葛蘭素史克 (GSK) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the GSK third quarter results conference call.

My name is Erica and I'll be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would like to turn the call over to your host, CEO Mr.

Andrew Witty.

You may proceed, sir.

Thank you very much and welcome to this teleconference, and thank you for joining myself and Julian Heslop, our CFO, to review GSK's third-quarter performance.

I'm going to ask Julian to run through some of the financials and then open up for Q&A.

But before I do that, let me make a few remarks on GlaxoSmithKline's performance and progress against our strategy as I laid it out earlier in the year.

This quarter's performance was in line with our expectation.

In reported terms, we have seen the biggest difference ever for GSK as a result of currency movement with EPS down 9% to CER but up 6% in sterling terms, so a very significant benefit for the ongoing weakness of sterling versus major currencies, in particular, of course, the dollar, so seeing continue even as we speak.

This quarter clearly demonstrates the very considerable transition occurring in our portfolio as several brands face generic competition in the US and our sales of Avandia continue to erode.

Specifically, we saw the introduction of generic Lamictal in America this quarter.

This adds to the existing generic competition to Coreg, Requip and Wellbutrin XL over the last 12 months.

All of these have been expected, but I think it's just worth noting that these products, at their peak, were generating almost GBP3 billion of annual sales.

So it just gives you a context of how much genericization impact there really is and why it's appropriate, I think, for us to describe the period we are in now as a significant transition period for the Company.

With regard to Avandia, controversy surrounding the use of the drug unfortunately continues.

And, speaking frankly, this means that the sales outlook for the product remains negative.

Altogether, as we go through this transitional period, these factors are having a significant impact on the pharmaceutical business.

However, despite those sort of headline-grabbing losses, if you will, on genericization products, we are seeing good growth from a number of pharmaceutical brands, including and importantly a recent strong improvement in prescription volumes for Advair in the US.

Also helping to offset the generic impact has been the sales growth we are experiencing in other parts of our businesses such as vaccine, the emerging markets and the continued performance of our Consumer Healthcare business.

The diversification in sales that we have here at GSK is, I think, an inherent strength and one we are actively nurturing through the renewal and reshaping of our product portfolio.

We are making good progress on this with 10 product launches so far this year in key growth areas such as oncology and, of course, within our existing franchises.

This kind of launch pattern is one we want to sustain to build a broader portfolio with a lower concentration of sales in any one or two products.

In the future this means that GSK will have more medium-sized type products collectively underpinning our sales growth.

And to be successful, therefore, we must be able to effectively commercialize a range of products whilst also retaining the ability to exploit a blockbuster when it comes along.

This has got implications for our commercial infrastructure and the strategies we employ, and we are working right now to make sure we have the new capabilities we need in this area.

In particular, I am personally working very closely with our US management team to assess opportunities for change in that business.

And I'm sure, over the next few months, we will be able to update you on some of those plans.

Geographic diversification is also a key component of our strategy.

Japan, for example, is a core market for sales expansion and growth.

The success of Advair here, which you will have seen, had a particularly good pickup in this quarter as prescribing restrictions on volume were relaxed.

Advair in Japan is a good example of driving growth outside of our more traditional Western markets.

Moreover, we have more than 40 potential product launches in Japan scheduled over the next five years with the next one being Lamictal, which was approved just last week in the Japanese market.

In emerging markets we are starting to make some early progress in our strategy to expand and tailor our portfolio to the needs of patients and consumers in these markets.

We have now formalized our trading agreement with Aspen Pharmaceuticals and identified around 60 assets for early prospective commercialization.

Those products should start kicking into the sales line from the end of '09 and into '10 onwards as they go through regulatory approval.

We also acquired during the quarter a broad range of pharmaceutical brands from Bristol-Myers Squibb in Egypt, making us the market leader in this fast-growing market.

It's worth noting that we have a further opportunity, as we also acquired the rights to these products across the Middle East and Africa as we can export them from Egypt.

In our Consumer Healthcare business we have also made some early progress along the lines of our strategy to strengthen this business and through our objective to diversify and globalize the overall business.

Last month, for example, we introduced Sensodyne, the fastest-growing global toothpaste brand, into the Chinese market.

You might be surprised to hear that this was our first major consumer product launch in China for a decade and represents the first step in our objectives to really step up our brand presence in our Consumer business in China.

And, this week, in fact just yesterday, we announced that we had acquired Biotene, a fast-growing oral healthcare brand which will strongly complement other products in this key franchise for the Consumer business.

The benefits of having a capability in both Pharmaceuticals and Consumer Healthcare are underlined in emerging markets, as these markets revolve around brands often in the absence of intellectual property and in a system where there is far less distinction between different sales and distribution channels.

