葛蘭素史克 (GSK) 2009 Q1 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to your Q1 results analyst and investor call hosted by Andrew Witty, CEO, and Julian Heslop, CFO.

  • My name is Richard, and I will be your coordinator for today.

  • (Operator Instructions).

  • I would now like to hand the call over to Andrew Witty, CEO.

  • Andrew Witty - CEO

  • Good afternoon and thank you for joining myself and Julian Heslop, our CFO, on this call today.

  • Before I open up for Q&A, I would like to make a few comments.

  • This first quarter performance marks what we always expected to be the year of two halves for GSK.

  • The year-on-year comparative effect of generic competition to products in the US at its most extreme in the first six months of 2009.

  • Generic competition to our neuroscience portfolio in the US reduced sales by close to GBP450 million compared to the same quarter last year.

  • This largely accounts for US sales declining 22% to GBP2.3 billion in the quarter.

  • As expected, this impact to higher margin US sales resulted in a decline to our gross profit margin, and together with one-off intangible asset write-offs in R&D, this primarily explains the reported difference we see between sales and earnings performance first quarter.

  • Looking broadly at sales performances for the quarter you will see divergence between the US and the strong sales delivery reported in Europe, emerging markets and Asia-Pacific/Japan.

  • In the US we experienced some tough performance challenges as our product portfolio transitioned and we have restructured our business model.

  • The scale of change we have undertaken has undoubtedly been disruptive and testing for our employees.

  • It is essential that we reconfigure our US business to make sure we have the right resource in the right area with an overall lower level of cost.

  • First quarter saw a lot of this change happen with, for example, 60% of the primary care salesforce being trained on new product areas and given new territorial responsibilities.

  • The appointment of Deirdre Connelly as the new leader of our US business was also an important event in the quarter.

  • She is undoubtedly one of the best executives currently working in the pharmaceutical industry, and is already well down the track of implementing the changes we need in our US business.

  • With generic exposure reducing and several new product launches to come, I expect a significant improvement in the performance of our US business during the second half of 2009.

  • Turning to the regions outside of the US, first quarter pharmaceutical sales were very positive, altogether growing at 7% to over GBP3.3 billion.

  • The strong start to the year of our Japanese business was particularly encouraging, the sales growth, driven by Advair and Relenza.

  • New indications for Advair in January for use in COPD and with pediatrics are helping to accelerate sales.

  • First quarter sales were triple those in the first quarter of last year.

  • We have increased resource behind Advair through a new copromotion agreement with another Japanese company.

  • You can expect to see more of this kind of activity as we look to execute successful launches from the extensive product pipeline we have in Japan.

  • This includes, and I am delighted to say, two new product approvals we received just yesterday.

  • One for Allermist and the other for Tykerb.

  • In emerging market first quarter sales were up 18% to GBP661 million.

  • We are investing rapidly in our salesforces to drive forward our product portfolio.

  • In China, for example, our salesforce has increased by 40% since the start of last year, and we now have well over 1,800 representatives working for GSK in the market.

  • In Europe we are in the midst of launching two major new products, Synflorix, our new vaccine that provides increased protection for infants against pneumococcal disease, and alli, our new OTC weight-loss treatment.

  • This is the first time that GSK has launched an OTC brand simultaneously across the region.

  • And by mid year alli will reach consumers in almost 30 markets.

  • This kind of launch capability indicates the competitive scale of GSK's Consumer business.

  • And with 12 new product launches in the first quarter alone, 15% sales growth in the BRIC market and marketshare gains for seven of our top 10 consumer brands, it is clear that we are demonstrating performance of this key business.

  • Given the current economic downturn, overall sales growth in the first quarter for Consumer of 4%, to well over GBP1 billion, a very resilient performance.

  • So far we have only seen a limited impact our business due to the downturn, and mainly in Europe.

  • We will be talking to you in more detail about our Consumer business at our meeting in London at the end of May.

  • I'm also pleased with the progress we have made against our strategic priority to improve long-term growth for GSK and to reduce risk.

  • We have invested in a series of transactions to leverage our existing assets and maximize value to shareholders.

  • The acquisition of Stiefel Laboratories and our collaboration with Pfizer on HIV assets will create two new specialist businesses for GSK, provide us with new options, diversify GSK's growth profile, and reduce the risk of pipeline cyclicality.

  • In the same manner we have now completed five targeted bolt-on acquisitions in the last six months to strengthen our Commercial position in Consumer Healthcare and emerging market.

  • Products acquired from all of these transactions will deliver new revenues to GSK from the second quarter.

