葛蘭素史克 (GSK) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the GlaxoSmithKline first-quarter results conference call.

At this time, all participants are in a listen-only mode until we conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

Just to remind you that this conference call is being recorded.

I would now like to hand over to the Chairperson, Dr.

JP Garnier.

Please begin your meeting and I will be standing by.

Thank you very much.

Hello, everyone.

I'm here with Julian Heslop, our Chief Financial Officer, who will speak to you in a few minutes; and also with Andrew Witty, our CEO Elect; and with Chris Viehbacher, the Head of our Pharmaceutical business in the U.S.

So they will be ready to assist me for the Q&A session.

In the meantime, I would like to make some general remarks on the quarter.

I think it was a quarter that I would define as on track, certainly on track with our financial guidance.

It was a tough quarter because we were comparing to very high sales of Avandia, as you know, but also a tough quarter because in the first quarter '07, we had quite a few positive one-timers which, of course, we didn't have this year.

Despite that, I think the financials indicate that our product performance and our profit performance seemed to be very well lined up with our preliminary guidance from last quarter.

I will also say that the other news on the pipeline overall quite good and I will come back and spend a minute on that.

If you look at the performance, the revenue line is explained, of course, by the fact that Avandia and generics cost us roughly $1 billion in lost sales.

But we are able to make somewhat of a comeback with, of course, the rest of our line, which is wide and diversified and in pretty good shape.

Just a word on Avandia.

Some of you have asked how we're doing, and as you can see, we had this brutal drop in May last year, and then, of course, there was a slight erosion that was going on.

But for the last eight weeks or so, I think we have reached some kind of equilibrium.

I haven't shown you on this graph the new RX because the new RX is a bit of a messy index.

It contains refill prescription and the like.

More importantly is to look at how many new patients are being put on Avandia every month or every week, and that is a red line that you see, that there is a stable to slightly increasing share of patients that are now either switched to Avandia from another drug or simply are receiving Avandia on top of their existing treatment.

And that is helping the total prescription line to stay basically static.

It's early days before we can tell you whether this franchise will become a gross driver again.

I think we had said at the beginning, at the last quarter review, that we wouldn't see anything move for at least six to nine months.

And I think there is nothing new there; we are sticking to the same forecast.

Now, of course, if we didn't have Avandia and generics, our business would have grown 7% in sales.

But the reality is we're always going to have generics to contend with.

However, if you look at the growth drivers, altogether, they represent half of the pharma sales and they are growing at a very healthy 17%.

And you see some of the new champions like Boniva and Arixtra and Avodart really doing really well.

Advair was up 10%; this is par for the course.

We're not suffering from Symbicourt.

Some of the analysts that predicted rapid penetration of Symbicourt.

This is just not happening in the U.S.

They represent less than 5% of our volume, and we had an uneventful quarter as far as Advair is concerned.

As you can see, double-digit growth for product of that dimension, which nearly broke the billion pounds barrier in quarterly sales.

That's pretty good, a pretty healthy result.

If you look at where those sales are coming from, clearly, the dynamic element is COPD; adult asthma is going okay, and we had a slight decline in the pediatric section of the market.

That is not surprising because remember we had the advisory committee that created some media noise and now that the opposite has happened, that we have seen media noise around our main competitor and the leader of the pediatric segment, who knows, we might see a turnaround of this trend in the months to come.

An important decision for us is what the FDA is going to allow us to put on our label in the U.S.

vis-a-vis COPD, exacerbations and the population, patient population in COPD.

Will they allow us to go beyond what we currently have?

We certainly hope so.

We think the scientific data is quite strong, but we'll have to wait and see a few more days before we find out.

Talking about clinical studies, I just wanted to mention to you, there's a lot going on and it is either being presented at Congresses or in press in terms of large prospective studies, or, for that matter, retrospective studies as well.

We're talking about the experience curve on hundreds of thousands of patients with Advair, and I won't go through all the different publications.

They are all interesting, but suffice to say that they all support the excellent profile of Advair as a very effective drug with a very good safety profile.

I also want to draw your attention maybe to one, if you had to pick one, the African-American study, because after all, all the negative publicity from SMART was coming from a study which was poorly designed to really demonstrate whether or not there was a significant signal in mortality for the use of similar products in the African-American population.

This is a better study because it's comprised entirely of African-American patients.

It lasts twice as long as the SMART study.

It's a one-year study, and it looked very carefully at the safety of Advair vis-a-vis Salmeterol.

And here, we are seeing again a confirmation of the excellent standing of our drug.

There were no deaths in that study, which is encouraging.

So I think Advair has still legs to grow and based on the new information, we're very confident, even though, as you know, there will be yet another safety review of particularly the pediatric population for Salmeterol and similar products.

And that review should take place later '08, maybe early '09.

Let's move on to vaccines.

I have picked on the U.S.

vaccines because you saw that the overall number was a bit below what we are used to.

Our vaccine business grew 10%; that is below our annual trend.

And the reason is essentially that there were some big tenders in international that didn't arrive on time.

That doesn't mean that they won't come, but they will come later.

So we will catch up with this.

In the meantime, one of the core markets for vaccines is, of course, the U.S., and you see we have a portfolio that is growing very nicely.

But more importantly, we have more new opportunities coming in the next couple of years.

You saw that Rotarix got approved.