The opportunity for synergy is never more apparent than in the emerging markets.

I continue to believe that our capability, being strong both in the Rx and consumer space, is a key source of competitive advantage for GSK in exploiting the emerging market.

As I have indicated before, this is going to be a major piece of our strategy.

Moving forward, it is clear that we will need to monitor closely the impact that changes in the global economy will have on, for example, the consumer demand for our products.

However, it's worth noting that to date we have only seen very modest impact on GSK consumer products in certain territories.

For us, having a diversified business, Consumer, Pharmaceutical and vaccines, again reinforces its relevance at this point in time of the economic cycle, where it's clear that our different businesses are exposed in different ways to changes in economic activity and consumer behavior, simply reinforces the benefit of having this balanced portfolio.

Let me turn to another major area of our businesses specifically, and that's vaccines.

Sales continued during the quarter to be driven by a broad range of brands across multiple age ranges.

Importantly, we are continuing to expand this business, and in this quarter alone we launched two need pediatric vaccines in the US, one being Rotarix and the second Kinrix.

We have also made good progress in Europe with Cervarix.

It has now been selected 60% of the competitive tenders which have been held since Cervarix was approved, most notably in the UK, where Cervarix was selected for the largest vaccination program against HPV so far announced in Europe.

Moving into R&D, here we continue to make changes necessary to deliver our pipeline.

We have seen a marked increase in the number of launches for GSK, and importantly, very importantly, we are replacing these successful products, which are leaving the pipeline and going to market, with a new series of products going into Phase III.

As a result, we are maintaining a level of around 30 assets in late-stage development, and our R&D strategies are focused on maintaining this level of late-stage activity in the pipeline.

GSK is also continuing to lead the industry in delivering innovation.

Around 75% of assets in our pipeline are entirely new compounds or vaccines which clearly demonstrates our goal of bringing new sources of value to patients and to payors.

The potential value of our pipeline was again shown during the quarter with new data being generated across a range of assets, including Tykerb, Armala and darapladib.

Our Biopharmaceuticals group hit several important milestones with good data being received on ofatumumab, a treatment for chronic lymphocytic leukemia.

We've filed our first in-house developed biopharmaceutical product, Bosatria, in Europe.

And finally, a new biopharm treatment for Type 1 diabetes entered Phase III development.

I said last quarter that GSK has a very clear ambition to realize value in R&D through better allocation of capital, and here again we have made progress through the reshaping of our organization with new initiatives such as our Drug Discovery Investment Board.

Just to bring you up to date, the Board has already reviewed 75% of our three-year investment plans for drug discovery, and we will have completed this task before the end of the calendar year.

We are also seeking to balance expenditure with risk through our externalization of R&D, as you know.

And during the quarter new alliances were formed with Cellzome and the Harvard Stem Cell Institute which we believe will be a source of advantage to the Company as we drive this research across multiple areas.

Our externalization strategy means that GSK now has option-based collaborations with access to products and pipelines of 16 other companies.

This extra capacity, together with our own organic efforts, provides us with opportunities for complementary, diverse and synergistic research.

In the same manner, Sirtris, our recent R&D acquisition, has enabled us to establish numerous research collaborations in the field of sirtuins across GSK.

And as an example, as recently as two weeks ago when I was in China, I was pleased to see our new R&D center in China undertaking experimental work on sirtuins only a few months after we brought Sirtris into the GSK organization.

In summary then, for 2008 we remain on track to meet our financial guidance.

With a Q3 dividend of 14p, up 8%, we have maintained our commitment to progressively increasing dividends.

On share buybacks we have bought back so far this year GBP3.3 billion, worth of shares and we expect to purchase in total up to about GBP4 billion by the end of the year.

Looking ahead, we do not currently expect to make significant share repurchases in 2009.

The recent changes in the financial markets have led us to now expect that investment opportunities are more likely to arise that will support our strategic priorities.

And it's very important that we retain sufficient flexibility to take advantage of these sorts of opportunities to invest in the business.

In conclusion, we remain very focused on improving our performance in the short run.

I also believe that we're beginning to take the right steps in the right direction to deliver our strategic priorities.

As you perhaps might expect me to say, these are still early days and this is a long-term agenda to improve sales growth and reduce risk for the Company.

But with the progress and commitment to change I have witnessed so far inside the Company, I'm very confident that we can deliver success at GSK in both the short and the long run.

I'm now going to ask Julian to run you through some of the financial aspects for the quarter before we come back for Q&A.

Thanks, Andrew.

