葛蘭素史克 (GSK) 2010 Q1 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen.

  • Welcome to the GSK Q1 2010 results call.

  • The format of the call, there will be some opening remarks from CEO Andrew Witty and CFO Julian Heslop, followed by Q&A.

  • I will now hand you over to Andrew Witty to begin the call.

  • Andrew Witty - CEO

  • Thank you very much and welcome to the call.

  • I'm here with Julian.

  • I will make a few comments and then hand over straightaway to Julian.

  • Q1 for 2010 I think really highlights that we had a very good start to the year at GSK with further evidence that our strategy is beginning to deliver.

  • Sales growth continues.

  • Q1 sales up 13%, obviously held by pandemic products, vaccine, and Relenza, but more importantly, a strong underlying growth, if you exclude the pandemic-related products, up 4% for the quarter, and I think demonstrating the sustainability of our sales growth.

  • Our established and new products both help drive this momentum.

  • Let me give you a couple of examples.

  • Seretide/Advair was up 9% to GBP1.3 billion.

  • Cervarix was up 60% to GBP77 million.

  • Synflorix in its second quarter at GBP45 million, and Tykerb, a treatment for advanced breast cancer, up 62% to GBP53 million.

  • Sales from what I call white pill in Western markets accounted for just 27% of sales in Q1.

  • That excludes, by the way, the pandemic flu products in the 27% compared to 32% this time last year.

  • So it shows a continued delivery of momentum.

  • Also, maybe just another metric to keep in mind, if you add the consumer vaccine and dermatology business together, they together accounted for 40% of GSK sales in the quarter, which again is a signal of the success we have been able to deliver in diversifying the business.

  • The diversification is getting growth from many different sources of the arguments.

  • Emerging Markets, for example, at GBP866 million, up 43%.

  • If you adjust for the pandemic vaccine and Relenza, that number was actually up 17% compared to what we think is a market growth rate of around 13%.

  • Our consumer business continued to have another great quarter, up 9% to GBP1.2 billion.

  • I am going to go into a little bit of detail because it really was once again a fabulous quarter from the consumer business.

  • Our nutritionals business worldwide was up 12%.

  • Our OTC business worldwide was up 11%.

  • Oral care worldwide, up 5%.

  • If I look now just at the BRICs for a second, overall the BRICs were up 18%, in Europe 20%, China up 17%, Brazil up 15%, Russia up 19%.

  • If I look at the product line within consumer, our smoking cessation business was up 16%, driven by the global rollout of NiQuitin and Nicorette mini lozenges, which we have been developing over the last couple of years.

  • In the nutritionals business, our Horlicks business performed very well, up 17% led by the UK up 21% and India up 19%.

  • Lucozade also returned to growth for the first time in a year or so, up 5% driven by the launch and supporting advertising campaign of Lucozade for light in the UK.

  • Sensodyne is now the world's fastest-growing toothpaste, and in America one of the Sensodyne SKUs took the title of the best-selling toothpaste in America in Q1, the first time we have ever achieved that, and I think a real testament to the efforts of our US team.

  • And, of course, we continue to launch Sensodyne across the world, including in China and India.

  • Brand innovations, which have been developed and launched in the last three years, represented 14% of sales during the quarter, and we also picked up a raft of Awards of Excellence both for our marketing quality, brand innovations in the UK, and a number of customer awards for best service, best supply in a variety of geographies.

  • No doubt that our consumer business is really playing at the top of the league.

  • And I'm also delighted in the quarter that we secured the future leadership for this business with the successful hiring of Emma Walmsley from L'Oreal who starts at GSK on Tuesday of next week.

  • Our dermatology business delivered GBP265 million of sales in the quarter.

  • The brands we acquired from Stiefel contributed GBP135 million of that number.

  • Overall the dermatology business grew 8% year on year on a pro forma basis.

  • We are in the process of globalizing that dermatology business.

  • When we bought Stiefel, they were essentially selling products in 50 countries.

  • Over the next couple of years, we will be expanding that distribution reach to over 100, including very big markets where Stiefel was not -- (technical difficulty) India, China and Japan.

  • Already we have begun to deliver our synergies that we anticipated, GBP44 million to date, and we are on track to deliver all the synergies that we targeted when we made the acquisition during 2010 and 2011.

  • We have also begun to establish a consumer platform within our consumer organization to start to bring many of the assets we believe are in the Stiefel portfolio direct to consumers, giving us another leg of growth within our consumer business.

  • Sales growth is also obviously underpinned by new products mentioned from our core pharmaceutical business.

  • Just in this quarter, we had three key European approvals for Revolade thrombocytopenia, Arzerra for chronic lymphocytic leukemia, and Duodart for enlarged prostate.

  • And we also had one positive opinion for Votrient for renal cell carcinoma.

  • So we continue to see good progress in terms of regulatory approval around the world.