Kinrix and Boostrix are significant franchises.

They are big commercial opportunities.

They are not small, tiny line extensions.

And of course, Cervarix, we have nothing new to really report.

We are filing some data as we told you before, and we are continuing our discussions with the FDA.

And finally, as far as the pre-pandemic vaccine, I will comment on it as we discuss Europe a little later.

But overall, a very important portfolio for the future.

In terms of Cervarix, we're making progress in terms of approvals.

We now have 60 markets where the product is approved.

But of course, reimbursement always is delayed in most markets compared to approval.

And now, we are getting slowly but surely reimbursement in European countries and in some international markets.

And, of course, we keep -- we will get more clinical data as we go forward.

Just to comment on the performance of Cervarix, if you strip out the markets where we can't compete because either we don't have reimbursement or there are no tenders that are getting started or we're excluded for tenders for a short period of time, let's talk about products where we can phase Gardasil and compete effectively because nothing is hindering us.

In those markets, we do well in terms of share, in terms of number of tenders, one.

And frankly, the entire revenue line that you saw on Cervarix this quarter comes from those few markets.

They represent less than 5% of the potential market of Cervarix in the developed world.

So we are competing in a very tiny piece of the tip of the iceberg.

It's not even the tip.

It's part of the tip of the iceberg.

But clearly, if you look at the dynamics, this is going to change quickly as we go forward as more and more countries are giving us reimbursement and we are starting to bid on tenders and collect from the tenders that we win.

So I would say it is business as usual as far as a new product launch is concerned or a new vaccine launch is concerned.

This is pretty much the way it is supposed to occur, but we will see an acceleration of our sales in Cervarix certainly in the second part of the year and beyond.

I would like to say one word about Lovaza.

This is a product we acquired, as you remember recently and we have now finished the restructuring of the sales force.

This is a U.S.-only market opportunity.

And as you can see, the product continues to grow very quickly, and sales of Lovaza in the first quarter were up 72%, so, so far so good.

And then finally, as I said, the important news for this particular quarter has to do with the pipeline delivery.

In '07, GSK received more approval from the FDA than any other company.

Well, we are starting on a strong note again in '08 with the approval of Rotarix and Treximet.

I remind you, Rotarix is a product that will play in the U.S.

in basically $0.5 billion plus market.

The market is entirely in the hands of RotaTeq, our competitor from Merck.

And our platform here, frankly, is to clearly differentiate Rotarix by underlying the fact that in order to protect the children, you only need two visits to the pediatrician instead of three for RotaTeq.

And you achieve complete protection of the child by the age of four months while with the Merck alternative, you have to wait until the child is six months, which means that for those two months, the patient, in this case the child, is at risk and doesn't need to be if the physician would switch to Rotarix.

Treximet is a very exciting commercial opportunity.

If you are a migraine sufferer, and I know that some of you are, this is a no-brainer because Treximet was compared head-to-head with the most commonly prescribed market leader, and frankly, Treximet won on every dimension.

If you talk about speed of action, 20% more Treximet patients were clear of pain in the initial part of the therapy.

After a day, if you look after a day, how many patients were pain-free, 80% more Treximet patients were pain-free after a day compared to the market leader.

And finally, need to go and have rescue medication for Treximet patients, that need was 80% less than the comparer.

So it doesn't take a genius to figure out that if you suffer from migraines, you ought to consider Treximet first.

And therefore, we have started to talk to, of course, managed care and are of course making sure we get on the key formularies.

It's early days, we just received the approval, but it's good to see that already half of the Medicaid formularies have already accepted Treximet in the U.S.

Now we need to make the rounds with managed care.

But I think that we are looking at a very exciting launch and hopefully a very successful product.

In Europe, we had two good wins, Prepandrix, our H5N1 pre-pandemic vaccine.

Now, in this case, it helps us with the authorities who are trying to prepare for a potential pandemic episode by stocking up on pre-pandemic vaccines.

Now, of course, their choice is a choice of one, because we have the demonstration and the official authorization from the regulatory authorities that many of those markets are looking at.

We did manage to convince a couple of markets to buy significant quantities of pre-pandemic vaccine, but we have bigger ambition for the rest of the year and we will see how that goes.

Clearly, a step in the right direction.

And finally, ambrisentan, Volibris is a product that will be exclusively sold in Europe.

This is a product for the treatment of PAH; and frankly, the advantage is on the safety profile of the product as well as the lack of drug-to-drug interaction.

Now, if we look at the second quarter, there are some more important dates.

I'm not going to mention them all.

They all are -- have commercial impact, but the one that is key for us is Tyverb in Europe, which we hope to get resolution within a few days, and we look forward hopefully to launch Tyverb in Europe.

And then, of course, Promacta, we will get the first news from the FDA on June 19th in the U.S.

This is a very exciting molecule, and I think scientifically, a very interesting product.

So we are looking forward to hopefully get, again, support from the FDA on Promacta.

And there is a long list of other opportunities for us, so the pipeline continues to deliver and that's good news for the future.

Talking about the pipeline, we did a quick update, so those are the most recent official numbers.

It doesn't really translate the excitement we have when we look at the degree of innovation of some of those molecules.

The fact that the late-stage pipeline is growing, the fact that we are entering Phase III with more product this year, again.