My comments today will be largely focused on the business performance results for the quarter, which as you know exclude the restructuring costs, which we show separately in the middle column of the P&L account.

I'll also comment on growth at constant exchange rate.

I'd like to start by looking at sales for the quarter.

Total sales declined 3% with Pharmaceuticals down 4% and Consumer Healthcare up 3%.

This is a tough quarter for our Pharmaceuticals business, given the impact of generic competition in the US not only for Lamictal and Requip, but also for Coreg.

However, partially offsetting these declines, we saw growth of 12% from our vaccines business, and our largest product, Advair, grew 7% in the quarter.

We're now starting to see year-on-year script growth in the US on a four-week MAT basis.

Recently launched products, including Cervarix, Tykerb, Rotarix, along with Lovaza, which we acquired last year, grew strongly.

Cost of goods in the quarter was 24.8%, and year to date was 23.7% of sales.

You will recall we previously guided you to around the 24% mark for the full year, recognizing both the impact of US generic competition and lower Avandia sales.

You will see that we continue to maintain tight control over SG&A costs, which were 5% lower in the quarter.

R&D costs were 2% higher, reflecting the higher costs of our late-stage pipeline, partly mitigated by continued cost rationalization.

Looking at interest, the share buyback program is the main factor driving the increase here, and interest costs rose from GBP42 million last year to GBP120 million this quarter.

Overall, of course, this program has enhanced earnings per share.

The tax rate for the third quarter was 29.8% and reflected the cumulative effect of changes to UK capital allowances in the recent finance act.

The tax charge for the nine months of 29% represents our best estimate of the full-year tax charge, which as we have previously guided is expected to be slightly higher than last year's full-year rate of 28.5%.

Our business performance earnings per share for the quarter was down 9%, and for the year to date was down 5%.

So, we are still on track to deliver our earnings guidance for the year.

You'll also note that we incurred restructuring costs of GBP322 million in the quarter, which are excluded from our business performance results, and we remain on track to deliver the benefits previously targeted.

You'll have seen that the weakness of sterling against most major currencies gave rise to a 15% currency benefit and an actual rate growth for the quarter of 6%.

Cumulatively, we are now benefiting from a 9% currency benefit, and if rates that persisted in quarter three continue, I'll expect an overall currency benefit of around 10% for the full year.

Nobody is going to predict exchange rates today, though.

The Group is well placed financially, having completed its debt financing program earlier in the year.

At 30th of September gross debt was GBP14.2 billion, and cash and liquid investments amounted to GBP5.6 billion, giving an overall net debt number of GBP8.6 billion.

Our debt maturity profile continues to be good with only GBP1.4 billion of short-term borrowings and overdraft being repayable within the next 12 months, with a further GBP600 million repayable in the subsequent 12-month period.

So, in summary, our performance this quarter was very much in line with our overall expectations, and I believe we are in a strong position with the financial flexibility we have to successfully implement our strategies.

I'll now pass you back to Andrew.

Thank you, Julian, and let me open up now for Q&A.

(Operator Instructions) John Murphy.

Thank you.

That was a very exciting wait.

I've got a few questions, please.

First, Julian, could you talk about the fourth quarter charge that we might anticipate from operational excellence?

Second, wonder if you could tell us within the pharma performance how much price benefited you in the quarter.

Then, third, Andrew, you mentioned there about assessing opportunity for change in the US business.

Wonder if you could tell us a little bit more about that.

Are you talking about just change to the selling model, or maybe going beyond that?

Let me hand over to Julian first, and then I'll answer that.

Price, basically this quarter, was just over 1%, which is a pretty steady rate that we see most quarters.

That's a 1% benefit overall.

And the answer to your question -- difficult to predict, obviously, with implementing the restructuring program as quickly as possible.

I don't expect the charge in Q4 to be less than the charge in Q3, but I don't really want to say more than that at this point.

As far as the US is concerned, John, obviously, I'm taking the opportunity to really work with the US management team on how we need to be shaped for the future.

I think it's fair to say that I'm looking at everything in the US and not simply the selling model, although that clearly is part of it.

I'm spending most of my time in the US.

I was there all of last week, I'll be there all of next week, and for most of the rest of the quarter.

I think this is a very timely moment for us to really ensure we've got the right structure and capabilities in place.

I'm very happy with the team I'm working with in the US.

And they are very engaged and, I think, enthusiastic about the opportunity to ensure that we put together the right approach for the portfolio that we're going to have in the environment that we now see evolving in the US, both of which is changing a lot.

Our portfolio is clearly becoming very dynamic in terms of saying goodbye to some of our historic products and bringing in a very wide portfolio of new product.

And our environment is changing significantly in the states.

