葛蘭素史克 (GSK) 2009 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 Heather and I will be your coordinator for today.

(Operator Instructions).

At this time, I would like to turn you over to your host for today's call, Mr.

Andrew Witty.

Please proceed.

Thank you very much and thanks, everybody, for joining the call.

I'm going to make a few comments, then ask Julian Heslop, our CFO who's with me, to also make a few comments, and then we'll take Q&A.

You've seen today the results reported for Q3 for GSK, and I think what they really demonstrate is the progress we're making to really develop the portfolio of this Company, to diversify the sources of growth, and in this quarter in particular, I think you've begun to see those strategies start to deliver.

For your information, less than 30% of this quarter's sales were generated from what I call white pill Western markets, compared to 38% in the quarter before I took over as CEO.

You know that's something we've been driving towards, and I think it's real evidence of the increasing degree of diversification within this Company and particularly when you look at where the source of sales growth are coming from.

What you're also seeing are the consequences of a disciplined effort to reallocate resources to our key growth areas of the business, which is bringing it back to sales growth for the first time in over two years.

That has been driven in particular by the areas we have been invested in, first of all the emerging markets, where sales for the quarter were up 25%.

Really, a phenomenal performance from [abatastain's] region, and really reflected across the whole of our emerging markets -- China, Russia, Latina, Middle East, North Africa, all of those business groups performing extremely well.

It's been delivered through a portfolio of different products, ranging from the most innovative brands, such as Seretide, through to our classic products, such as Augmentin and the uplift in our vaccine businesses.

During the year so far, we've increased by 15% the size of our emerging-markets sales force.

And just for your information, roughly roughly during the last year or so, we've reduced our European and American sales forces by about 2,200 people and we've increased our emerging-markets sales forces by about 2,200 people.

A very good example of where we've been restructuring to reduce our activity in mature markets and invested in growth markets.

Also, during the quarter we've now made our first regulatory submissions for products from Aspen and from Dr.

(technical difficulty).

We've also continued to sign transactions to establish our footprint in China with the vaccine deal for flu and also the deal for MMR with Walvax announced just a few weeks ago, really giving us a much stronger entree into the Chinese market where I'd remind you there are around 20 million babies per year entering the vaccine population.

So emerging markets, it's really a strong growth area for us.

We see really substantial opportunity here.

I was in Brazil just last week and just another example of an economy which is really beginning to demonstrate huge potential for us in the future.

If I move to a second growth market, where again we've been diverting resources, we've been moving money from mature activities to this business, consumer healthcare, where again we have delivered terrific sales growth of 8% versus a market growth of around 1.5%.

Our 8% growth has been delivered on a broad portfolio of businesses.

Our OTC business is up 9%.

Our oral care business, the toothpaste business, up 10% and our nutritional business, led by Lucozade and [Hall], is up by 4%.

Alli, our new over-the-counter weight-loss brand, was launched in Europe and is now the largest-selling weight-loss product in Europe and among the top few OTC brands already.

What's been driving this business?

Well, you know one of the key priorities is brand innovation.

If I just pick one example, which is our toothpaste business in America, the launch of iso-active formulations in both Aquafresh and Sensodyne has already delivered a two market-share point gain in the quarter and delivered for GSK the highest-ever monthly toothpaste market share performance in the month of September.

Across our whole consumer business, homegrown innovation of brands contributed GBP100 million pounds' worth of extra sales in Q3.

That's from innovations which were introduced just in the previous three years.

Our geographic expansion strategy continues apace.

As you know, I'm focused on either acquiring or developing our own brands from relatively restrictive geographies into a much more of a global position.

We've done that in the past with acquisitions such as Breathe Right.

We're doing it right now with the Biotene acquisition, and of course we're also continuing to do it with our existing brand Sensodyne.

It was launched in China at the end of 2008, and we've just signed an agreement to commercialize Lucozade in China, and you should anticipate further announcements on the globalization of our nutritionals business as we move forward.

If I look at our third area of significant investment, that's the vaccines.

In Q3, you'll see that our vaccine growth was not as strong as we've seen in the past.

For me, that's not surprising.

This is a very good example of the volatility that is associated with this business because of the very significant quantity of government tenders in Q2.

We had very large European tenders for Cervarix in Q4.

We are going to have very large deliveries of not just H1N1 vaccine but Cervarix, Synflorix, and Rotarix.

And it's not surprising to me that we will have the occasional quarters where our vaccine growth rates bounce around.

Notwithstanding all of that, the underlying performance of our vaccine business is extremely good in our pediatric business, in the new innovative vaccines, particularly Cervarix, Synflorix, Rotarix, and of course in our flu portfolio.

More of that later.

As we look at our overall portfolio of vaccines, I was delighted to see the progression of a series of approvals and important filings during the quarter.

The approval of Cervarix in America and Japan is obviously critical to the brand, and I'm delighted that those two approvals represented countries number 99 and 100 on the Cervarix approval schedule.

The approval of the novel adjuvant for Cervarix is also a significant landmark for the Company, as it was for FDA.

As you well know, FDA have really not approved a novel adjuvant for vaccines pretty much for about 50 years, maybe even in the history of the FDA.

And what this really demonstrates is the framework for us now to develop a dialogue with FDA on a wide portfolio of potential vaccines under development at GSK, all of which incorporate different types of adjuvant technologies.

It's a very important milestone to open up the pathway for our new vaccine.