  • We are continuing to maintain a level of around 30 medicines and vaccines in our late stage pipeline.

  • And pipeline output for the quarter remained positive with six filings completed with regulatory authorities.

  • Notable was Cervarix in the US, and it was good to see ofatumumab granted priority review by the FDA.

  • Biopharmaceuticals, excluding vaccines, now constitute almost 15% of GSK's clinical pipeline.

  • This is a further example of the way in which we are aiming to broaden our portfolio.

  • All of these filings will be further valuable additions to our new product portfolio, sales of which were GBP265 million for the quarter, so already annualizing to around GBP1 billion per year.

  • These and other products, together with the changes we are making to invest in and change GSK's business model, are intrinsic to delivering greater growth and improved shareholder return.

  • Finally and in conclusion, I am also pleased to confirm that our policy of progressive dividend continues, with this quarter's dividend up 8%, an increase to 14p.

  • With that, I will now hand over to Julian to take you through the numbers in some more detail.

  • Julian Heslop - CFO

  • And as usual I will concentrate on constant exchange rate growth.

  • Turnover in the quarter was GBP6.7 billion, 5% lower than the previous year.

  • And pharmaceutical turnover was down back 6% to GBP5.6 billion.

  • And Consumer Healthcare was up 4% to GBP1.1 billion.

  • US pharmaceutical turnover declined 22%, adversely impacted as we expected by continued generic competition, primarily to our CNS portfolio.

  • However pharmaceuticals' turnover in Europe and the rest of the world was strong, with combined sales growth of 7% to GBP3.3 billion.

  • At the product level, total sales of Advair were flat at GBP1.2 billion, with good growth in emerging markets and Japan, offsetting a 5% reported decline in US sales.

  • Our estimate for underlying US Advair sales growth is in the mid-single digit range.

  • The primary reason for the difference being variations in wholesaler stocking patterns.

  • Our vaccines business had another strong quarter, with sales up 18% to GBP625 million, driven by strong growth in Europe and emerging markets.

  • However, vaccine sales declined in the US due to increased competition in the hepatitis and DTP segments.

  • Overall we continue to expect our vaccines business to be a key driver of growth for the group during the rest of the year.

  • Relenza sales were GBP222 million, reflecting significant pandemic stockpiling orders from both the UK and Japanese governments.

  • Avodart and Lovaza also performed well with sales growth of 12% and 54%, respectively.

  • However Avandia sales declined by 19%.

  • Sales of newly launched pharmaceutical products totaled GBP265 million in the quarter.

  • Our Consumer Healthcare business reported sales growth of 4%, despite suffering from some customer destocking, particularly in Europe, where sales fell 4%.

  • However, this was more than offset by sales growth in the rest of the world.

  • And encouragingly we saw marketshare gains in both our OTC and oral care businesses.

  • We did, however, see lower sales in the UK nutritionals business, as lower consumer purchasing power adversely impacted Lucozade soft drink sales.

  • Looking at the results before major restructuring costs in more detail, you will have seen that cost of goods as a percentage of turnover was 24.3%, in line with my expectations for the full year, with the increase over the previous year principally reflecting lower sales of high-margin US products due to generic competition.

  • SG&A costs, excluding legal charges, were 30.6% of turnover.

  • You will appreciate that this margin is a function of both the phasing of costs and turnover.

  • I continue to expect the SG&A margin, excluding legal charges, be slightly higher for the full year than it was in 2008.

  • Overall, SG&A costs were 1% lower this quarter than the previous year.

  • This reflected a 9% increase in investment to deliver sales growth in emerging market, Japan and Consumer Healthcare, higher pension charges, primarily offset by a significant reduction in SG&A costs elsewhere in the business, reflecting the benefit from the ongoing restructuring programs.

  • R&D costs of GBP1.1 billion were 14% higher than the previous year.

  • This included GBP115 million of intangible asset write-off compared to at least GBP6 million in the first quarter last year.

  • Excluding this write-off, R&D expenditure was 3% higher than last year.

  • I did not expect this level of asset write-off when I presented the Q4 results to you earlier in the year, and I know consequently expect full-year R&D expenditure to be slightly higher of the percentage of sales than it was in 2008 as a result.

  • In the quarter other operating income, together with the profit on the sale of some of our Quest shares, amounted to GBP169 million, which was similar to last year's income of GBP161 million.

  • Included within this was royalty income of GBP67 million, some GBP5 million higher than last year.

  • I expect other operating income, together with the Q1 profit from the sale of our Quest shares, to be slightly higher in 2009 than it was in 2008.