So I'm not going to give you a lot of detail, John, today.

There will be an occasion for me to do that in the not too distant future.

But suffice it to say, a lot of work going on, on this area.

I appreciate the last part of that comment.

Could you maybe just elaborate, though, a little bit about you saying, talking about the changing environment as you see it there?

Is the anticipation that you do see a significant slowdown within that market?

What sort of things are you thinking about there?

It's not so much that I see, necessarily, growth slowdowns in the marketplace in the US.

I simply think that to compete in the future effectively will require enhancements to some of the skills that we've seen in the past, and that if you just stay fixated on the skills and the capabilities of the past, I'm not sure that's going to work.

So, to be blunt, I don't necessarily believe the ultra-high frequency model of the selling environment, which has clearly been a feature of the last 15 years.

I'm not convinced that that is -- I don't think I'm unique in that box -- is a sustainable way forward.

So at the selling model level, I think the way in which companies interact with the payors is going to be another area, where if you went to sustain substantial, rapid access to markets in the US it's going to require different skills and capabilities than you've had in the past.

I'm not saying that this thing is going to change overnight, but it's pretty clear to me that we are seeing a market in a pretty fundamental phase of transition over a period of time.

And for us, this is a perfect moment for us to really ensure we've got the right approach to that kind of evolving marketplace that we see in the future.

That's great, thanks very much.

Graham Parry, Merrill Lynch.

Just on the buyback here, in your release you say buybacks for 2009 are not expected to be significant.

I know you'd flagged this before; I'm just wondering if you could give us a feel for how much this really means.

Are we talking less than GBP1 billion?

Are we talking less than GBP100 million?

And then on a related topic, on the acquisitions, ones done to date have been relatively small.

Should we read your comments on the scope for acquisitions that you're seeing now as meaning there that scope for larger deals, and what the timing of these would be?

So are you looking at imminent deals?

Are you just preserving capital for tougher times for the industry in 2011 and '12?

And then, finally, just a quick one for Julian.

Could you just highlight for us how much FX benefited gross margin in the quarter?

As far as the buyback is concerned, I'm not really going to go any further than saying you shouldn't expect significant repurchases.

I think we're sending a pretty clear signal when we say you shouldn't expect significant repurchases.

I'm not going to go any further in terms of qualifying it.

In terms of the kind of acquisition profiles that you've seen us undertake, let me be clear on a couple of things.

One, we are not reserving capital for a rainy day that may or may not come in two or three years time.

I actually think that, while the industry may be in a particularly tough place in 2011, I believe that for GSK, that's a period where much of our genericization will be behind us and much of our -- what we expect to have, delivery of new product portfolio, will be in the portfolio and we'll have moved forward.

So I really don't see GSK being on the same cycle of the rest as the industry, first thing.

Second thing -- we have made these moves to create the financial flexibility to take advantage of opportunities which come our way.

Those opportunities are surfacing with some frequency, I have to say, and they are surfacing at the small to medium scale.

So far you've seen us execute at the small level.

So everything we've done so far has been pretty small.

We are seeing other opportunities which are more at the medium scale.

There's no doubt, there has been more of these things start to surface in the last month, as various other types of businesses have been impacted in different ways by the economic changes we have seen surrounding us.

And we are clearly engaged in a number of these conversations and I think that that pace is only likely to accelerate as we go into the next year.

In terms of specific timing, it depends whether or not we actually conclude any of the deals on terms we are happy with.

It's no secret that we are -- while we are an interested buyer, we are prepared to walk away from the table if we can't get terms that make sense for us.

So those are the stars that have to align in terms of whether you see things coming through.

My expectation is that we will see deals which work for us and which we can get executed.

And I think we will see some more small ones and we may see some a bit bigger than the ones you've seen so far.

I'm going to reiterate that, while I'm never going to rule out a very big transaction, we don't see that as being something in our near-term horizon, not least because we think that the organic strength of GSK is significant.

And, while we have got to get through this transition period, and I have laid out very transparently all the negatives we see hitting the Company, offset by, we believe, a growing set of positives, enhanced by appropriate bolt-on small and medium-sized acquisitions and investments.

Once we get through that, we see a pretty strong organic story for the Company.

And, I really don't want to go rushing off and doing a big transaction which changes the face of the Company because I don't think that's necessary at this point in time.

I'm not saying never, but it's certainly not something on our horizon.

So, hopefully, that gives you a little bit of a context of what we mean by small, medium.

And in terms of when, it's when we get a deal that works for our metrics.

I'm going to hand you over to Julian on the last question.

Yes.

If the currency rates that ruled in quarter three 2007 had applied, the 24.8% would have been 25.3%.