Pandemrix, our H1N1 vaccine, was approved in Europe, and MenHibrix, our new combination vaccine for meningitis, was filed in the U.S.

in August.

We also secured during the quarter a very significant contract for Synflorix in Brazil.

This contract has a life of 10 years.

It involves a technology-transfer procedure at the end of that period, for the Brazilian government has contracted to purchase from GSK 13 million doses of Synflorix per year.

That's a very significant volume and represents a meaningful market share of the overall market from an emerging economy.

So suddenly, by being successful in an economy such as Brazil, you are already in a very big way taking on the competition in this market place on a global basis.

Synflorix rollout is progressing well.

We continue to achieve approvals and we're seeing some very significant wins in terms of retail market share.

Typically around 30% of the market is coming to Synflorix in the first few months.

We have tender procedures under way in a number of countries and have already begun to win regional tenders in Canada, Australia, Sweden, and elsewhere.

Some major countries going to tender in the next few months.

Of course, H1N1 remains a huge focus for our organization in total and, of course, for our vaccine business.

You know we've announced 440 million doses of vaccine have been ordered already by governments, and we are already underway shipping.

We've shipped in the last three weeks 25 million doses of vaccine.

We are on schedule to meet all of our contractual commitments over the next few months.

As you'll be aware, these shipments will take place during the balance of this year and into the first half of 2010.

I have to say this is all the product of 10 years of very diligent research by scientists at GSK and around USD2 billion worth of investment, both in the technology and in the manufacturing capacities which are now being put into full production.

It's a very significant venture for GSK and has required an enormous amount of activity from across the business.

If I look at another area of our business where we are really beginning to light up some very exciting growth opportunities is Japan.

I made this a priority when I took over as CEO.

I've made several visits to Japan personally, and it's an area where we continue to invest significantly on upgrading our capabilities.

Products in Japan which have been launched in the last three years contributed GBP170 million in new sales in year-to-date 2009.

It's clear that Japan is capable of moving the needle for this Company going forward, especially so because we can see very clearly a route to deliver between 30 and 40 line extensions and new chemical entities between now and 2013.

We had some great progress in this quarter.

Adoair, or Advair, market share continues to grow and now achieves a 16% market share.

We also had some phenomenal progress in our R&D efforts in Japan, with three significant first-time medicines.

Avolve, or Avodart, is the first 5ARI approved in Japan for BPH and was launched in September, ahead of the competition.

Secondly, Cervarix, as I've just mentioned, was the first HPV vaccine to be approved in October.

And Promacta, the first TPO agonist, was filed in September.

The reason I picked those three out is because it really gives evidence to what we've been saying for a while, which is that we can deliver the heritage portfolio of GSK, if you will, typified by Avodart/Avolve; the current portfolio of GSK, Cervarix; and the next portfolio of GSK, Promacta and other oncology drugs.

We believe we can get these drugs now registered in Japan and really bring an opportunity to have three generations of product hit that marketplace very much simultaneously.

This is a terrific opportunity and I'm very excited about progress in Japan.

This has also been augmented by the Japanese government's decision to import flu vaccines for the first time, which, as you know, resulted in GSK receiving an order to supply H1N1 vaccine to cover 37 million people in Japan.

Again, a significant shift in the strategic stance of Japan in terms of opening its market for companies like GSK.

Our acquisition strategy has again, I think, demonstrated its ability to contribute to growth.

We've seen sales now delivered in Q3 from our acquisitions in the emerging markets and of course from Stiefel.

Our new dermatology platform is created and we've begun the integration process of that operation, already announcing the rationalization of the real estate platform and in the next few weeks we'll be making announcements about a manufacturing network.

Stiefel is a very important opportunity for us.

It creates a new platform of business and, of course, it gives us a tremendous opportunity to extract around USD250 million of synergies, which will allow us to take that business into a much more profitable state.

It's really good evidence of how GSK can add value to an acquisition target.

On a much bigger scale, next week we will be making announcements to launch our new HIV company, the joint venture with Pfizer, which has now received all its regulatory clearances, and we're going through the final steps of creating that business, which you will see more announced on that on Monday and Tuesday of next week.

Let me touch briefly on our American business.

A huge part of our organization, it's a critical piece of the business, and it's a part of the organization which has faced many challenges over the last few years with multiple products being exposed to generic competition for the first time.

As you know, we are actively engaged in changing our approach to the American marketplace, in the way we structure our sales force, in the way that we have re-approached the managed markets, the way we are managing our contracting strategy, and in the way in which we changed our senior management team.

I believe that those changes are really beginning to show evidence of a different approach to our environment in the U.S.

and I think they will underpin long-term success for us in the United States.

I would also say that when you look at the degree to which our U.S.

business has been exposed to very strong headwinds of both genericization of multiple brands and the loss of Avandia, and yet has been able to, broadly as a corporation and within the U.S., pretty much hold its own, I think there is a real credit to that business.

As we move forward, those headwinds will start to diminish.

You are already seeing many of the genericizations drop away.

We have one more to go, which is Valtrex.

We're beginning to see Avandia now stabilized, particularly post the record results.

And on the positive side of the register, the approval of Cervarix, Votrient, and Arzerra really represent chances for us to start to re-energize momentum in our base business of the U.S..

So, the U.S.

is still a work in progress.

There is still a lot for us to achieve and certainly a lot to prove, but I'm confident that we have the right strategy here.

I'm very sure that we're beginning to see the headwinds diminish, and clearly we're beginning to see the ammunition be created for us to start to drive this business forward again.