  • Earnings per share before major restructuring costs was 26.3p for the quarter, 28% lower than last year, which was in line with our expectations.

  • We expect 2009 to be very much a year of two quite different halves, with the first being significantly impacted by generic competition in the US, but with this impact projected to diminish significantly in the second half of the year, at the same time as that we expect the sales contribution from new products to increase.

  • Currency continues to be strongly beneficial and the actual sterling EPS growth, excluding for the restructuring charges for the quarter, was 3%, a 31% currency benefit, principally reflecting the strength of the US dollar, the euro and the yen.

  • And taking period end rates, quarter end rates, I expect the currency benefits, if that applies for the whole of the rest of the year, to be around 23%.

  • The restructuring program is progressing well.

  • We took charges of GBP264 million in the quarter, and remained on track to deliver GBP1 billion of savings by the end of the year.

  • You may have noticed on pages 15 and 16 of the release that we have implemented the new operating segment standard, IFRS 8 with effect from 1st of January.

  • This requires us to report externally segmental turnover and operating profit on the same basis as it is provided internally to the Chief Executive Officer in our management account.

  • I would like to make a couple of points on this information.

  • Firstly, it reflects our internal management reporting process, which simply allocates all profit on product sales to the segment in which the external sale is finally made.

  • Secondly, there is no allegation of central or pharmaceutical R&D costs.

  • This has the effect of ensuring that sector Presidents see the total group profit impact from performance in their businesses.

  • Finally, if you look at the cash flow, you will see the net cash inflow from operating activities for the quarter was GBP1.7 billion, 4% lower than last year, reflecting higher cash restructuring charges.

  • Cash generated in the quarter was used to fund acquisitions of GBP500 million.

  • With that, I will hand back to Andrew.

  • Andrew Witty - CEO

  • Now I would like to open up the call to Q&A.

  • Operator

  • (Operator Instructions).

  • Gbola Amusa, UBS.

  • Gbola Amusa - Analyst

  • A couple of pipeline questions.

  • Given that MAGE-A3 went into Phase 3 on melanoma, I just had a question about whether gene expression profiling data that emerged at ASCO '08 was used in this Phase 3 trial for recruitment purposes?

  • And then secondly, I know Promacta is still in early days given the 20 November US approval.

  • Is there anything you have anecdotally as to which direction that could be going even for early days?

  • Andrew Witty - CEO

  • Thanks for the question.

  • As far as the MAGE-A3 gene profiling an antigen acid was used in the way in which the trial was designed in the way in which recruitment and the analysis will be carried out.

  • So I confirm that.

  • As far as Promacta is concerned, I actually think Promacta is going to be fine.

  • And the slow start, not least in terms of the various risk management program required by FDA now, which I think is becoming a bit of a pattern, if I can put it that way, for many drugs, or we should expect it for many drugs in the future.

  • And essentially it just creates a bit of a slowing of the initial introductory phase to the marketplace.

  • But we are starting to see good commitment from accounts, from the marketplace.

  • And certainly in terms of the beginning of sales as we have gone through Q1 into April, I am fairly confident that Promacta is going to do okay after what was admittedly a slow start.

  • But I think we understand exactly why it is a slow start.

  • The other thing I would emphasize is obviously that the idiopathic form of cytopenia puria is really the -- obviously the launch indication, but by far and away the smallest of the potential indications for this medicine.

  • You won't really see the real opportunity open up for Promacta until the indications such as chronic liver disease, hepatitis B induced liver disease, chemotherapy induced thrombocytopenia, all of those indications which are underway in our trial program are really where the larger volume opportunities are.

  • But I remain pretty optimistic around Promacta, and beyond that nothing more to say.

  • Next question.

  • Operator

  • Kevin Wilson, Citi.

  • Kevin Wilson - Analyst

  • A couple of questions if I may.

  • Andrew, what is the sustainability of the 18% emerging market growth?

  • Secondly, what is the sustainability of the 7% European growth?

  • And what was also behind that European growth?

  • And finally a couple of questions for Julian.

  • If you were using 3 times sales as an NPV value of the Pfizer HIV business, would that be a good starting point to think about calculating the intangible asset value?

  • And finally, are you going to change your guidance on net financial expense for this year in the light of the acquisitions?

  • And if so, can you give us some sense of what that would be?

  • Andrew Witty - CEO

  • Thanks very much for those two questions.

  • As far as the emerging markets are concerned, I am obviously very pleased with the performance.

  • We haven't seen any material impact -- one or two countries, but nothing really material in terms of downturn in demand due to economics.