So there was a 0.5% margin benefit from that currency change year on year.

That's great, thanks very much.

Gbola Amusa, UBS.

Used to be that we could predict the sales of drugs after they expired in the US and Europe fairly reliably.

But now that we have big drugs coming into Japan late as well as the increasing importance of emerging markets, how do you globally forecast sales for these big drugs that are going generic in Europe and the US in coming years?

And, are there any drugs, specifically, that have been rendered less relevant previously that may make a comeback in the future?

That's an interesting question, Gbola.

Simplistically, obviously, the way we do our forecasting is bottom-up.

It doesn't help you very much, but we clearly work literally brand by brand, market by market.

So we have seen that kind of -- we obviously take into account these things.

One of the beauties of bringing Japan on-stream, and I think, down the road, emerging markets, albeit in a slightly different portfolio of businesses, is I do think you will see products which maybe we have all consigned to be historic actually show second wave.

Now, what you have to remember about Japan is not only, for example, have we just got Lamictal approved, we've got 10 years data exclusivity in Japan.

Remember, Japan has a very, very new and pretty positive data exclusivity period for the industry as a reward for putting up with a pretty long and slow regulatory path.

So here we are on the verge of introducing up to 40 products in Japan, many of which have already been launched, some of which are already off patent in the West, with 10 years exclusivity position on these brands.

So I think you're going to see Japan, if we play our cards right, you are going to see Japan become a really interesting business for GlaxoSmithKline in the future.

I could say the same in emerging markets around products like Augmentin when, if you look at a product like Augmentin, which clearly we sell very little now in -- particularly in the US, we see in Europe it continues to be a performing product.

And we see in emerging markets the same.

I think you may see the same happen with our cephalosporin in antibiotics as we go forward.

There are a number of these sorts of products which you should keep an eye on.

Now, are any of these going to replace what once existed in the US?

Of course not.

But what you end up with is, rather than a ski slope which goes to zero globally, you get a ski slope which comes down to a plateau and then at least stabilizes.

And maybe, in some cases, actually starts to grow again if we can bring Japan and emerging markets on-stream enough.

That is clearly part of the strategy, Gbola, to not only diversify laterally across our businesses but, if I can put it, temporally across our businesses.

So you've got lifecycles of products.

And Advair in Japan, Lamictal in Japan, are really good examples where we've got products with very well understood, massive databases of information coming on-stream into a market late compared to the West, but actually bringing in a very nice kicker to the sales performance of the Company.

And, I think we'll see more of that as we carry on.

Thank you.

Tim Anderson, Sanford Bernstein.

A few product-specific questions if I can.

On Cervarix, updated timing on the head-to-head trial comparing to Gardasil, and what would be the likely forum of everyone seeing the data?

Going back to your comment about Cervarix winning 60 tenders, we of course need to know how many of those tenders Merck has won, to be able to put that in context.

Next question is any update on the product in the US in terms of what regulatory authorities have told you?

And then, on Advair, I'm wondering if you can give us an update on the advisory committee meeting that I believe is looking at the safety of long-acting beta agonists, and whether you think that could be something that hurts Advair or maybe even helps Advair.

Thanks very much for the question.

Let me just try and nail these one after the other.

On the tenders in -- so this is worldwide tenders, most of which are in Europe.

They're not all in Europe.

There have been 52 competitive tenders awarded since Cervarix was launched.

Of the 52, GSK Cervarix won 31; that's for the 60%, so 31 of 52.

If you look -- that's obviously numbers of tenders.

If you look at volume represented by those tenders, which is another important way of looking at this, actually, GSK won 70% of the volume.

So the 52 represents 100% of the market for tender business.

We won 31 of the 52 events, which represents 70% of the total tender market.

So hopefully that answers explicitly that question.

In terms of the head-to-head data, this is a study called HPV-010.

We are not announcing when we are going to release this for competitive reasons.

But it's coming, and I'm not going to say too much more about it than that.

In terms of regulatory approval lines in the US and feedback on Cervarix, nothing new to report on that.

We are absolutely on track to deliver what we have guided, which is to submit the final data from our large study, pivotal study to FDA in the first half of next year.

We have not had any indication from FDA that anything has changed in terms of anything to do with this review in the period that has elapsed since we last talked to you.

I would also, though, just mention to you that there are -- a huge amount of safety data is being generated both on the adjuvant we are using in Cervarix and Cervarix specifically.

And for those of you who are interested, there is now an online version of a publication on a journal called Vaccine.

This is part of the Elsevier portfolio of journals.

If you go online, you can see what is called a galley proof of that paper.