I have to say I think it's probably a rare occasion that a CEO of a drug company can go onto a quarterly call and say that they've received three new molecular entity approvals in the last seven days, and with Cervarix, Votrient, and Arzerra, I'm very proud to be able to make that claim.

We've also, during the quarter, been reloading our U.S.

pipeline with two key FDA filings, one for Avodart in prostate cancer risk reduction and the other, our combination meningitis vaccine, MenHibrix.

All of this represents the building blocks for change in the States, and I believe that we will continue to see those changes executed well over the next year or so.

Now, our strategic priorities have really been focused on driving our growth and making sure that we drive our business forward from a sales perspective.

But of course, delivering earnings is also critical, and being absolutely rigorous around cost reduction is also very high on my agenda.

I'm very pleased to say that we remain absolutely on schedule to deliver our committed GBP1.7 billion cost-saving program.

We are now at an annualized cost-saving level of GBP1 billion.

And we are being very, very aggressive around how we allocate capital across the organization.

You see that in a number of areas.

You see it, for example, in the reduction, if you will, in the percentage of sales in R&D, and you see us slightly guiding downwards in terms of the amount we're spending in R&D, and you know that that is in the background of more drugs in development than ever before, with more vaccines in development, and more consumer innovation in development than we've ever had.

That tells you the efficiency program in R&D is really, really working, and great evidence of that is in a molecule like darapladib.

So first thing, very strong focus on efficiency.

Secondly, within the SG&A line, we are very much focused on taking expenditures down in mature markets.

To give you an idea of that, we have reduced in U.S.

and Western Europe our SG&A spend by about 6%, but we've offset that by a 12% increase in our investment areas, such as the emerging markets.

That's the kind of rotation of investment.

Now as we go forward, clearly many of these investment businesses are getting up to the level we need to get to.

So as we move into the next year or so, what we will be focused on is ensuring that our sales growth is really then translated into strong earnings growth, and that's obviously an objective we want to move this organization to and I've been clear on since I took over that that's the shift in the business model we wanted to achieve, and we're making good steps in that direction.

Now if I just finish off on pipeline, it wouldn't be right to miss what has been a very strong quarter for R&D.

We still have 30 drugs in late-stage development, the metric we've set for ourselves, in spite of the fact of achieving 10 product approvals so far this year.

I've already mentioned two new filings around MenHibrix and Avodart for prostate cancer.

We made two terminations but both relatively small molecules.

One was Rezonic.

We just didn't believe it was worth the allocation of further R&D and launch investment.

It was a poor investment decision to carry on, so we terminated.

And we also terminated Mepolizumab for an orphan indication, HES, because we couldn't see a regulatory pathway.

I'm very pleased to say that that molecule has also, however, been identified as a potential molecule for severe asthma, and that clearly represents a much more significant commercial opportunity.

We also made progress in some of our major Phase III programs, so darapladib has now -- well on the way through its first trial.

15,000 patients have been enrolled in the first study.

It's enrolled about six months ahead of schedule.

We'll be up to full enrollment in the next couple of weeks.

We've already executed the first interim safety analysis, in particular looking at blood pressure.

As you know, many cardiovascular -- or putative cardiovascular medicines have failed because of raises in blood pressure.

We wanted to dismiss that risk early before we spent a lot of money on this program.

Delighted to say that the results from that study were extremely reassuring, and we are carrying on full speed on study one and we will be initiating the second study shortly.

So we will have studies both in the heart failure group and the post-ACS group going forward.

The second study will recruit around 13,000 patients.

Let me also just make a quick comment on the announcement we made yesterday.

I'm very pleased that Horizon COPD initiated first patient dose yesterday -- last week.

We made the announcement yesterday.

Horizon, of course, is just one of a portfolio of respiratory medicines that we're now moving forward to essentially build on our Advair position in the respiratory market.

As far as biopharmaceuticals are concerned, when I took over as CEO I made this a priority for the Company to establish itself as within its R&D portfolio a player in biopharmaceuticals.

We've seen some significant delivery in this area.

Collaboration with Amgen for denosumab in the European Union and the emerging markets is one example.

Arzerra's approval is our first large molecule approval, and of course very good data for Benlysta also gives us great optimism going forward.

We'll see the second data in the next few days, then we'll see.

Some good evidence of progress in biopharms, and for your information we now have six large molecules in late-stage development and 15% of our overall clinical pipeline is biopharmaceuticals.

Again, reinforcing the drive in this organization to build a business which has greater annuity value and a greater degree of predictability even within the R&D portfolio, and then augmented by the other growth businesses such as consumer and vaccine.

Cash generation for the quarter was sustained, and that allows us to support our progressive dividend.

Cumulative net cash inflow from operations was up 10%, and as a result, we are increasing our Quarter Three dividend by 7% to 15p per share.

On that note, I just conclude by saying that I believe Q3 reinforces our expectations of an improved performance for GSK in the second half of 2009.

And Q4, I expect we will see further improvements, including substantial sales generated from our influenza products.

With that, I'll hand over for Julian to give you a little more detail on the quarter.

Thank you, Andrew, and as usual, I'll comment on the results using constant exchange rates and also excluding major restructuring costs.

Turnover in the quarter was up 3% to GBP6.8 billion, with pharmaceuticals up 2% and consumer healthcare up 8%.

U.S.

pharma performance continued to be impacted by generic competition, and turnover there declined 12%.