  • Although I think we should continue to be watchful around this.

  • And one or two areas of destocking in Russia I would say we remain conscious of, keeping a close eye on.

  • In terms of any distorting factors to Q1, a little bit of phasing around some vaccine tenders, but actually not very material.

  • On the other hand, all of the acquisitions we made so that UCB and the BMS transactions will all start to kick in in Q2.

  • So net net who knows what is going to come next.

  • I don't see any great reason to suddenly feel concerned about our ability to deliver robust performance, whether it is exactly 18% or plus or minus a little bit.

  • I am not sure yet.

  • We will see how the rest of the year goes.

  • As you absolutely know, we have prioritized emerging markets as a place where we do believe we can deliver superior growth.

  • We are investing behind it.

  • So that is clearly what we want from them.

  • I am delighted to see it start so well this year on the back of what was a 12% growth rate in 2008.

  • As far as Europe is concerned, we have had a very robust start to Europe.

  • It has been [blasted] a little bit in Q1 because of the Relenza order from the UK government.

  • That obviously won't recur again during the rest of the year.

  • But beyond that we have seen good robust performance across the portfolio in Europe.

  • And with the introduction as we speak of Synflorix, we will start to see Synflorix sales in the next quarter, and then that will obviously ramp up as we go through reimbursement.

  • As you know, that is a big marketplace in Europe.

  • So again, I think a robust start.

  • Will it be as good as 7% for the rest of the year?

  • We will see.

  • The Relenza thing has clearly bumped it up for Q1, but a good start for the European business.

  • I will hand over to Julian for the other two questions.

  • Julian Heslop - CFO

  • If you want to do a Net Present Value of Pfizer in terms of that combination, really I wouldn't use a multiplier of sales.

  • You have to obviously use your extrapolation of the Pfizer sales over time.

  • Or if it is easier, which it may be, just take 15/85 of your estimate of the value of our portfolio, which clearly I think it is much easier to do.

  • In terms of financial expenses, the unhelpful answer is it all depends on when the transaction closes.

  • The more helpful answer is the guidance I gave you before those transactions is still good for the year.

  • And the interest that we are receiving on those monies that are currently on deposit is around the sort of 1% mark.

  • So if you apply that you can come up, I think, with a very good call.

  • Operator

  • Jeff Holford, Jefferies.

  • Jeff Holford - Analyst

  • Just want to get some broad brush comments from you on stocking and pricing for the pharma business.

  • The first being, are you seeing any abnormal tightening of inventories anywhere, but particularly in the US market?

  • And secondly, have you, or are you looking to change any of your direct pricing policies in the US at this point, given the focus on that in the US?

  • Andrew Witty - CEO

  • In terms of stocking, if I can just look around the world, what we have seen is, as I mentioned earlier, one or two of the emerging markets we have seen some destocking going on.

  • In the US marketplace we have seen a little bit of destocking compared to last year.

  • Q1 to Q1 comparison is slightly adverse in terms of destocking, because there was quite a lot of stock building going on last Q1, Q1 '08, particularly I am thinking Cardinal were opening warehouses or a big warehouse in the US, which obviously didn't repeat so there is a bit of a year on year thing.

  • A little bit of destocking in the US affected some of the products.

  • Obviously Advair was affected a little bit there.

  • We have seen some destocking in the consumer trade.

  • So some of the retailers, the big retailers in Europe, have really destocked quite a bit.

  • So I actually think that although we've got great performance of our overall Consumer business, Europe Q1 was a little bit held back in consumer.

  • I think that is probably a one-off effect, because they are now -- the inventory levels in some of the big European retailers is pretty thin right now.

  • Beyond that, nothing dramatic to report.

  • In terms of pricing, we are not -- I'm not going to go into great detail of what we are doing on pricing, and we certainly don't have some whole new tracing plan which we are about to spring in the US.

  • But we are obviously looking at how best we go forward in terms of pricing, given the evolving marketplace.

  • And you started to see in the way in which we price some of our products.

  • I think Promacta is a very good example, where we priced it at a significantly lower price to existing product in the marketplace.

  • That has received good support from the accounts as we have started to sign them up.

  • So we've already got something like 3,500 accounts and doctors signed up for Promacta, and not the least I think because of that, alongside the profile of the drug.

  • We will look drug by drug and make the right call.

  • I think the best way to think about it is we're embarking on pricing with a flexible mindset and a very open mindset in how we might use price to maximize the value of our assets as we go forward.

  • Operator

  • Andrew Baum, Morgan Stanley.