So we are reloading the late-stage pipeline at a good pace, and of course, we had one such event that was anticipated because we're still discussing with the FDA; we haven't really started the Phase III, but we will soon.

But bottom line is this is good fundamentals for the future.

And then one word about Consumer Healthcare, basically the scorecard wasn't perfect.

It was three out of four.

We did well on nutritionals, oral care and OTCs, and we did poorly in RTs.

That's the nonsmoking, the smoking cessation segment.

The reason really is the same as last quarter, we have competition from Chantix and also some house brand.

But on top of that, there was a little bit of destocking in the first quarter.

But nevertheless, we're going to have to turn around this trend, and this is not going to take place right away, but 27% I would say if you are trying to predict the future is probably on the high side.

We ought to improve somewhat, but not dramatically because of the factors that I mentioned.

But overall, it's still a very good quarter with sales up 8%, and again, good performance of the key products, Sensodyne, Alli, Lucozade and the like.

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

JP, thank you, and good afternoon.

I would like to begin by taking you through the business performance results, which exclude the middle column restructuring costs, which I will cover later.

Turnover in the quarter decreased 3%; Pharmaceutical sales declined 4%; and Consumer Healthcare, as JP told you, delivered strong sales growth of 8%.

The cost of goods margin of 22.8% was higher than last year, reflecting lower Avandia sales in U.S.

generic competition.

However, the margin was beneficial to quarter four last year, and this is explained by an improvement in the sales mix compared to that previous quarter.

SG&A costs were 2% lower than the previous year with pharmaceutical SG&A 4% lower and Consumer Healthcare 9% higher.

The latter being driven primarily by higher advertising spend.

R&D expenditure was up 5%, and this was impacted by an increase in vaccines R&D of over 20%.

Other operating income includes GBP62 million of royalty income, a GBP66 million mark-to-market gain on the Quest financial collar and asset sale profits of GBP56 million, partly reduced by impairment of certain equity holdings.

If you turn to the next slide, you can see that interest expense for the quarter of GBP86 million was significantly higher than the previous year, and this is primarily attributed to the share repurchase program.

Earnings per share for the quarter declined 9% and the share repurchase program reduced this decline by some 2 percentage points, having taken account of related interest costs.

You also note that the Company benefited from favorable currency movements, particularly the strength of the euro.

Overall, sterling results were some 4 percentage points better than results at constant exchange rates.

The next chart shows the total results for the quarter, including the impact of the restructuring costs charged to the middle column.

You will see that GBP85 million of restructuring costs were charged in the quarter in respect of the new operational excellence program and the integration of Reliant.

Approximately 1/5 of the charges related to asset write-offs.

Moving on, the new operational excellence restructuring program announced last October is on track and you will recall that we projected total program costs of GBP1.5 billion; over GBP400 million has now been charged to date, representing 27% of this total.

I continue to expect this program to deliver cost savings this year of GBP350 million, rising to GBP700 million by 2010.

If you look at free cash flow, free cash flow benefited versus last year from lower capital expenditure and improved working capital movements, partly offset by lower operating profit.

Free cash flow for the quarter of GBP1.5 billion was more than utilized by dividends and share repurchases, which together total nearly GBP1.7 billion, a 36% increase over the previous year.

We closed the quarter with net debt up GBP0.5 billion to GBP6.5 billion.

Let me conclude by summarizing our performance for the quarter.

Earnings were in line with our expectations.

We are on track to meet our financial guidance for 2008.

Currency provided a 4 percentage point benefit.

And if average exchange rates prevailing in Q1 continue for the full year, I expect the overall EPS currency benefit this year to be between 4 and 5 percentage points.

We continue to focus on reducing costs, particularly in our pharmaceutical business, but at the same time, continue to support faster growing areas of our business with increased strategic investment, particularly advertising to support the growth of Consumer Healthcare, and enhanced capital and R&D investment in vaccines.

Finally, increasing returns to shareholders continues to be of prime importance and the dividend declared for the quarter of GBP0.13 represents an 8% increase over last year whilst share repurchases in the quarter were some 70% higher than last year.

I'll now hand back to JP.

Thank you, Julian, and now we are prepared to take some questions.

(OPERATOR INSTRUCTIONS).

Tim Anderson, Sanford Bernstein.

Sanford Bernstein here in the U.S.

I have a general question about the vaccines business.

Glaxo obviously has a well-established franchise, but when I look at several more recent vaccine attempts, there has been a host of setbacks it seems with one recent good exception being Rotarix.

Cervarix has obviously had delays, and it's still unclear to me when that will launch in the U.S.

Streptorix has had various setbacks with the development program over time, especially in the U.S.

And I'm not sure if I've even seen the Phase III data for what you filed on in Europe; if you've presented it, maybe I've missed it.

And if I'm not mistaken, even with the meningitis vaccine, I think there's been some difficulties.

So I'm hoping you can add some color on why this sort of thing has been happening and if there's anything that can be done about it.

It seems like it's a pretty important franchise going forward and certainly an area that's becoming more competitive.

Tim, just for the record, Synflorix was filed in the end of '07 in Europe, so we are on track on this one.

If you are trying to say that not everything happens according to plan in vaccine development, there is nothing news.

I'm afraid we have had setbacks before and we will have setbacks in the future, because those things are not programmable in an easy way.

What matters is that at the end, you get there, and you get there with significant novelty.