However, pharmaceuticals growth in other regions was strong, with sales up 3% in Europe, 25% in emerging markets, and 13% in Asia-Pacific Japan.

Stiefel contributed sales of GBP111 million in the quarter.

At the product level, total sales of Advair rose 5% to over GBP1.1 billion.

The reported U.S.

Advair decline of 1% was impacted by both stocking patterns and the true-up of rebate provisions.

Our best estimate is that underlying growth in the U.S.

was around 4% in the quarter.

Advair grew very strongly in all other regions.

Relenza sales were GBP182 million in the quarter and reflected significant pandemic stockpiling orders from governments around the world.

Other strong pharma performances included Avodart, Lovaza, and Tykerb with sales growth of 14%, 27%, and 54%, respectively.

However, Avandia sales declined by 14%.

Sales of newly-launched pharmaceutical products totaled GBP318 million in the quarter, and this brings the year-to-date sales contribution from these products to over GBP960 million.

Our consumer healthcare business reported strong sales growth of 8%, well ahead of estimated market growth.

We delivered sales growth in our OTC, oral healthcare, and nutritional sectors, and saw good performances from our Sensodyne franchise and weight-loss treatment Alli, which was launched in Europe earlier in the year.

However, Lucozade and Ribena continued to be impacted by lower demand in Europe in the impulse segment.

Looking at the results before major restructuring costs in more detail, you will have seen that cost of goods for both the quarter and the year to date was just less than one percentage point higher as a percentage of turnover than the prior year.

This principally reflects the impact of generic competition to higher-margin products in the U.S.

and changes to product mix, including the Stiefel acquisition in the quarter.

We continue to expect full-year cost of goods to be in the range of 24% to 25% of sales.

SG&A costs, excluding legal charges, were 29.6% of turnover in the quarter.

This is higher than the prior year, reflecting the increased investment we are making in growth markets, the consolidation of the Stiefel business for the first time, and increased pension costs, partly offset by the benefits of the restructuring program, which are reducing costs in both U.S.

and Europe.

You'll appreciate that the SG&A margin is a function of both the phasing of costs and turnover, and with a significant boost to Q4 turnover expected from H1N1, I continue to expect the SG&A margin, excluding legal charges, to be around 29% for the full year.

R&D costs were favorably impacted in the quarter by a provision release due to reassessment of a receivable balance.

Excluding this item, R&D costs in the quarter were 13.6% of turnover.

I now expect full-year R&D expenditure as a percentage of sales to be broadly in line with 2008.

In the quarter, other operating income was GBP123.0 million.

And this included normal royalty and [covered] GBP74 million.

Year to date, other operating income is GBP582 million.

And I now expect the total for this line for the year to be more than GBP700 million.

This does, however, exclude the one-off accounting gain we will make on the formation of the new HIV company with Pfizer, which we will report in the fourth quarter.

In addition, as you will recall, we have already reported a gain of GBP115 million on our disposal of Quest shares earlier in the year.

The cumulative effective tax rate is now 28.8%, which is broadly in line with last year's rate of 29%.

I continue to expect the full-year rate to be around 29%.

Earnings per share before major restructuring costs was 28.5p for the quarter, down 3% in CER terms.

Currency continued to be beneficial in the quarter, and the actual sterling EPS growth, excluding major restructuring charges, was 13%, reflecting a 16% currency benefit.

I don't currently expect a currency benefit in the fourth quarter.

The restructuring program is progressing well.

And after deducting charges of GBP152 million in the quarter, we reported total EPS of 26.3p.

You will have also seen the commitment we have given to provide more P&L information from next year on our major business unit.

This will include our major trading segments, such as U.S.

Pharma, emerging markets, and consumer healthcare, but we will also provide additional memorandum information on our global vaccines and dermatological businesses.

Finally, if you look at the nine-month cash flow, you will see that the net cash inflow from operating activities was GBP5.6 billion.

Working capital moved adversely in the quarter, reflecting an H1N1 and Synflorix stock build, but I expect it to be positive for the full year before taking account of any abnormal levels of H1N1 inventory and receivables.

Cash generated by the business was used to fund capital investment of GBP1.2 billion, pay dividends of GBP2.3 billion, and fund the majority of the acquisition spend of GBP2.7 billion.

Net debt was flat compared to last year and reflected net cash utilization of some GBP800 million, almost exactly offset by favorable exchange-rate movement.

Overall, the Company is on track to deliver its strategic programs and remains committed to its progressive dividend policy.

With that, I'll hand back to Andrew.

Thanks, Julian, and I will open it up for any Q&A, please.

(Operator Instructions).

Andrew Baum, Morgan Stanley.

Three quick questions.

Firstly, could Andrew comment on the experience with NICE and Tykerb?

We've watched GSK apparently turned somersaults trying to get the NICE happy on the cost benefit of the drug.

Is this a worrying sign for dealing with other systems, such as IGWG, in terms of getting reimbursements?

Second, on the U.S.

turnaround, could you give us some sense of how long you think it will take and how much is dependent on product mix versus on integrating the two sales forces?

And then, finally, on your HPV vaccine franchise in the U.S., what market share in the U.S.

do you think is achievable after how long with Cervarix?

Thanks for the questions.

So not -- yes, we have been jumping somersaults with NICE and we continue to go through a process with them.

It's not over.

But it is very difficult, and I think there is no doubt that NICE -- you've seen this with many other companies and particularly with end-of-life type drugs.