  • Andrew Baum - Analyst

  • Three quick questions, if I may please.

  • Firstly, just returning to economic sensitivity, but this time on US business, and this time pharma and just talking about the Consumer level.

  • What percentage of your revenue base is exposed to coinsurance?

  • And do you have any sense of how you see pressure on that growing as COBRA programs start to mature as we get into the second half of the year?

  • The second question is on investment in your Consumer business.

  • To what extent do you think that you've got sufficient management competence and expertise with your existing franchise, without seeking to augment from some of your peers and standalone companies with expertise in those spaces?

  • Then the final question is on Syncria.

  • Obviously the FDA is chewing through the issues with GLP-1.

  • My understanding is that you initiated a Phase 3 trial with 5,000 odd patients, but you can't put the drug into rodents.

  • Have you addressed that with the FDA?

  • And have you thought about in terms of initiating rather than waiting for the dust to settle, given the current debate?

  • Andrew Witty - CEO

  • Let me see if I can have a crack at some of those things.

  • In terms of our exposure to things like COBRA and coinsurance in the US, and I think you probably -- let me just doublecheck -- you're probably thinking about some of the anxieties which have surfaced around high-priced drugs in the US.

  • Is that where you're going with that question?

  • Andrew Baum - Analyst

  • Yes, that's correct.

  • But also more generally the increasing use of coinsurance plans.

  • Andrew Witty - CEO

  • Right.

  • So we are certainly not exposed in the way that others are, or appear to be, with these very high prices.

  • Obviously we are not particularly exposed in that marketplace.

  • We haven't seen generally too much impact so far in terms of the economic impact on the pharma business.

  • I mean, I think we have issues which affect us specifically, like our genericizations.

  • But beyond that not too many -- no real evidence of a trend I would say to be honest with you.

  • As far as the Consumer business is concerned.

  • And I think given the performance of our Consumer business versus a number of other consumer companies, I am pretty confident with the leadership we've got of our consumer businesses.

  • No, I remain extremely impressed with the people who are running our toothpaste businesses.

  • Which once again Sensodyne remains one of the fastest-growing products in the oral care sector.

  • We grew marketshare in the oral healthcare market.

  • Grew marketshare in the OTC market.

  • The phenomenal launch of Panadol Advance in the UK market.

  • To be honest with you, but for the weaker performance of the nutritionals business in the UK, partly driven by weather, partly driven by stocking in the economy, consumer business is firing on all cylinders.

  • But I am very -- a big fan of our team.

  • Of course, we look to how we can upgrade personnel.

  • And where we see key talent, just as I have demonstrated on the pharmaceutical side, we will go and get them.

  • But right now I am very proud of the performance of our Consumer company.

  • I think this is a business which has performed strongly across the world -- continues to perform strongly across the world, even when others are stumbling and haven't done quite as well.

  • So I am very happy with that.

  • As far as Syncria is concerned, the reason why we haven't conducted studies in rodents is that they have an immuno reaction to human albumins, which is in Syncria.

  • So there is a very kind of straightforward reason for that.

  • We have had no thyroid findings in the preclinical or clinical development program for Syncria to date.

  • Obviously, we have done studies on primates.

  • We have had this clearly in a significant range of species.

  • And in Phase 3 we are going to collect data on thyroid findings as adverse events, if they occur, and make sure that we don't miss anything.

  • So overall in terms of the issues which are around here, we feel like we are addressing them.

  • It is obvious why we didn't do the work in rodents.

  • And obviously we are starting the studies in Q1, and I think we're in good shape to get going on Syncria.

  • If we go to the next question.

  • Operator

  • Brian Bourdot, Deutsche Bank.

  • Brian Bourdot - Analyst

  • Two questions please, one financial question and one product question.

  • Firstly, on the financial side.

  • I would just like to ask you about cost of goods sold, specifically the constant currency growth rate of 13% that we saw.

  • Andrew Witty - CEO

  • Brian, could you just repeat the question?

  • You broke up just as you asked it.

  • Brian Bourdot - Analyst

  • Sure.

  • Okay.

  • A question on cost of sales.

  • You recorded a 13% growth rate for COGS in constant currencies in the first quarter year on year.

  • That looks high compared with the runrate you might expect over the year.

  • And just looking back at the last two years, COGS grew constant currency 6% in 2007, 4% in 2008.

  • Although it does seem very volatile, I was just wondering what is driving that spikiness in the year on year constant currency growth rate please?

  • And second question on Cervarix.