It describes a safety database of the adjuvant in over 68,000 subjects, and it describes the very encouraging safety profile of the adjuvant.

If you would like to wait just a little bit longer, we have submitted a paper to a journal called Human Vaccines, which is likely to be published later in the year, which looks only at Cervarix safety database coming from 11 clinical trials involving 13,000 women of all ages.

16,142 of them were on Cervarix, 13,811 of them were on control.

Again, you will see a pretty reassuring picture in terms of safety.

So, while I can't -- appropriately, I can't read the minds of the FDA, what I can tell you is we're generating very significant safety databases.

The adjuvant safety database is essentially available online at the Vaccine journal, and the Cervarix one will be in human vaccines, and it's also being submitted to ESPID for discussion in summer, I think May, of 2008 -- I'm sorry -- it was in summer of 2008; it has already been discussed.

So you can look at that in the ESPID poster abstract.

As far as the respiratory advisory board coming up, the advisory board, as far as we understand it, is looking at long-acting beta agonists.

Obviously, that is a class review, so it's going to cover not just salmeterol; it will also cover formoterol.

We don't know yet what the questions are at the advisory board.

We are obviously preparing our data.

We've recently concluded a very comprehensive review of all of our information, and we are ready to go to that advisory board.

We feel particularly -- that we obviously have a very substantial safety database, both for [lobbers] and for [lobbers] in combination with inhaled steroids and, of course, for Advair.

We make it very clear in the label of salmeterol that salmeterol or a long acting beta agonist should only be used with an inhaled steroid.

Of course, the easiest way to do that is with Advair, and I think our safety database is going to speak volumes for the logic of that argument.

And we'll wait and see how the FDA asks the questions at that meeting.

There's not much more I can tell you today, and we'll wait and see how it goes through.

Terrific, thank you.

Nigel Keegan, Royal Bank of Scotland.

Just a quick question for Julian, please.

Julian, I noticed in the middle of last year, year working capital requirements started to creep up, and in particular your inventory days are now running at somewhere around the 230 days mark.

I just wonder if there's an opportunity there for you to free up cash going forward.

It looks like you could potentially free up something over GBP1 billion.

Could you just comment on your working capital requirements going forward and whether or not you see such an opportunity there?

Yes, and a very perceptive question.

First of all, an explanation on inventory.

Inventories have risen because we have been building up our vaccine stocks and because we have been increasing the stock of certain pharmaceutical products on a sort of strategic stock basis.

In other words, we've identified we need to have reserve stocks.

That's why it has gone up.

But you're absolutely right.

Not only do we see an opportunity in receivables -- sorry, in inventory -- we see it in receivables and payables.

We have set up a series of -- we've set up a big project here with individual working teams, and we are hunting for cash, is how I would describe it.

And, we do intend to deliver cash back to the shareholders -- back to the Company, really, to reinvest behind strategic investments.

It's a major program, and I think you'll start to see the benefits of that starting really, probably, within about a month's time.

So yes, it's a big initiative of the Company.

And let me add to that, that if you look at any of the lead tables of working capital efficiency, you will see that GSK has tremendous opportunity to improve here, and that is absolutely what we're going to do.

So I see this as another great opportunity for us to make this organized, this Company sweat harder and drive out more cash at a time when there's great premium on having cash.

And, clearly, this is a good moment for us to do it.

We announced back in May that this would be a priority for us, and Julian is leading the charge with his team on getting it done.

And I think you should anticipate some pretty significant deliveries on this.

Thank you very much.

Marcel Brand, CA Cheuvreux.

Thanks for taking my question, Marcel Brand from Cheuvreux.

A question on SG&A -- the marketing productivity looks quite solid, at least in terms of business performance, less so in the reported number.

But when I look at the number of your incremental launch activities -- Treximet, Rotarix, Volibris, Requip XL, probably also some Veramyst -- it looks to me that you may not be doing justice to some of those opportunities.

Some of them have been launched a couple of months ago.

So isn't it the case that you are maybe saving too much on SG&A at the expense of the top line?

And then the second question is, could you talk us a bit through the Japan opportunity, how you see the epilepsy market in terms of size and growth, and also highlight maybe the most important opportunities from the 40 launches that you talk about in that country?

Thanks.

Listen, thank you very much for that question.

As far as SG&A is concerned, it's a very good question in terms of, obviously, you want to try and manage the most efficient delivery you can.

On the specific products, for example, Treximet, Requip and others, Rotarix, each -- I'm actually pretty comfortable with how these things have started.

The thing has held us back on Treximet is not an investment horizon; it's that it took three months for FDA to sign off the promotional materials.