It's a very different environment trying to work with NICE.

There's very little read-across, to be honest with you, Andrew, to other authorities, even in Europe.

So whether it be IGWG or Transparency Commission in Paris, we haven't had the same issues.

We have Tykerb essentially reimbursed and doing very well actually in continental Europe.

So NICE is, at this point, a stand-alone issue.

We don't see a read-across.

There is a philosophical difference between the way NICE operates and many of the other authorities, and it's not easy to negotiate through.

As far as the U.S.

is concerned, a lot of change going on in the U.S..

The restructure of the sales force is basically done.

That's behind us.

I think they're really beginning to get into their groove.

We're seeing the respiratory sales organization, I think, really get back into its depth.

That's reflected in the beginnings of some sustained volume growth on Advair, which is important, obviously, and I think it's something I'm very pleased to see.

Continue to see that, albeit relatively low numbers but nonetheless positive, and that's good.

So I think sales force in pretty good place structurally.

A lot of effort going in right now in terms of modernizing our managed-care approach and making sure we're ready for healthcare reform.

Making sure we have the right value propositions, making sure we have the right balance of discounting versus access, and not be too far overbalanced in one direction or another.

All of that is underway, and no doubt this is a journey which will take some time to get right.

In terms of what the U.S.

business looks like over the next year or two, there are two or three big drivers.

Obviously, there's all the change program that I'm just describing to you, and I think as each month goes by I'm confident that this will all improve the U.S.

for the better.

Secondly, it's about what happens to Valtrex.

So when exactly do we see generic competition for Valtrex will have an influence on our U.S.

and obviously the overall business.

And thirdly, in our ability to commercialize some of our newer products, particularly products like Cervarix, Votrient, and let's wait and see for the Benlysta trials.

But if the Benlysta second trial comes through positively, that's a significant opportunity for the U.S.

in the relatively near term.

So that -- and what I like about the U.S.

is the portfolio swings are starting to move in our favor.

It's not over yet because we still have Valtrex.

But the portfolio swings are beginning to move our way.

We've demonstrated again an ability to get significant new products approved, including products like Cervarix, to get those approved by FDA.

That is giving us now a balance of products which allows us to feel more confident about the future.

We have to work our way through Valtrex, and we have to make sure that our capabilities and our presence in the U.S.

is properly matched to our portfolio and the environment.

But it's going in the right direction.

It's absolutely going in the right direction.

I was there last week for a week.

I met with the top thousand leaders of our U.S.

organization, and I have to say I came away from that meeting feeling like our people are very revved up and our people feel confident about the future, which is 90% of the challenge in these sorts of things.

As far as HPV vaccine, you're not going to be surprised, although I've been very confident we would get approval, you also know that I'm not the kind of person who's going to give you a specific market-share forecast.

The only thing I would say is I think that Rotarix serves as a pretty reasonable kind of proxy.

So again, although we were the first in the world to launch a rotavirus vaccine, we were not first to launch in America.

We've launched after Merck, and I think you can see from our performance there that we've been able to take some pretty material market share.

And so, maybe that's a good proxy without me having to give you a specific number, which you know I just don't do.

Okay, let us move on to the next question.

Gbola Amusa, UBS.

It's Gbola Amusa, UBS.

Three questions.

First on your Horizon program disclosure yesterday.

The program is showing you're testing your lab with your inhaled corticosteroid, but doesn't mention other compounds.

Can you confirm that this press release isn't effectively ruling out a triple combo being progressed ahead of the results of the studies which just started?

Secondly, on the impressive 35% emerging-markets growth, our market-share data is now showing Glaxo's pretty impressive in most regions, just about everywhere except certain Latin American countries.

Would you update us on your strategy in those Latin American regions ahead of your emerging markets [they], especially given what has happened with business development activities in 2009?

And then lastly, I'll push my luck a little bit, if I may.

Could you comment on your understanding of the status of Ranbaxy's ability to launch generic Valtrex in the U.S.

at year end?

Thanks.

That's an interesting set of questions.

So as far as Horizon is concerned, the announcement yesterday was only about the announcement yesterday.

So, and you know how -- thoughtful I am about how much we say about what we're doing in respiratory.

We're by far and away the leader in this field, and I'm not in the business of giving any of my competitors any help.

And I would refer you to comments I've made previously, which is that Horizon is just one of a portfolio of products which we expect to develop so that we will build on the Advair foundations, not with a single brand but with multiple new products.

And I maybe just leave it at that because, rather than getting to all the nuances of it, I think for sure you should not regard Horizon's announcement yesterday as being the totality of our respiratory strategy.

Completely the opposite.

It's an update on one, one of the lead programs, but by no means a comprehensive coverage of it.

As far as the emerging markets are concerned, absolutely we are very, very pleased with the progress.

I think what you're seeing is region after region essentially click into our comprehensive strategy for emerging markets.

So what does that look like?

It looks like making sure we are doing the best we can with our established core GSK innovative products.

So Seretide, fabulous growth rates in emerging markets of Seretide.

It means making sure that our classic portfolios, like Augmentin and Ventolin, which remain extremely big brands, are growing very well.

It means bringing in other brands, so this is probably coming from outside of the company, like [UC], BMS.

We have now been begun to file the Aspen and ready the portfolios.

All of those coming together, and really hit vaccines out of the park.

Those are -- it's a kind of playbook for our business.