  • I was just wondering if you could update us on the progress of Cervarix, specifically relating to any further tender sales and whether you're seeing continued similar patterns that you were seeing last year in terms of how you're going against Gardasil and some of those contracts?

  • Andrew Witty - CEO

  • I am going to hand over to Julian in a second to address the COGS question.

  • As far as Cervarix is concerned, we have seen a continued evolution of the business exactly in trend with what we have seen in the past -- continue to win significant proportion of the competitive tenders.

  • Obviously, we have been supplying now in the UK against that tender.

  • I think something like 800,000 girls have already been vaccinated in the UK.

  • In the Netherlands we won 100% of that tender as well.

  • So Cervarix continues to go just fine.

  • We filed the new data in the US.

  • We will see how that goes with the FDA over the next few months.

  • But I have to say with Cervarix, I think the product is living up to expectations.

  • And as we progress through our FDA dialogue, hopefully, we will be able to bring this [to spec] in the not-too-distant future.

  • I will handover to Julian on the COGS question.

  • Julian Heslop - CFO

  • On COGS, I guess two main factors.

  • One is the significant decline due to generic competition in the US.

  • So we're losing very high margin, and hence very low cost of goods as a percent of sales products.

  • So that is reason number one.

  • And the second reason is mix, which is that the products that are growing have a lower cost of goods -- sorry, have a higher cost of goods margin.

  • So for example, in getting to emerging markets, which was growing 18%, they have a higher cost of goods margin.

  • You think of the Relenza product, that has a higher cost of goods margin.

  • If you think of our vaccines business, which is growing strongly, that has a higher cost of goods margin as well.

  • So all those factors combine to give you that overall result.

  • What I do simply is look at the gross profit margin as a percent of turnover, which is 24.3%.

  • My expectations for the year was between 24% and 25%, so it is pretty much where I would expect it to be at this stage.

  • Operator

  • Philippe Lanone, Natixis.

  • Philippe Lanone - Analyst

  • A couple of quick questions on some of the midsize products that have been growing in the quarter.

  • First of all, a comment on Tykerb.

  • That is (inaudible) it seems to be sequentially stable.

  • What can we expect going forward?

  • We had Ventolin making a strong contribution.

  • How sustainable is it going forward?

  • And one question on Arixtra, because you have been doing a very good job here because it is making now a significant contribution.

  • But in the Sanofi days we remember that there was some generics coming, because there were no patent.

  • They disappeared because of virtually no sales.

  • What will be the situation there according to you?

  • Andrew Witty - CEO

  • Let me take those in the order you asked them in.

  • Tykerb right now continues to do well.

  • It is about just under a 20% marketshare of total metastatic breast cancer as of the end of 2008.

  • And as we have penetrated advanced stage of the disease it is inevitable we are going to see these sorts of patterns I think in sales.

  • We are beginning to get more and more used in Europe.

  • Not in every market.

  • The UK we remain in dialogue with the UK government and NICE trying to get Tykerb reimbursed by the NHS.

  • We need to appeal the issues there with Tykerb.

  • And overall we have just filed -- not long ago filed for first line for Tykerb.

  • So I'm not really surprised with the evolution of Tykerb.

  • I think it has done very well in its approved indications.

  • We now need to extend the indications.

  • Obviously with the first line that looks good.

  • You know we have encouraging data in hormone sensitive tumors.

  • We have the adjuvant studies up and running.

  • Tykerb is going to be a classic oncology agent in the sense of building up its potential over the years as the various indications come through.

  • As far as Ventolin is concerned, strong performance of Ventolin.

  • A lot of that is driven by the US.

  • In particular the introduction of a lower-priced Ventolin through the Wal-Mart chain under the label of ReliOn Ventolin.

  • This has been a very significant success for us in terms of increasing share in the biggest retailer in the US.

  • Obviously, there is a lot of dynamism in this marketplace, as we have seen rotation from CFC- to HFA-propelled aerosols.

  • And again that has given a new lease of life to Ventolin, which was up 23% in the quarter.

  • As far as Arixtra is concerned, I am delighted with the way Arixtra has developed.

  • I think particularly the European business has done a very nice job of developing the Arixtra franchise, on the back of the Fraxiparine one.

  • I think in hindsight that was a really tremendous acquisition when we brought the Fraxiparine and Arixtra businesses.

  • We are conscious of companies working in this space from a generic point of view, but we are also conscious that this is the a 50 stage synthesis.

  • We were well aware of the risk of generic competition when we acquired this business and began to invest in it.

  • We will wait and see what happens.

  • But I would say, to put it very mildly, this is a very difficult product to get to from a generic point of view.

