-term, on the hundred yard dash, but we also never take our eye off running the marathon, because that's where the big wins will be, when we transform this product line and starting to show that we have the guts and the goods to replace our aging product line that is now more behind us than in front of us.

So the last question--can you remind--I don't have a pen, so--you

Yes, on (inaudible) do we have more information on that?

Why don't I pass it on to you?

Sure.

Before I answer that, let me -- I share JP's view obviously in terms of where margin progression is.

I think we're likely to see cost of goods probably drift up a little bit, because we've got more licensed products, some of the newer product just the way they are synthesized, that kind of thing, but clearly, as I've already said to Michael's question, I think there's opportunity in the SG&A line, so the net-net of all of that is not obvious to me will be a dramatic change.

As far as the response to the FDA Cervarix is concerned, as you've already heard, we're planning to get our response in Q2.

We think we can make a very full response to them.

There's no doubt we know a lot about ASO 4.

I'll remind you it's not only approved in Cervarix in Europe and the rest of the world, it's also approved in another vaccine called [Fendrix] elsewhere in the world which was about three or four years ago.

So this particular [Adjuvant] ] we know a lot about.

We have a very high degree of confidence.

Frankly, it's the [Adjuvant] that makes Cervarix as effective as it is in terms of cross protection, and particularly we think the [Adjuvant] plus the fact that we originally developed this as a (inaudible) and not (inaudible) subsequent which makes us confident we have protection both on 16 and crucially 18, and that that is going to be sustainable for a long period of time.

Now, if you compare that to the other vaccine, what you see there is not the same sustainability, not the same degree of sustainability on 16 and 18, and not the same degree of cross protection when you look at genetically related sub-types to 16 and 18, i.e., for them it's worse on 45 which is close to 18, all of which supports the hypothesis if you will that I'm just laying out.

And that has a lot to do with ASO 4, not entirely, but a lot to do with it.

So I think in terms of us going back we're confident we can go back and respond.

Obviously, then, it's up to FDA how they then go forward, and as JP said, likely there's going to be an advisory committee on why there wasn't going to be an advisory committee, and maybe there will be more questions there.

We'll see.

Thank you.

The gentleman in the middle.

[Kerry Scott] for HSBC.

A question for Andrew.

2008, we've got guidance.

2009 is your recovery, effectively, so you've given us some idea as to perhaps where you think SG&A etc.

But just running through, looking at JP's presentation, is there anything that you think JP has missed in terms of the 2009 recovery?

Is there anything that you think that JP perhaps didn't emphasize strongly enough in his presentation?

Can you give us an idea of where you see the two year view?

You have to remember he's still the boss for another three months.

So I'm not going to say anything too much.

So --

I'm a lame eagle.

Listen, for me, two things.

First of all, when I take over as CEO, it will be a good time for me to kind of answer that question, number one.

Number two, we'll focus on making sure you have a clear view of what we believe for 2008.

And as we've tried to describe it and JP has described it very clearly, there are a lot of swing factors in 2008.

What we're guiding here is what we think is a realistic estimate of what is likely to happen this year based on what we know today.

Swing factors will go one way or the other during the rest of the year.

Yes, I know.

You're next.

I promise.

It's so far.

Sorry.

It's Andy Cosen at Red Burn.

Just trying to understand operating cost items better in 2008.

The guidance to my mind implies quite a bit contraction in the operating margin, despite some cost savings coming through maybe adding 2% to the operating margin, and you said maybe the R&D ratio stays the same.

Other operating income probably stays the same in absolute terms.

Cost of goods obviously gets worse, which leaves--but not to the extent that would explain the underlying margin decline that you've been talking about.

So should we be assuming the SG&A is going up a lot, or that was something that Julian didn't talk about in terms of guidance on cost line items I noticed?

Fair enough.

Julian, you want to address.

We're not in terms of cost of goods, I think we're not giving specific guidance on cost of goods, but I think the cost of goods, excluding one off items is a good sort of starting point in terms of determining what they might be for 2008.

In terms of SG&A and R&D, clearly R&D is going to be driven by the progress we make in the pipeline.

In terms of SG&A, we have a strategy to bring down SG&A.

At the same time, our bottom-line focus is on maximizing the earnings per share given all the other constraints around us.

So for example, if by investing in more sales force we can boost a product and make profit from it, we're not constrained by the fact that we have got particular guidance around a particular cost line in the P&L.