If you look at our Middle East/North Africa, you see all of those things flying in parallel and you see all of our regions beginning to come up to speed on that same approach.

Now in some countries, it takes longer.

In China, we need to establish some joint ventures before we can get vaccine to where we need it to be.

But that's the strategy.

You are absolutely on the money about Latina.

I was in Brazil two weeks ago, spent a very -- it was a very good chance for me to go meet both with government and with our organizations in Latina.

But no doubt in my mind, it's all -- this is a huge opportunity for GSK.

This is a priority area for us to invest in, either organically or inorganically, if we see the right opportunity.

We are clearly making great progress on one of our key planks, which is our vaccine business.

Rotarix is a very significant player for us in Latina, particularly in Mexico, but certainly across the board, and the Synflorix deal with Fiocruz is a very material deal.

30 million doses a year for a decade is a very big deal and represents a substantial amount of market share from that overall marketplace globally.

So, yes, Latina is key.

The playbook will be very analogous to the playbook we're deploying around all of our emerging markets, and you should anticipate us looking to invest either organically or if we see opportunities for bolt-on, then we will do that.

We do, as you may also know, have a 10th of December update coming up on emerging markets when you get a chance to talk to Abbas, who is obviously driving all of this.

As far as Ranbaxy and Valtrex, this is all down to whether or not they can get their act together, right?

So I don't know the answer to that, and we have to wait and see.

All I can tell you is as of today, I'm not hearing anything on the presence of a potential generic.

It doesn't mean to say it isn't going to be there.

I don't know.

I can't give you any guidance on that.

The only people who can really give you guidance on that, of course, are the generic manufacturers.

So, I'm sorry I can't help you on that.

But thanks for the question.

Next question?

Tim Anderson, Sanford C.

Bernstein & Company, Inc..

A few questions.

I know it's a little bit tough to talk about a drug ahead of data being released, but can you expand a little bit on your level of excitement with Benlysta?

Any nuances we need to appreciate as we approach the next data set?

And assuming that data is positive, what would be the development timeline from there?

On H1N1, in the past you've talked about that being a sustainable revenue stream.

Some of your direct competitors who have skin in the game say something very different, say it's not a sustainable revenue stream.

And I'm wondering why there is a difference in opinion.

And last question is SG&A.

If you exclude Stiefel out of the numbers, what would've been the figure?

Thank you.

Okay, great.

I'm going to ask Julian to answer the third question.

But let me take the first two, Tim.

So Benlysta, obviously we were thrilled to get the data from the first Benlysta trial and we will have the data from the second trial in the next few days.

So, this is one -- thanks for the question, because depending on what the data says I could look pretty silly pretty quickly.

But listen, we were thrilled to see that first study come in.

The fact that it was so comprehensive and positive in a population where everything else failed obvious that obviously caught everybody's imagination.

We were thrilled by that.

I'm very proud of the people at GSK who were involved in the trial design because I think it's a real credit to the skills of our R&D organization how that got done with HGS.

First off.

Secondly, if the data that's coming in over the next few days reaffirms the first study, then this is a very significant opportunity for ourselves and HGS.

This is an unmet medical need, significant population.

Not everybody with lupus is going to use this product.

Obviously, there are other -- people are going to go through steroids and other treatments first.

But nonetheless, this is a significant population.

I think if we have two positive studies, we are going to be heading for a rapid filing, hopefully in the first quarter of next year.

I would hope that we would achieve an accelerated review, given that nothing has ever been proven to work for 50 years.

And we -- all going well, I'd like to see this to be a material source of growth for us in the pretty near-term future.

But it all depends on the results of the trial coming up in the next few days, and as a result I can't be more definitive than that.

Now, as far as H1N1 is concerned, what I've said is that I don't -- I believe we will have peaks and shoulders in this market.

I don't believe it's going to be steady-state at the high levels we are seeing now.

I think we will see peaks and shoulders.

Why do I say that?

Primarily because we have such a broad portfolio of products in this space.

So in addition to H1N1, we've got Relenza, we've got flu mask, we've now got diagnostic products being developed.

So first of all, we have a broader portfolio.

Secondly, I think it's really important to understand the difference between GSK's adjuvanted vaccine and the non-adjuvanted vaccine as far as stockpiling is concerned.

So if you go with a non-adjuvanted vaccine, then essentially you have to wait until you know what the antigen is before you can buy the vaccine, by definition.

If you go with an adjuvanted technology, you can actually keep a stockpile of your adjuvants and then simply rotate in the antigen at the last minute, right?

Which is basically what the leading countries like Switzerland did.

So Switzerland actually stockpiled from us three years ago H1N1 antigen and adjuvant.

It turns out -- I'm sorry, H5N1 antigen and adjuvant.

It turns out that the pandemic wasn't H5N1.

So they didn't use the H5N1 antigen, and they reordered from us H1N1 antigen to go with the adjuvant they already had on hand.

So what you will see, I believe, is a range of behaviors from government as they continually keep now a stock of both antivirals and vaccines and, in our case, keeping the adjuvant is a real option for them as a standby ready to plug with whatever antigen they need.

The reason why this becomes more material compared to prior to May 2009, pre-May 2009 there were probably less than 10 countries in the world that were running any kind of material stockpiling strategy, and those stockpiling strategies were almost all entirely Tamiflu driven.

So it was antiviral and it was Tamiflu.

Today, something like 60 countries are running stockpiling strategies.

They include both antiviral and vaccine.