  • And I would also point out in Europe, where the majority of our current sales are, we have [datrex] exclusivity protection until 2012.

  • Thanks for the question.

  • Next question.

  • Operator

  • Jo Walton, Credit Suisse.

  • Jo Walton - Analyst

  • I've got two questions.

  • One on the Advair franchise in the US, down 5% in local currency, but we do see some prescription growth, and we do see some pricing for that product.

  • Is it all to do with wholesaler destocking?

  • And have we actually moved down to a lower level of stocking, so we all just see the growth of Advair come through in the future, or should we see some sort of rebound?

  • Secondly, I wonder if you could go a little bit more into the vaccines issue.

  • I understand the hepatitis decline because of the temporary problems that Merck has that has now been put right.

  • Could you just give us a little bit about the outlook, what do you think would be reasonable assumptions for the vaccine business, particularly the pediatric and the hepatitis vaccines?

  • Andrew Witty - CEO

  • Yes, Advair was primarily affected by stocking issues, Q1 comparison, as I mentioned earlier, in particular.

  • We think the runrate, the core runrate on Advair is somewhere mid-single digits in the US.

  • I think that is a very good kind of estimate, at least of what we see today.

  • I have been very pleased to see the gradual strengthening of the prescription growth rate that we have seen over the last -- since the second half of the quarter and as we go into this month.

  • So I am pretty relaxed around the Advair performance, frankly, in terms of what it is doing in the real world versus what we are seeing in the reported numbers.

  • Obviously, we need to also make sure that as we have reengineered our sales teams they are really focused on making (technical difficulty) impact in this marketplace going forward.

  • But I would say that mid-single digit number is a pretty reasonable estimate for where we really are today.

  • We will see obviously how the rest of the year goes, but that is where I would be on that one.

  • As far as vaccines is concerned, it is a very complicated moving part.

  • Last year because of the hepatitis A shortages from one of our competitors we had a tremendous year on hepatitis A.

  • Not surprisingly, we have seen some share fullback for us as that company has come back into supplies.

  • So that is part of the story.

  • We have also seen on our DTPa franchise, the Pediarix franchise, a reduction in sales and share for GSK because of an absence of Hib monotherapy vaccine in the marketplace.

  • What was happening last year with people using our Pediarix plus monotherapy Hib to vaccinate, in the absence of monotherapy Hib they have gone to a competitor which has Hib included.

  • I told you this was going to be complicated.

  • As a consequence of that, we have seen a movement in our Pediarix sales.

  • Interestingly enough, now people are using more hepatitis B monotherapy, so we have seen a positive movement in hepatitis B.

  • So there is a tremendous amount of moving parts in the US vaccine marketplace.

  • I think there is some settling out to be done during the rest of this year.

  • In the background we have seen great growth of our new vaccines, Boostrix and Kinrix.

  • And to be honest with you, I think as we go through the rest of the year, we see all of this start to settle out.

  • I think in the long run our pediatric vaccine business in the US is very robust, being the beneficiary and the victim of other companies' stockout problems over last year in nd the first part of this year.

  • As all of that starts to settle, I think we have a really strong brand in Pediarix, have a great portfolio of hepatitis products.

  • And with Boostrix and Kinrix we've really got the full line.

  • So I would expect some continued volatility in the next quarter or so.

  • And then I think it will start to settle out.

  • And I think we are in very strong position.

  • I have got time for two more questions.

  • Operator

  • Steve Scala, Cowen.

  • Steve Scala - Analyst

  • I have two questions.

  • First, would you provide any color on the tone of discussion regarding Synflorix with key EU regulators?

  • Do you believe there is an opportunity for Synflorix to become the pneumococcal vaccine of choice in key markets?

  • And does the eventual arrival of the 13-valent product part of these discussions and perhaps stop regulators from long-term commitment?

  • Then secondly, there was no mention of Avodart's REDUCE trial, even as an upcoming event, despite the fact that it is very near term.

  • Presumably you know the data by now.

  • Is there any other conclusion we can draw than maybe the study was not positive?

  • Andrew Witty - CEO

  • As far as Synflorix is concerned, we have just started the negotiations with different authorities, as well as with multilateral funders for the emerging market.

  • I think it is really worthwhile just putting it in the back of your mind that pneumococcal vaccination is likely to be high on the list of the emerging market and developing market agenda over the next two or (technical difficulty).

  • We have approval now in Europe, Canada and Australia.

  • We also have our first approvals in Latina in Chile, which included an indication for otitis media caused by NTHi.