So in terms of SG&A and R&D, these costs, they're out puts based on what we need to do, rest assured for what we need to do, we aim to do it as sufficiently as possible, but we're not giving specific guidance around those two areas.

Our operating income, as I said, is broadly in line with 2007.

Thanks, I think.

The gentleman in the back.

Thank you very much, JP.

It's Matthew Weston from Lehman Brothers.

Three quick financial questions if I could, and then one bigger one on the picture for Andrew and JP.

On the financials, could you just split pandemic through ex-US and U.S.

so we can see where the demand has been?

Also, the guidance on other operating income being flat year on year?

This year if I recall, it had about 220 million sterling of product divestiture income in there.

Should we also anticipate a similar element of product divestitures, or is it the royalty elements of that line, which is going to grow in 2008?

And finally, if you could just give us quick guidance on where you see the tax rate going for 2008, I would be grateful.

And then finally, on the big-picture question, one thing that both JP and Andrew have made clear is that the future of line extensions is going to be a little bit more difficult an environment where payor power is stronger, and clearly that's been a very key strength of GSK over the last handful of years.

And another key strength of GSK has clearly been Advair, which has been a tremendous success under JP's tenure at the firm.

If I look at Andrew's next ten years and beyond Advair program becomes a very big element of the future potential of GSK in terms of maintaining that franchise, and I would be very interested in terms of whether or not we should see that basically as a line extension, because one of the things you've said you're aiming for is once daily, and quite frankly if I'm a payor do really I care about once daily anymore, or should we really see that as a real key therapeutic shift in terms of asthma and COPD, which is really likely to take GSK forward into the next decade?

Very good questions.

Let me just take one and a half, and then I'll pass on to Julian for the other two.

The one in the middle if you look at other operating income, this is a very easy answer to that one.

We're going to grow royalties because of bunch--a big part of those royalties come from Gardisil.

I think Gardisil is going to grow big time next year, in '08 as well.

So, the royalty line is going to take a bigger share of operating income, and I think it's fair to say that we've been somewhat conservative on the rest of operating income, saying, well, we will sell fewer products and so forth, but it gives us a little bit of room--wiggling room.

Not huge, but clearly this is what the makeup of this line is.

So if you do your forecast on Gardisil, you fill in the rest, you'll see that, there might be a little bit of room here.

On the last question, remember one thing.

Advair is not going to go off the cliff and disappear overnight because of the regulation in the U.S.

did not allow automatic substitutions for similar our products.

So we'll have more time as we launch Horizon, we'll have more time to manage the decline of Advair, because there will be branded basically generics coming in, but they won't get any break from the automatic substitution, and as we have seen in the U.S.

market, those inroads are fairly modest.

Now there will be--we're actually counting of those enrolled to be more important than it would have been five years ago simply because payors are going to play us against the generic and we'll have to give up some price concessions and so forth, but I think there is--the market is going to be more stable when we introduce Horizon, we're not going to face the abyss and then try to build it up from zero.

And I think we're going to have to be clever on the pricing and on the claims, you're absolutely right.

The extent of differentiation will vary with the kinds of studies we have done, and I think Andrew had mentioned specifically we want R&D to deliver products that sell to the payor.

So we're not going to be there and be like a deer in the headlight and be very surprised if the payors say, well, it's marginally better, so I'll give you a little bit more than the generics, but I don't want to put you on the form of some significant concession of some kind.

So I think it's more in the matter of how we sell it and how we divvy up the drug and what kind of advantages we have, and I also want to remind you that yes, line extensions are going away, there's no question, but they still are meaningful, and I would say that it's all in the eyes of the beholder.

If you present Horizon as a line extension, it will be perceived as a line extension.

We have no intention of doing so.

So I think there are different molecules, they don't really fall into that category as quickly as you presented it.

On the pipeline, you're absolutely right.

The reason GSK got good at line extension in the last 10 years, I had nothing else.

It's a simple answer.

We were not that, that clever.

We just said, what do we have?

We have two drugs in Phase III, one died within weeks, so, you know, it was not too hard to say what can we do, and that's when we decided to really push Advair, which we thought had long legs in the marketplace, and many people disagreed with that but we proved them wrong, and then to divvy up as many line extensions as we could, so at least we could (inaudible) some of the patent exploration, and it's still working today.

But if you look at the value of our pipeline going forward, line extension a fraction of the value, a small fraction of the value.

The big value, frankly, is vaccines number one, and everything else.

So I don't think that there's--I think that we're in the right place in terms of positioning.