And within the antiviral portfolio, they've rebalanced their stockpiles to be much more heavily weighted in favor -- so much more of it is Relenza than it used to be.

Still majority Tamiflu, but still -- now a big chunk of Relenza.

So what's been created during the summer is essentially a stockpiling marketplace, which over a period of time will need to be refreshed, either because of product obsolescence or because of new challenges in terms of strain development, and that's exactly where we see there being some kind of steady-state.

I am not promising that it's going to be 90% of this year's sales, but it's going to be something more than we've seen in the past and it's going to be less sporadic than what we've seen in the past, and that's why we take that view.

I'll ask Julian to comment on the SG&A question.

Yes, Stiefel SG&A was just over GBP60 million of the Q3 reported SG&A number.

Alexandra Hauber, JPMorgan.

I've got three or four questions.

Firstly on the Horizon program, I seem to remember that around the second-quarter results when you first talked about it, you also were mentioning a morbidity/mortality study, which wasn't part of your announcement yesterday.

Is that something you're not going to do or is that something you consider to do more in a post-approval setting?

And also from your announcement about the study that is conducted against another COPD medication, can we rule out that this is going to be Advair, your active comparator?

Secondly, obviously your government orders you have for H1N1 products for both adjuvant and vaccine is worth over GBP2 billion.

How much of that will you ship this year?

Because your ratios you're giving for the various cost supplies are, of course, percentage of sales, so the H1N1 shipment in the fourth quarter becomes a very important part of our calculations.

Then finally, you said -- you emphasized that first approval of a novel adjuvant in the U.S.

opens possibilities for new vaccines.

Beyond flu, are there any other areas you could point to that could be of interest?

Actually, I have one other question.

Can you just remind us what the shelf life of bulk adjuvant is once it's on a stockpile?

Okay, Alexandra.

Thanks for the questions.

So as far as Advair -- so as far as the Horizon program is concerned, we are basically -- again, I'm going to reiterate what I've said already.

We are being frugal with what we're saying about these programs for completely obvious reasons.

What we announced yesterday is what we announced yesterday.

It is not the whole story of the trial program of Horizon.

Okay?

We will, as I've said previously, we will run a very big program.

It will involve a big focus on generating differentiation and it will include trials involving active comparators and it will have many thousands of patients in it.

But the studies we announced yesterday are, if you will, the core regulatory program.

But rest assured that we are tackling this opportunity in exactly the way I've described to you before.

As far as the flu -- the H1N1 sales, I think a good -- I think consensus actually in the market is pretty close to what I would expect in Q4, to be honest with you.

The only caveat I would say is obviously by the end of the year, we're going to be manufacturing and shipping very large quantities per week, and therefore, if we have -- if things go slightly better or slightly worse in a particular week at the end of December, then you could see that number bounce around a little bit on the margin.

But I think consensus estimates for H1N1 shipments in Q4 are pretty reasonable.

As far as adjuvant is concerned, if you look at our portfolio, it's a very significant piece of our development program.

So in addition to Cervarix, in addition to H1N1, our flu improved, so this is our improved seasonal flu vaccine, which is particularly for elderly and other populations who historically don't get such a good immune response from non-adjuvanted vaccines.

It's there, it's in our MARS 3 therapy, or a set of adjuvants are in our MARS 3 therapeutic cancer vaccines, and they are also in our malaria vaccine.

So there is -- adjuvant technology is a major platform for the Company.

In terms of shelf life, work in progress, Alexandra.

But my expectation is it will be probably between three and five years.

But obviously, shelf life -- just as it has done with Relenza, shelf life becomes -- is extended the longer you have time to generate more data.

My expectation is that for the adjuvant, it's likely to be three to five years, and for the antigen, it's more like 18 months.

Now, just to be absolutely clear, at the moment, we have a two-year shelf life on Pandemrix.

But my expectation is that over time, we'll be able to extend it because I know what you're trying to get to, which is trying to work out obsolescences of stockpiles.

So over the period of a stockpile, I think we will be able to generate shelf-life data which is more in the three to five years, although as of today, we're at two years.

Okay, great.

Thank you.

Thanks, Alexandra.

I'd just like also to make a correction.

I think when I was talking about darapladib earlier, which is a product I'm very pleased to see progress so well, I think I described it in trials for ACS patients and congestive heart failure.

I should've said, of course, chronic coronary heart disease, which is different.

So I just want to make sure in case anybody did pick that up and thought I was having a senior moment.

I was.

And that's a minor correction.

Next question?

Graham Parry, BAS-ML.

Just starting off on Relenza, the GBP180 million you booked in the third quarter was probably a little bit above, certainly, our expectation.

I'm just wondering if you can give us an update there on current capacity and whether there is the potential to exceed previous capacities that you've talked about.

Secondly, just looking at Promacta, just wondering why the CLD study was suspended there.

I remember that the Hep C study also was suspended briefly at one point, so if you could just make any comment on that.

Thirdly, on Horizon, we've seen Novartis running into some dosing issues at the regulatory with QAB149.

I'm just wondering what conversations you've had with FDA on dosing of 444 in Horizon and how certain you are you won't fall down a similar path with them.

Then finally, on Benlysta, just in a hypothetical situation where you saw borderline data at 76 weeks, so, for example, a trend but not statistically significant, can you combine the studies to try to get a [better] analysis to a regulator or could you still attempt filing on one study?

Thanks.

Thanks, Graham.

Okay, interesting set of questions again.