Now, that doesn't mean we get there first, but we very often get there with the best product at the end.

You were mentioning Rotarix.

That's absolutely correct.

We are behind in terms of timing, but there is no question that if you ask any person who markets vaccine to pick between RotaTeq and Rotarix, they will pick Rotarix.

It's an easier one to sell.

It's a much better proposition for the patient and the payer.

So we expect that the future will prove us right on Cervarix.

Cervarix was designed exclusively for the prevention of cervical cancer.

We made a conscious decision to avoid distracting, so to speak, the formulation of antigens from other indications, and I think we will be proven right.

And I'm very encouraged again by the start of our marketing campaign in the markets where we can compete.

And granted, there is uncertainty and we wish we knew exactly when we would get the product in the U.S., but I'm not overly concerned about it.

When we had the hepatitis vaccine launched, we launched three years after Merck.

And today we have a 70% marketshare.

It's not a question of being first in vaccines.

It's a question of being there with the best profile and the best support system and the best manufacturing support system so that you don't get into out of stock like Merck is doing with hepatitis 10 years after you launch.

So sometimes you have to take the harder road to arrive to the best product proposition.

I am convinced that there are people in vaccines are doing the right thing and are making the right choices.

This is a very entrepreneurial type unit.

Ten years ago, we were not in the -- we didn't exist 10 years ago; it's that simple.

They've built a tremendous business.

Those people are the same.

This is the same team.

They are as excited about the future of the vaccine business as they were 10 years ago when we couldn't spell the name [Rick Sansart] here or outside the Company.

So I'm probably a little bit too passionate about this, but I am absolutely excited about the future of this vaccine.

I think you are forgetting about the positives.

The Boostrix, the Kinrix, the improvements on everybody else.

The fact that we have a potential first in class with MAGE-A3 in lung cancer.

Those are things that are -- there are lots of possibilities with this vaccine business, and even if we stumble here or there, or if the regulatory authorities don't approve our products on our timetable, it doesn't matter.

There will be a sufficient amount of positives to continue to underline a very fast-growing business, and I think the fundamentals are there to support what I'm saying.

But thanks for the question.

It's a fair comment.

If I can follow up just on one thing.

Was the Synflorix Phase III data presented?

And then on Cervarix, based on your comments, so it sounds like you think this is going to be the market dominating product over time.

Yes, I mean I think that -- let's just play it out.

Let's assume that you compare the two formulations, Gardisil and Cervarix.

In the case of Cervarix, you have fewer antigens, which always is good in terms of the depth of immune reaction you create.

The fewer antigens, the higher the response.

Plus, you have an adjuvant that is really turbocharging the effect of the drug, and there is no contest on that.

In fact, when you look at antibody formation, we are much, much higher than Gardisil.

Now, we have to demonstrate that this translates into a meaningful clinical endpoint, which in this case, is cross protection and duration of action.

And we are on the verge of doing so, and there will be data coming in '08 and '09 that will put the nail on the coffin on this particular claim.

But if we get that claim, you have to admit with me that it is more important to cover 85% of the cancer risk, than to cover 75% and have some benefit on condiloma.

So I think that there is a very good, logical approach that has been carefully designed years ago by the best scientists in the field to make Cervarix the treatment for prevention of cervical cancer.

If you want to know more about Synflorix Phase III, look at the data in Lancet.

There is some data published in Lancet in March '06, and the whole data published post-approval that will come for competitive reasons, we don't want to give their entire story.

As you know, we have some differentiating points with Prevnar, and we intend to explore them aggressively.

But we're not going to give the game plan book before we get approval.

So just hold on for the final presentation of Phase III data.

Next question, please.

Gbola Amusa, UBS London.

Thank you.

Four questions.

First of all, on Advair, how much of the year-over-year global growth was attributable to use of higher doses?

Secondly, on Cervarix, how much patient experience or pharmacoepidemiological data has been and will be submitted to the FDA?

Third, on darapladib, if that drug is someday proven effective, wouldn't the mechanism most likely be plaque stabilization?

And if so, might IBIS-2 be the wrong type of study to evaluate a potential benefit?

And then lastly, on the migraine franchise -- what level of switching would you be disappointed by in advance of the Imitrex [X3]?

And as a sort of follow-on to that, what sort of exclusivity has the FDA granted for Treximet?

Listen, I think we should have a rule of maximum number of questions.

I might forget one because you had quite a few.

But let me just say Advair high dose, higher dose is a tiny fraction of the growth.

I don't have a number here.

I think it's 1% or less.

So the next question was Cervarix, the epidemiological data.

Look, I don't want to comment on the file.

It's a very complete file that we have submitted to the FDA.

We are filing some additional data based on their preliminary comments and questions to facilitate the review.

The dialogue is ongoing.

We don't have a date on when the FDA considered that they are satisfied and ready to go to the advisory committee, which would be the next step.

So I'm going to leave it at that.

In terms of darapladib, it's too early to talk about Phase III.

We have a game plan.

We're going to present it to the FDA.

I think it's a very creative and good program for Phase III, but we want a comment from the FDA, we want a commitment from the FDA that this is good enough to demonstrate the effect of the drug.

And those study designs will be preliminary cleared with the FDA before we can tell you more about this.

And then, can you repeat the question four?

We couldn't hear.

The connection is very bad with you.