Coming back to some other question on --

Yes, we're not disclosing what proportion pre-pandemic was of our total influenza vaccine sales.

I think JP sums it up, in terms of other operating income, the quality of other operating income, i.e.

the royalty element is improving--improved in '07 versus '06.

I think it will improve '08 versus '07.

Tax rate slightly higher than the tax rate in 2007.

Andrew, you want to add to--

If anything I'd add, Matthew, on the post-Advair scenario is Horizon isn't one product, all right, and our respiratory future isn't about just having simply one product develop for a post-Advair environment, and I think that's important enough to keep in the back of your mind.

Absolutely, and we're entering new markets where we are not today with those products.

Okay, last question.

Yes, sir, in the center?

Go ahead.

Thanks, JP.

It's Craig Maxwell with JPMorgan.

We've got an industry going through a period of substantial change, and obviously cost savings is a lot of what we're looking at, you've got a lot of questions on this.

I think, from the SG&A angle, it would really help us if there's any more color you can give us on the understanding.

You've dropped the margin 35% down to 28%, that's incredibly impressive.

That's also got sales growth in there as well, despite the patent exposures and the sales growth.

So as an absolute, my feeling is this is probably fairly flat along those lines, but understanding are you in absolute terms decreasing the sales force, absolutely terms decreasing advertising, head office procurement, where are the lines these benefits are coming from?

And on the new selling models, can you actually give us--I know you don't want to give away anything competitive, but do you have any feel for how you can sell on the new models?

Is that lower cost stuff or is it more efficient?

Then just one last question.

I just have to ask this one.

On the clarification of the LP/PLA II and the ACC, did that imaging study miss the late break deadline on January 7th, or just didn't make the cut on the late breakers?

Well, the late-breaking new ones, to take it further, they want products which are very late stage, so we had a difficult case to present in the first place, and we came in a little late, so it's a combination of two.

And frankly, honestly, we think that going through a major publication is probably a better way to give those news.

So you can't read anything in what I said, because I can't tell you, as I said, the full database has not been publicized even within the Company.

It's still together.

Some of us have seen some part of it, but I'm not--can't give you the right or wrong body language, because I really don't know what the bottom line is on the product yet.

I'd like to pass it, maybe you want to comment on SG&A.

I'm not sure there's much more we can add, Craig, to what I already said.

In terms of the sales force efficiency, yes we are running new sales force models, that are driving efficiencies out in terms of number of salespeople, and that's one of the key elements of saving and overall sort of operation experts program that we announced.

So we are being cleverer about how we use our sales force, and that doesn't mean less salesmen as a result of that program.

And as always, I think we for you forecast for '08, you have to worry about the sales line to get that right.

That's the hard part.

On SG&A don't forget we have two divisions.

We have consumer and we have pharma.

Consumer was way up in SG&A this year because of the launch of (inaudible) So you really are better off splitting the two before you get your forecast.

That's a consideration when we do the budget.

You want to make an additional comment on sales force?

I think it's a bit early to draw a definitive conclusion.

Yes, I mean, we have piloted these things, and again, we're not--in some ways the model that's changing is really how you deploy them.

We haven't changed as much yet, what happens when a rep is front of a physician.

And because there is still that education, we are doing lots of things, like lots of other people in terms of E detailing and everything else, but I don't see any revolution really taking place in the atmosphere.

There is an awful lot of cost saving around fuel force, and I can tell you when we look at things like benchmarking our cost per meeting, doing a lot more web-based training, so we've been able to dramatically increase the amount of time we spend in the field.

That's gone up about 20% in the last two years.

So there's an awful lot of effectiveness and costs around operating the field force.

Really the same thing is on the A&P line.

I mean, there's--we have just taken an extremely disciplined look to really understanding what is driving, and the mentality often in our industry is, just throw more at it.

Just throw everything but the kitchen sink at that to make it grow, and it's sometimes , quite honestly, difficult when you're with partners, and you've got people who come from other companies and just want to throw more at it.

But if you ask people out there who gets a better deal from ad agencies, who is spending more effectively.

I got a promotional warehouse, five years somebody came to me and said we need to rent another one because this thing was so full.

Now we're leasing space out of that same warehouse on a much bigger sales base.

So this is something that we take very seriously, and I would agree with Andrew.

I think this is something that you constantly chip away at.

And no part of the Company is sacrosanct here.

We're looking at cost savings

Okay.

On that note, I want to thank you very much, and we'll see you soon.

Thank you, guys.