So, Relenza, yes, we've had a very good run obviously in Relenza.

We have been able to increase our capacity quite a bit, so we had previously talked about a capacity of around 60 million packs a year.

We're actually running at closer to 90 million as of now.

And we are putting in place new capacity, which will take us well over 100 million packs from the end of next year onwards.

We've also put into production a second device, a much simpler device, a lower-cost device, rotacaps for, frankly, lower-price marketplaces.

And that capacity is just about coming onstream now.

So we will have more and more capacity as we go forward.

Things are going very well as far as Relenza is concerned.

Promacta.

This was -- so what we've seen in this chronic liver disease population was some embolic events, which, as you know, there is a background tendency for these sorts of events that come along in these sorts of patients because of sluggish blood flow and the like.

And so, what's going on at the moment is trying to untangle -- is it possible for us to untangle whether there's a drug effect or not a drug effect?

So that's why it's on hold.

We've got a variety of dialogue going on at the moment to figure out what's going forward.

It has no impact on any of the other indications for Promacta, all of which are carrying on, but that's the issue there.

It's really just trying to unpick the different pieces.

As far as I have seen, over the last three months, many of our respiratory putative competitors run into issues.

Obviously we keep an eye on all of those things and obviously we make sure that we learn any lessons we can from that.

I'm very content that the start of our Phase III program for Horizon was all agreed with FDA.

But nonetheless, I think you always have to keep on going back and making absolutely sure there's nothing to be learned, and we will make sure of that, but once again, I think it simply reiterates what I've said repeatedly is that bringing an inhaled respiratory medicine to the marketplace, especially in America, is a very, very challenging thing to do.

This Company has achieved it in the last four decades.

And I think this is a Company that is experienced.

We are very open-eyed about keeping up with the latest demand of regulators.

And I am confident that we are in the right direction.

As far as Benlysta is concerned, I'm kind of not going to address your question because it's so hypothetical and it's so proximate to the data coming out, Graham, and I just -- so listen, the first data is fabulous.

Let's see what the second data looks like, and then we'll make -- obviously, we and the regulators will take a view on what can be reasonably expected.

So I'm going to frustrate you on that one, but we'll be able to talk to you about it with the real data next week.

Last question, please.

Kevin Wilson, Citigroup.

Just two questions from me.

On Arzerra, could you talk a little bit about your reimbursement expectations, given what I gather is a fairly high price for a six-month course?

I think close to $100,000 was mentioned by [gem mab] yesterday.

What [conversations] have you had with those who might reimburse it?

And secondly, how should we think about in the longer term the reinvestment of the cost savings of GBP1.7 billion, which you clearly have been putting into those other markets?

How long will it take for some of those savings to make it down to operating profit, if ever?

Okay, Kevin, listen, thanks for the questions.

So as far as Arzerra is concerned, obviously Arzerra's first indication is really -- it's a very -- it's a narrow indication.

These are refractory patients -- CLL patients.

And they do receive a very high dose.

If you then look at the rest of the indications in development for Arzerra, you'll see much lower doses.

So I don't anticipate a huge issue with reimbursements because it's not as if this price is being applied to a very high volume of patients.

It's not.

It's for a niche indication, and as the bigger volume indications come along, those folks receive a lower drug weight and really the best way to think about this is a price per milligram, rather than the total price.

Obviously, ultimately, it's a total price, but the way to think about the pricing strategy is much more around price per milligram, and then you just need to simply need to understand what the likely dose weights will be (multiple speakers) for those other bigger volume indications down the road.

So that's the first part.

The second question in terms of the flow of benefits from the investment, well, clearly we've been through a phase where we've been -- it's obvious that you have to invest ahead of the curve to try and generate returns.

And what we are going to be looking for from our investment businesses is that improvement in both sales growth and then earnings growth.

And I think consumers are a really good example of that, you know, where we've been ramping up our expenditure.

You see in this quarter, again, very good sales growth.

You see earnings ahead of sales growth, and that's the kind of performance obviously you want to try to get businesses to get to.

What I'm not prepared to do is to shortchange the investment and fall short of the long-term opportunity.

What I've said repeatedly is that we will deliver the best we can in terms of earnings performance in the first two or three years that I'm CEO, but meanwhile, in parallel, we are going to reinvent the business model of this Company so we are not vulnerable to major patent expirations, major troughs, which create enormous volatility for the investor.

To do that, we need to make sure we have a reliable delivery from our R&D portfolio and we need to make sure that our businesses are properly built to compete wherever they are, and that means making sure we have the right investment level and then we start -- we'll titrate the flattening off of that investment curve when we feel comfortable that we are there.

And that will be different in different parts, so I can tell you we're more likely to hit that point in Middle East/North Africa than we are in Latina because we have a lot more opportunity to grow in Latina from where we start.

So you will start to see that discipline being applied.

The other thing I would say to you is we will continue to look for further incremental cost savings in this Company.

I don't believe that's over.

I think this organization has plenty of capability to drive more efficiency out of it, and you should anticipate seeing a continued focus on delivering more cost efficiency because it's obvious that we need to make sure we're driving the best earnings performance we can alongside a recovery in sales line.

I think the momentum of this business is going in the right direction.

I think the progress on our strategy is now becoming clearer and clearer, and obviously what we need to do is maintain that as we go forward.

Thank you for all of the questions.

I appreciate it very much.

Look forward to an opportunity to talk with you all individually or next time we have a call, and in the mean time, thanks for your attention today.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.