Can -- do you mind?

Sure.

On the migraine franchise, what level of switching might be disappointing?

And I was just interested if there's a certain level of exclusivity granted on Treximet, if you could confirm that.

Well, why don't we -- first of all, let me just make a very quick comment and then Chris will take it on because this is the launch that he's responsible for.

But let me just say that you look at the comparative profiles of Treximet and the others, we have high hopes for this drug.

We're not going to give you a sales forecast or a switch forecast.

But clearly, if you were to look at models from the past, assuming we can get it through managed care effectively, we have high expectations.

But maybe you can say something more and also talk about exclusivity.

Yes, will this isn't a new chemical entity, per se, so you are going to get three years of data exclusivity.

But the FDA will take some time to confirm that.

I think on the launch, I would echo what JP said.

We're very excited about that not just because the opportunity is there to cannibalize Imitrex, although we will certainly be going after that in the early days.

But there's almost an opportunity to redefine the marketplace.

The triptan market has not grown much over time.

We have maintained our share.

But Treximet offers a whole new opportunity with the mechanism of action to redefine that.

If you look at the number of people who take both an NSAID and a triptan, it's very big.

And so I'm looking actually at the opportunity of really breaking out of the classic severe end of the migraine market and seeing if we can't expand that market finally, having tried and not succeeded at that for a decade.

So the opportunity is bigger than just Imitrex.

And, as JP says, we're not going to give a sales forecast, but it is an important product for us.

And we are going to be firing with all guns blazing when we launch.

Thank you, Chris.

Next question, please.

Kevin Wilson, Citigroup London.

Thanks very much.

On Advair, how much of the international growth was due to the Japanese launch?

And could you give us some more color on that, how well that's going?

And on U.S.

Advair, can you give us the price volume breakdown in that 8% growth?

On restructuring, Julian, can you give us some sense of the timing of the spending of the remaining $1.1 billion over the next two years?

And finally, JP, as sort of swan song observation perhaps and maybe Andrew as well, give us your latest thoughts on pricing in the U.S.

in the upcoming political process.

Okay.

Kevin, we're not going to comment on Advair Japan because we don't split our results, our financial results, between Japan and the rest.

Let's just say that we globalize international.

We'll be glad to discuss international growth, but not the specifics of Advair.

But on the U.S., why don't, Andrew, do you want to make some general comment on Advair?

Sure.

Advair I think in the U.S.

has an underlying growth rate of around 5%, we think, which is essentially a combination of various movements on mix.

There was a little bit of wholesaler unusual stocking patterns at the beginning of '07, so nothing unusual in '08 but the prior year comparator, which is what really drives the difference between the reported growth rate and the underlying growth rate.

But actually we feel that the underlying growth rate in terms of mix, volume, and obviously discount management, all of those dimensions look pretty robust actually in the U.S.

So overall, around the rest of the world, we've seen absolutely a sticking to track for Advair performance, Seretide performance, whether it's in Europe, which has been pretty much at that 9%, 10%, 11% for frankly the last five years; and international is very much in the same position.

And as you know, Japan is just getting going, and that will continue to contribute as we go forward.

Very good.

Julian, restructuring?

Restructuring benefit 355, 50, and 700 in terms of 8, 9, and 10, Kevin.

And I expect most of the restructuring costs will be incurred this year and next.

Okay.

Chris, do you want to comment on pricing in the U.S.

and the political situation?

Yes, I think the -- as we've said for some time, I think pricing is most influenced by the Medicare Part D segment.

That's clearly become a very price sensitive segment, given that the providers, the insurers in this area have skin in the game themselves, so especially any product that's got a big exposure to the more elderly section of the population, you are going to have more pressure on price, which then seeps across the rest.

Our approach has certainly been to really focus on volume growth across the piece.

Obviously, if you've got a bigger portfolio of products, you also have an easier time with this.

Politically, not every -- I think the support of Republicans has been exaggerated and I think the animosity of Democrats has also been exaggerated.

Arguably, there's a greater impact on health care at a state level, where you've got a mix of Democrats and Republicans as governors.

And I think our industry has been very effective at being able to work with that -- with both.

If you are going to do any major work in health care reform in Washington, you are going to need a broad spectrum of political support.

So whoever wins the White House isn't going to be able to change health care on their own.

They're going to need a broader support of that.

We have been very proactive as a company in looking to seek to participate in that health care debate.

And I think a lot of people would say that a Democratic White House has been baked into most share prices in the industry.

Thank you, Chris.

Next question, please.

Marietta Miemitz, Societe General London.

Good afternoon.

A few questions, please.

The first one on the cost of goods sold.

Could you just elaborate a little bit as to what products drove the improvement in mix between Q4 '07 and Q1 '08?

And also give us an indication as to whether you think the underlying Q4 '07 COGS or the Q1 '08 COGS are more indicative of what we should expect going forward.

I was actually a little bit surprised at the positive development this quarter because my understanding was that actually Q4 '07 was roughly what we should expect going forward.

And then a couple product questions, please.

One is on Advair in Germany.

Is there a reimbursement decision coming up?

Because I thought that reimbursement was at risk following the negative view that the IKWIG took on combination inhalers.

A quick question on Avandia.

Can you just elaborate a little bit on the dynamics you are seeing in Europe?