It's what -- unfortunately, it's one of the issues we face with an FDA which is, frankly, just under-resourced with people.

And that's why I keep banging on about we need the FDA to be staffed up properly.

Unfortunately, we just lost some time in terms of FDA giving us approval.

We now have all of that information.

We've got very good reaction in the marketplace, and I'm not worried about Treximet.

I'm certainly not worried about the investment we've got behind it.

It's a significantly weighted product for us, and it will be fine.

Requip -- you've got to remember that we've got genericization of the original formulation going on in the background of the introduction of the new product.

The new product actually has been received very well.

We had good first quarter sales.

If you look at in the US, although it's somewhat offset by the continued genericization in the US.

If you look in Europe, it was up, I think, 35% -- very good performance.

If you look at the performance in the US of Requip, new formulation versus the two most recent introductions we are -- before we are taking share more quickly than either of the two most recent introductions, which were Neupro and the Teva product.

So very comfortable with that.

Rotarix -- again, I'm very comfortable with where we started with Rotarix.

The issue we've got there is that, frankly, doctors are looking to use up some of the inventory of the competitor product in their fridges before they stock our product.

This is going to be a share take-away game; we can't expect to take all that share on day one until the fridges and the stock rooms essentially get cleared out.

That's the simple story on that.

So I think that realistically we have got -- when we get a new product, we go after it.

The reality is that in various situations there are things which influence the immediate pickup.

I'm not concerned about it.

I'm going to draw your attention to another product in the US called Lovaza.

This is a product we bought last year from -- or when we bought the company Reliant.

Q3 sales were GBP75 million.

We have done GBP192 million year to date on this product.

The TRx, the total prescription volume, for this product is 50%.

So you've got a very, just a very good example of, again, a product where we are putting investment behind it and delivering very significant growth on what will be a very substantial product for us.

And let me also reiterate, the last eight weeks Advair has delivered very strong TRx performance, and I think if any if you -- as I'm sure you all are -- are looking at the performance of Advair versus prior periods and prior years, it's a long time since you've seen this level of sustained volume performance of Advair.

All of which represents that we are deploying significant resource and getting sales responsiveness where we need to get it.

In terms of your Japanese question, we are, as I said before, we have 40 projects and major indications being launched into Japan over the next few years.

So I am just going to pull out a few and to be honest with you, this could get very dull very quickly.

Lamictal, obviously is the most imminent.

We are expecting Tykerb in the not-too-distant future; Advair COPD is still to come, Cervarix is filed.

I'll draw to your attention that we filed Cervarix ahead of the competition, a somewhat unique phenomena.

We are just now rolling out Arixtra.

We have Allermist.

And, if you recall, any of you who know the Japanese market will know that the rhinitis market is a very substantial market.

Allermist is coming.

Pre-pandemic vaccine is coming, Promacta is coming.

There is a lot of good stuff in that business.

And when you look down the list of what we have, it gets pretty interesting.

And the real challenge for us is making sure that in Japan we have the capacity to bring these markets to the market properly.

As far as the specific question goes on the epilepsy marketplace, we don't believe there's any structural difference between the Japanese epilepsy market and the European or American one.

And, we will go to market and aim to build share as quickly as we can.

Thanks for the question.

Marcia, can I ask, is there one?

I think we have time for one last question.

Just check if there is one.

Kevin Wilson, Citi.

Thanks very much, a couple of questions if I may.

On emerging markets pharmaceuticals, the quarter-on-quarter volatility seems quite wide.

I think 15% CER in the second quarter, down to 9% in this quarter.

Could you comment on that and give us some sense of what you think the emerging markets pharma business is going to grow at, given your earlier comments about that?

And on the emerging markets Consumer or, indeed, the broader Consumer business, could you give a bit more granularity on where you -- the specific areas where you have seen some Consumer slowdown?

Secondly, on FX, you have in the past, Julian, kindly guided us to the sensitivity of EPS to FX movements.

I wonder whether it might be appropriate at some point to include perhaps the yen or another major currency, given that that clearly contributed to this quarter's strong FX gains.

Finally, on the dividend policy, you have for a number of years had the first three quarters the same but we increase in the fourth quarter.

What should we read from the increase this quarter?

Are we now going to look at a progressive quarter-on-quarter dividend, or is there a change to the pattern of how you are going to put increases through during the years?

Okay, Kevin, thanks for your two questions, and I'm going to give the second to Julian and I'll answer the first two.

In terms of the performance of the emerging market, the underlying growth for Q2, we believe, was about 12%.

The variation -- there is going to be some lumpiness and volatility going forward, and a lot of that is driven off the back of vaccine.