  • And the first launches are underway.

  • So the private markets have started in places like Portugal, Czech Republic and elsewhere.

  • Germany should go by the end of this month, and then we move from there.

  • In terms of a dialogue with the authorities, I think the authorities have been waiting a long time to have the opportunity to have choice in this marketplace.

  • I would fully expect Synflorix to be a significant player in this marketplace, and see how that competition plays out over the next 12 months.

  • I do think that markets, that governments are looking to make decisions in the next 12 months.

  • And I think they will be focused on products which have got their approvals and are ready to go.

  • As far as the REDUCE study for Avodart is concerned, absolutely happy to confirm that the data is going to be presented next week at the AUA in the US.

  • My view is that that is the place for information of this nature to be communicated.

  • I would encourage you to tune in and listen to it.

  • Operator

  • Alexandra Hauber.

  • Alexandra Hauber - Analyst

  • Thank you for taking my questions.

  • The first is a follow-up question on Andrew Baum's question earlier on Syncria.

  • My understanding is that you do not measure calcitonin level in these trials.

  • And please correct me if I am wrong, but there just seem to be quite some focus on their calcitonin levels.

  • I am wondering whether you are not at least thinking about modifying the protocol of the Syncria trials?

  • Then I had a few financial questions.

  • Firstly, just thinking about modeling all these recent transactions, Julian, are you going -- what are we going to do with amortization?

  • Will you also book that potentially in the middle column so we can focus on something like -- previously you have focused on business performance EPS, or are your EPS on the left column going to include intangible amortization?

  • Then you seem to have quite a benefit -- a margin boost from FX.

  • Could you just quickly tell us where that is coming from?

  • The final question is, can you just confirm that the gain you're making from the HIV transaction is excluded in your guidance of other operating income, and that is incremental to that guidance?

  • Andrew Witty - CEO

  • Can you just repeat your third question please?

  • Alexandra Hauber - Analyst

  • Sorry.

  • The first question was on the Syncria Phase 3 program.

  • Andrew Witty - CEO

  • No, the third question.

  • Alexandra Hauber - Analyst

  • The third was on the -- I think the third question was on the margin benefit you had from FX.

  • Because the top line was boosted a lot and lost less than the bottom line, so hence I assume there was a margin benefit.

  • And it is always quite difficult --.

  • Andrew Witty - CEO

  • I got the rest.

  • You just broke up on that one.

  • That is perfect.

  • Let me just answered the question on Syncria first of all.

  • The whole issue of the relevance of calcitonin is not proven.

  • We are open-minded on this in terms of whether we will need to look at this as the story evolves.

  • And we are certainly open -- we keep open discussion to this as it does evolve.

  • But you are right, and we will wait and see how things play out.

  • On the other three questions I am going to hand over to Julian, all three of which I think he would be more than happy to answer.

  • Julian Heslop - CFO

  • In terms of amortization, the only thing that goes in the middle column are major restructuring cost in respect of the large restructuring program we have talked to you about.

  • And secondly, significant major acquisitions.

  • The only major acquisition to date that has gone in there has been the Reliant acquisition.

  • All the other restructuring costs and other acquisition-related costs in relation to acquisitions have been reported as part of the left-hand column, the profit excluding restructuring costs.

  • Looking forward, Stiefel is the only transaction which is big enough for the gain to go in that middle column.

  • But in terms of amortization, all the amortization charges that we take on the fair value of the intangibles goes into the left-hand column.

  • In other words, it is in the column which is profit before restructuring costs.

  • Clearly as that starts to get more significant I may well disclose that separately so you see what it is.

  • But when you look at our profit before restructuring charges, that bears the cost of that amortization charge.

  • In terms of FX, the one element in terms of our manufacturing is we have a lot of manufacturing in the UK.

  • So when currency strengthened in comparison to sterling, we clearly benefit from the fact that our UK cost base is clearly very -- even more competitive than it was before.

  • And in terms of the game on the HIV transaction, this is the gain in respect to the exchange of assets with Pfizer, provided we complete it this year, as we expect, there will be a gain.

  • And it will go through the account, and it is excluded from that other operating income guidance I gave you.

  • But if for whatever reason it should fall into 2010, a new accounting standard applies, and again will go straight through reserves.

  • Andrew Witty - CEO

  • Thanks, Julian.

  • And let me bring the call to a close.

  • I really appreciate you all listening in, and for your questions.

  • Thank you very much.

  • Operator

  • Ladies and gentlemen, that concludes your call for today.

  • You may now disconnect.

  • Thank you for joining.