I'm actually a bit surprised as to how weak it is given that I was always under the impression the hysteria from the U.S.

hadn't spilled over to Europe.

And in your December 2006 Avandia day, you actually showed us some slides that seemed to suggest that there's very good switching going on from SUs into TZBs.

And then finally, kind of more of a broader question on technology acquisitions.

Sirtris is a quite big acquisition and you've made other relatively big technology acquisitions of Domantis.

And I was just wondering, is that the end of major technology acquisitions or should we expect a lot more of these types of acquisitions that would be in the sort of several hundred million pound range of acquisition prices?

Okay thank you, Marietta, for this list of questions.

On the Q4 to Q1 COGS, I'm going to ask Julian to answer, but let me just say that remember, the product mix can play both ways.

It can play if you sell more of the high margin product, then of course your COGS -- I mean your gross margin benefits.

But if you could -- if you sell less of a low margin product, then the product mix is also favorable, and that's a later -- the latest that happened.

And maybe you can illustrate that with some numbers.

Yes.

Just to remind you, Q4 last year, when you stripped out the one-offs, we were around the 24% mark for cost of goods.

In Q1, we're at 22.8%.

Q1 has benefited from a very low level of Relenza and flu sales.

If you look at that you will see it's a very low relative to I think any reasonable expectation for the full year.

So that certainly helps the cost of goods in Q1.

Secondly, we're reaching a sort of more level -- Avandia sales level.

So as we progressed through the year and we get increased generic competition in the U.S.

to certain products, we will see that having its impact on the overall gross profit margin.

And finally, as Consumer Healthcare grows at a faster rate than the rest of the business, that also brings down the overall gross profit margin and increases the cost of goods.

So I expect the cost of goods in the remainder of the year, and particularly for the full year, to be above the quarter one level, and above last year's level.

Thank you, Julian.

Let's, Andrew, if you could review Advair Germany and Avandia Europe, please.

Sure.

There's nothing specific to report on Advair Germany.

There has been an ongoing -- I think it's now been running it, from memory, around three years discussion with IKWIG and the manufacturers of respiratory products is not an Advair-specific issue.

It's a category issue.

It's focused on asthma.

It is not focused on COPD, so it is for a minority of the Advair business.

And as you know, Advair has a particularly strong position in COPD.

It's the driver of most of the growth, but there's been no conclusions to those discussions, and it's not obvious what those conclusions -- what the range of conclusions could be.

Frankly, the role of IKWIG and its competency in Germany continues to be under development and is nowhere near the same level of an organization, for example of NICE in the UK, which has developed into something everybody understands and has a significant impact.

IKWIG is still in its early days and nothing more to say on that.

As far as Avandia is concerned in Europe, you are quite right, Marietta, that for the bulk of last year, Avandia continued to grow, albeit at a decelerating rate, while events were unfolded in the U.S.

We've seen a further deceleration in Europe, and obviously a decline of about 14% in Q1.

That's really a completely mixed bag.

Just to give you a sense of that, while Avandia is down, Avandamet grew.

And if you look country by country within Europe, you will see a tremendously diverse picture.

Those countries which are more, if you will, directly impacted by U.S., so UK has had a somewhat worse impact than others.

And so I continue to believe actually that in Europe we will see a less -- we certainly haven't seen anything like as dramatic as the U.S.

reaction.

There hasn't been anything like the same media frenzy on the issue.

There has, of course, been a further review by the European regulators in the last two or three months.

And there are -- to varying degrees, if you will, fallout from that in different countries.

But the impact is much less than we've seen elsewhere.

And even within the overall picture, we're seeing some very strong continued pockets of performance.

And, particularly for Avandamet, in combination with metformin, we've continued to see growth throughout this period.

Okay, and Marietta, on the technology acquisition, you're right, we don't do it that often.

We did Domantis because -- and this one -- because essentially they share a common point.

Those are new technologies that will allow us to possibly reinvent an entire area that is -- because this is more than just producing one drug.

If the bet on Domantis succeeds, we will be able to introduce basically second generation monoclonals in various categories.

We'll have our own version of Avastin and Embrel and many others.

In this particular technology, there is also the promise of a multiplicity of drugs coming out of this new pathway which has been more and more worked on by really one -- what is essentially one of the top scientific teams in the country, in the U.S.

And we are confident that now, this pathway and those multiple drugs can provide a completely new and unique platform for drug discovery.

That's why we decided to enter into this agreement.

Frankly, we don't particularly choose between buying or licensing or alliances.

We like buying less, but sometimes, there is no choice.

Either you are going to play, and to play, you have to buy the company or you're not going to play.

But now, going forward, I think we should ask Andrew, his view on basically the technology deals, the long-term deals -- how do you feel about this, Andrew?

Thanks, JP.

I mean certainly I think this particular acquisition and very much in the same vein as the Domantis acquisition, I think are exactly the kind of high-quality, broad technology platforms which make a lot of sense for the Company to invest in.

Clearly, we're going to look at making sure that we're building a portfolio of assets in the organization.

And within that portfolio, we need to make sure we are paying attention to what will be the driver of significant product opportunity five, ten, 15 years from today, as well as those assets which are going to drive significant performance in the much nearer term.

And for me, this type of acquisition plays exactly to that space.

It's an area where we believe there's tremendous opportunity.

And I think in the future, we will remain very open-minded to these sorts of things.