So as we see -- what you tend to see in the emerging markets is the vaccine business is very often tender-driven, and you tend to get some quite big deliveries.

So Rotarix, for example, can really bump numbers up in a given quarter.

So that is what typically explains the kind of volatility you are seeing.

I would take this opportunity to say that, as we go forward, I kind of anticipate that kind of volatility even touching the corporate level because, as you look at our business, as vaccines get bigger, as we see more tendering going on by governments, and as we have some very big products in that tender mix you will see quarter-to-quarter volatility in our business.

You see it in emerging markets.

You will see it in other parts of the business as we go forward.

It's just the nature of the beast, as we step forward.

I'm not going to give you a guidance on what I think the emerging market growth is.

Suffice to say, I've made it very clear that I expect it to be a strong growth business for us.

Will it always be a strong growth business every quarter?

No, because the emerging market portfolio has in it countries which, from time to time, will have glitches and we all know that.

But over the long run, we expect to see this to be an enhancer of growth for the Company going forward.

As far as Consumer is concerned, I think Consumer is a bit of a mixed story for the quarter.

Emerging markets, we have seen no sign of any slowdown.

If anything it just looks great.

At this point, let's see.

It's early days, but so far in this quarter --.

The US has obviously seen the most examples of economic downturn pressure.

Having said that, it's still sporadic by category and kind of area, and Europe is a little bit in the middle.

I'd also emphasize that we were hurt a little bit this quarter by the awful summer in Europe, which really hurt our drinks business.

Albeit we did grow market share, even though the overall market was depressed.

If you look, in particular in the US, Kevin, the kind of thing we're seeing in a few categories is people moving to own-label type of purchases, so some down-trading in some categories.

We're seeing a little bit of pressure from retailers on things like three-for-two type of programs.

That type of thing is the stuff we see in certain categories.

The good news is that, as you know, much of what we sell in our consumer business is what you might describe as quality staples.

We have the fastest-growing toothpaste brand in the world.

We have one of the biggest analgesic brands in the world.

These are brands which people are going to typically buy, whether there's an economic downturn or not.

And really, the pressure for us is more at the margin rather than the core of the business.

I caveat all of that by saying it's still early days in the evolution of this economic change of circumstances, and we are watching this very carefully.

We'll keep an eye on how these three different regions of the world perform.

What's reassuring to me is that in most of our categories in most of the world, we are growing share even if the category is under pressure.

And we have to be realistic that the economy is going to go where the economy goes.

The question is, are we building a stronger Company competitively?

And I think, so far, so good.

I'm going to hand you over to Julian for those two other questions.

Yes, Kevin, on currency, if you look at the 15 and you applied our simple dollar/euro formula, you are going to come up with 10.5.

The yen, which actually appreciated just under 17% in the quarter year on year, contributed a further 1%.

It takes, actually, quite a bit for the yen to generate that sort of contribution.

But that gave us 1%.

Non-euro European currencies, which there's a whole basket of them, nothing particularly significant in itself, gave us another 2%.

Rest of the World, which is tens of currencies, gave us just over 0.5%.

And then intercompany settlements, which I can explain to you off-line if you are interested, gave us 1%.

So it's quite difficult, actually, to put another currency up.

Probably the yen, and there a sort of 17% appreciation in the yen gave us 1%.

But beyond that, it's difficult to point to a particular currency.

In terms of dividend, yes, our policy has moved back now to the more traditional giving an indicator on the full-year dividend with the prelims rather than at the Q3 results time.

And then in terms the sort of dividend by quarter, we like to try and spread the dividend so we don't have a huge dividend in the quarter four, and then quite modest ones in the preceding three quarters.

So, where we have the opportunity, we do bring the dividend up by $0.01 during the year.

Over the last three years we have chosen to do that in quarter three and this year is no different.

So -- and, obviously, we will decide what the Q4 dividend is when we decide what the full-year dividend is going to be.

But to reinforce what Andrew says, we know the [importance] to our investors of a sustained growth in the annual dividend, and we are very much behind that.

Thanks very much.

Kevin, thanks very much for your question.

I'm afraid we are out of time.

I'm going to bring this Q&A to a close.

I'd like to thank everybody for your attention and very interesting questions.

Obviously, our investor relations team, led by David Mawdsley in Europe and Tom Curry in the US are available, obviously, to take calls off-line.

And if there are further questions that anybody has, obviously, you know the team are there to help you as much as possible.

With that, I'd like to thank you all for your attention today and I look forward to seeing you at the full-year results, if not before.

Thank you.

Thank you for your participation in today's conference.

This concludes the call.

You may now disconnect, and have a wonderful day.