Having said that, I think you can see from our past track record, and I think it's a good guide of our future track record, that where we are able to strike collaborations and partnerships, that tends to be a direction that we prefer.

And sometimes we have to do an acquisition and other times we are able to do it a different way.

And I think that kind of pattern of performance you should anticipate to see in the future, and you should certainly anticipate us to continue to look for what we believe to be transformational scientific platforms that we think could one day deliver a whole swathe of new product innovation.

And then the last point, Marietta, for your forecast of R&D expenditures, we don't consider those acquisitions are necessarily additional to what we are doing.

Very often, R&D [makes test] the initiative and cancels some comparative discovery projects which were not as promising.

So they make the hard choices so that their ongoing costs are not necessarily greatly influenced by this kind of acquisition.

On that note, I would like to go to the next question please.

Graham Parry, Merrill Lynch London.

Thanks for taking the questions.

Just a couple of financial ones and then one on darapladib.

On the financial side, could you just let us know, and apologies if I missed this, but exactly what the cost savings from operational excellence were in the quarter; and if they've actually started to kick off fully yet?

Also, the tax rate for the first quarter, should we be using that as a good guide for the full year?

And then, on darapladib, just given that the primary endpoints on the IBIS-2 trial was a plaque composition rather than plaque volume endpoints and plaque volume was just a secondary endpoint, would it be fair to say that you could have just based your decision to progress the products into Phase III solely on plaque composition rather than any impact on plaque size?

And also, could we assume that your creative Phase III design still includes clinical morbidity mortality outcomes endpoints?

Thanks.

Let me take the second one and then pass on the first one to Julian.

As I said before, it's very premature to discuss the logic of our decision, the next design of the trial, exactly what we got out of the studies and what we learn about the drug.

Suffice to say, we've decided to go forward but I think that for the fine print and the play by play, you're going to have to wait for the scientific presentation.

It would be a little bit unfair to try to summarize in a cartoonesque way by nonscientists here around the table, the very complex results and protocol that characterize this very exciting drug.

So I will push back here a little bit and ask you to be patient.

We are going to publish the data.

You will see in greater details with more editorial comments from the investigators themselves.

I don't want to take the really the worms out of the cup here.

That's probably not a very good English expression, but anyway, translates very well in French, I could tell you!

So we will just have to wait and look at this in more details when the time comes.

Now Julian, can you comment on the (multiple speakers)?

Sure.

Yes, Graham, in terms of OE savings, we are on track.

We're not giving each quarterly amount, but we are -- we do obviously monitor it and we are on track to our full year commitment of 350.

In terms of the tax rate, it reflects all enacted legislation.

There is some legislation to be enacted in the UK, which will bring the effective rate for the full year very slightly higher than the rate for the quarter.

Does that help?

Yes, that's great.

Thanks very much.

Jo Walton, Lehman Brothers London.

Two quick ones.

Lovaza, was there any change in the way you distributed or any distortion in the sales?

Or was that the representative sales really before you saw the acceleration in the scripts, which you're seeing now?

And secondly, could I just ask you to talk a little bit more about your European business?

Looking back, the underlying constant currency growth of that is only sort of plus 1, minus 1.

And so for well over a year, you've been undershooting in the European market.

I think we all understand what the issues are with patent expiries and very fast erosions that we see in the U.S.

But I'm surprised that your European business has been below the market for so long.

Okay.

Chris first?

Yes, on Lovaza, Jo, there's no change in distribution, and there's no impact of stock levels on this, but I think it is fair to say that when we announced the acquisition at Thanksgiving, Reliant had essentially one rep for one market, and they probably did take their eye off the ball a little bit.

So I think you did see a bit of a hiccup in the script trends.

We have now over 1,000 reps on the product.

Our, both some Reliant reps as well as GSK reps are now behind that, and I think we're seeing some very good share gain and growth in scripts as a result.

Andrew?

So the sales were representative in the quarter?

Yes, they were.

So as far as Europe is concerned, as you know, Jo, over the last few years, we've had some very strong years where we've grown significantly ahead of the market.

Other years where we've been more slow.

The last 12 months was particularly slow because we took a very significant burden of generic erosion.

And while you are right to say it's not as dramatic as the U.S.

picture, essentially, I think five or six brands went over a period of 12 or 18 months, and cumulatively, they really took the edge off.

Now, I think in a business of GSK's size and scale in Europe, you're really looking at a kind of underlying growth rate objective in the current market of branded pharmaceuticals somewhere in that 3 to 5% range, and what you've seen is the generics knocking off 3 or 4 points over that 12-month period.

And you're talking about a portfolio of products including Imitrex.

You're talking about Lamictal going.

The end of Paxil, all of the respiratories with the exception of Seretide, Advair going off patent during that period.

All of the antibiotics, a very significant burden; and then of course, Zofran, as well.

So in a way, Europe was frankly, a couple of years ahead of some of our expirations elsewhere in the world.

They came in a very tight bunch, one after another.

And together, even though they come down a more shallow erosion curve, they have taken off a lot of the edge over the last year.

And obviously, with the then deceleration of Avandia in 2007, that took off the edge of our growth.

Clearly, if Avandia had continued to grow -- I remind you in 2006, Avandia was growing at in excess of 40% in Europe, and while it continued to grow in '07, it decelerated significantly.

The combination of all of those things really took the edge off in 2007.

Thank you, Andrew.

Next question, please.

Brian Bodoff, Deutsche Bank London.

Could you please recapitulate for us why the FDA is again revisiting the issue of Advair safety?

And what their problem is given that they have looked that this issue more than once, the product has been on the market for a number of years with high patient experience and lots of data.

What do you think you need to give them to assuage their concerns?

And does this issue have the potential to impact any of your development projects for novel agents?

Thank you.

Brian, why don't I ask Chris to comment and maybe I can add a little bit at the end.

Yes, we think this latest round of interest is actually not driven by Advair; it was really driven by Foradil.

And I can't really tell you what data they may or may not have seen.

But I think that's why they decided to have a look at everything in this class and it started off with pediatrics, and so they will just do another review.

They've gone to five companies and asked for more data.

As JP pointed out earlier in his presentation, we've had an awful lot of data come forward, certainly showing the benefit of combination therapy versus an ICS alone.

Looking at the [arg-arg] genotypes, African-Americans.

So I think we feel very confident going into that advisory committee.

I think part of this is just a fact of life of the environment that we are in and where the FDA is and we will deal with that again as we have done in the past.

And I think it's fair, Brian, to say that we don't know everything that the FDA does know.

They might have seen something.

Certainly it wasn't with one of our products or otherwise they would have talked to us directly about that, but who knows.

And secondly, I think that we have to accept that the bar has moved on safety.

And the FDA will be very eager to communicate more frequently, as we have seen recently.

On a given day, I think there were three warnings -- three safety warnings -- on very, very faint signals observed with three different drugs a couple of weeks ago.

And they will also initiate more class reviews, particularly on the safety side because that's what they want to do now.

They want to focus more in terms of drugs on the market on their performance, and want to avoid any surprise and catch even very faint signals early so that in a way, there is a positive for us.

Frankly, when they handle it well communication-wise, it avoids a panic like we saw in Avandia when the news appear to be news when they are not, and come from outside the FDA; that really panics the public.

And I would prefer to have the FDA be the spokesperson for our drugs and do it on time so that there is no surprise and it can be explained in a way that is I think balanced, as we have seen, in fact, more recently.

Some of the signals we have seen from [Metanag] in the recent past were much more dramatic frankly than what we have seen in Avandia and provoked a very mild reaction because they were revealed by the FDA with the appropriate context.

So it's not all bad.

I'm trying to explain to you the atmosphere there, and in a way, it's more realistic.

Andrew Baum, Morgan Stanley London.

Apologies for the background noise.

Three questions.

Firstly, you alluded to, JP, at the beginning of the call, your hopes for Avandia with an expanded label.

Could you just give a sense of how much current, excuse me I said Avandia, I meant Advair use -- is already incorporating those indications from its use off-label?

Second question, you've touched upon the fairly hostile or challenging U.S.

regulatory environment.

There's been a recent appointment of a new head of CDER in Janet Woodcock.

Do you perceive this is actually going to have any effect in terms of stabilizing the risk adverseness inside the agency?

And then thirdly, you've seen recent recently with both Novartis and Alcon and to less degree with Takeda and Millennium, a sort of move towards a sort of pharma 2.0 model of diversification away from some of the small molecule pharma.

When you look at the asset prices out there within both biotech and med-tech, how do you see valuations right now?

Well look, the last one would take about a half an hour to really give an intelligent answer because it's not -- it's a series of forks in the road here.

But let me take the easy one first.

The change of personnel at the FDA is always important, always indicative of some new programs being put in place.

In this case, sort of the safety first momentum that has been building up.

You characterize the environment as hostile; I didn't.

I really think quite the reverse.

I think the FDA is more demanding, but that's not necessarily bad.

At the end of the day, we must absolutely have great trust between our products and the public.

And having panic episodes destroys trust at a very fast pace.

The FDA has to be the custodian of our products and their safety, and I think they can fulfill that role better in the future.

And I personally, I don't see that change as a negative change.

It's just a change; it's just the world has moved on.

And there is no coming back to the old world which we knew a year or two years ago.

So now, the next question I would like maybe if you could comment, Chris, and then we'll come back to your last question.

I think the, Andrew, the extended indication will give us two things.

First it will give us the indication in COPD, period, so not with chronic bronchitis associated with it.

And the second thing is, we will be the only medicine now with an exacerbation claim.

And given that other drugs are potentially going through some difficulty in this area, I think the whole opportunity in COPD is going to be even more attractive than it is.

As you've seen, we've had some very good growth in that area, and we believe that this will buttress our position.

Thank you.

As far as the diversification or lack of the pharmaceutical companies, there are many aspects.

There are many dimensions.

And let me just say that no matter what you do, you have to have a high performance pharmaceutical business model.

You can add to it.

You can reduce the risk of the company to some extent by acquiring other businesses, or through organic growth as we have done with vaccines, create more legs to the stool, but you cannot escape the pharmaceutical model.

You have to fix it.

You have to have a productive R&D.

You have to have a dynamic sales line, and you cannot escape that.

In terms of valuation, I'm going to just pass because we're running out of time.

But we'll be glad to entertain you on this.

And frankly, it's more important that Andrew addresses those questions going forward.

So on that note, I want to thank you for your questions and wish you a very good day and we will see you soon.