  • We have also continued to progress molecules into Phase 3, the most recent being Relovair Phase 3 start for asthma, and we now have six biopharmaceutical large molecules in advanced development within the organization.

  • We continue to expect to be able to do retain around 30 major programs in the Phase 3 on an ongoing basis.

  • Simplification remains a priority for the Company with, of course, a continued focus on cost containment.

  • We remain on track to deliver annual accumulative cost savings of GBP2.2 billion by 2012.

  • GBP1.5 billion of that number will be delivered before the end of 2010.

  • We also continue to focus on improving returns in the business, and we intend to keep investing into our growth businesses around the world to enhance our returns.

  • You will have seen that our legal charges were higher in this quarter as we made good progress towards setting a number of existing cases that we have.

  • I'm sure you will see our legal charges bounce around quarter to quarter.

  • As you have done in the past, I would remind you that over the last several years on an annual basis our legal charges have run around GBP450 million on average.

  • And going forward I would expect to see some quarterly volatility as we take evolving dues on a variety of cases.

  • Our cash generation has been very well sustained, certainly helped by our focus on working capital, and, of course, supports our progressive dividend policy.

  • Net cash inflow from operating activities in the quarter was GBP2.1 billion, up 22%, and that allowed us to increase our Q1 dividend by 7% to 15p a share.

  • Overall, therefore, I continue to believe that GSK is moving to a position of delivering sustained financial performance, and I continue to look forward to the rest of 2010 with confidence.

  • With that, I'm going to hand over to Julian to give you a little bit more detail on the numbers, and then we will open it up to questions.

  • Julian Heslop - CFO

  • Thank you, Andrew.

  • As usual, I will comment on the results using constant exchange rates and excluding major restructuring costs.

  • Turnover in the quarter was up 13% to GBP7.4 billion with pharma sales up 14% and consumer up 9%.

  • The business benefited from higher flu pandemic vaccine sales of GBP698 million, although Relenza sales were lower at GBP84 million.

  • Underlying sales growth, as Andrew said, excluding these pandemic-related sales was 4% for the quarter and continued to be adversely impacted by generic competition in the US market.

  • Within pharmaceuticals Advair performed well and delivered sales growth in all regions -- 4% in the US, 10% in Europe, and 25% in the rest of the world.

  • Other strong pharma performances included Avodart, Lovaza, Tykerb, and Arixtra with sales growth of 20%, 9%, 62% and 25% respectively.

  • However, Avandia sales declined by 10%.

  • Sales of newly launched pharmaceutical products, excluding flu pandemic vaccine, totaled GBP412 million and were up 65%.

  • Our vaccines business performed well, supported not only by flu pandemic growth, but also by growth in our hepatitis franchise, up 38%; Cervarix, up 60%; and Synflorix, which delivered sales of GBP45 million following its launch in quarter two last year.

  • Hepatitis sales benefited from supplier shortages in the US market.

  • In Consumer Healthcare we saw marketshare gains across all categories and delivered sales growth in each of our regions.

  • Our international business performed particularly well with sales growth of 13% and now represents over 40% of the total consumer business.

  • Alli achieved sales of GBP63 million in the quarter, which included sales growth of 7% in the US, and it also included a strong performance in Europe where the brand was launched in March last year with sales of GBP34 million.

  • Looking at the income statement, you can see the cost of sales increased to 26.2% of turnover compared to 24.3% last year, reflecting the impact of the US generic competition, but also GBP94 million of stock write-offs, roughly half of which related to flu pandemic vaccine inventory.

  • The Company continues to expect cost of sales as a percentage of turnover to be around 26% for the full year.

  • SG&A costs, excluding legal charges, were 28.3% of turnover and remain on track to deliver our estimate of around 29% for the full year.

  • R&D costs were 9% lower in the quarter compared to last year, reflecting the timing of clinical trials, good progress on efficiency savings, and significantly lower intangible asset write-offs.

  • We continue to expect R&D costs for the year to be around 14% of turnover.

  • Other operating income was GBP199 million, significantly higher than the previous year, and included royalty income of GBP80 million and a one-off payment relating to the transfer of US Boniva rights to Roche/Genentech.

  • No further payments from Genentech are expected this year.

  • Earnings per share in the quarter was 30.7p before restructuring charges and grew 16% CER and 17% at actual rates of exchange.

  • Exchange gains in the quarter compared to losses in the previous year eliminated the adverse exchange rate impact.

  • The restructuring program is progressing well, but after deducting restructuring charges of GBP301 million, we reported total EPS of 26.4p for the quarter.

  • Net cash inflow from operating activities was GBP2.1 billion, up 22% in Sterling terms, and net debt at the end of the period was GBP9 billion, GBP400 million lower than the year-end, which reflected net cash generation after dividend of some GBP700 million and adverse exchange adjustments on the retranslation of net debt of some GBP300 million, a net improvement of GBP400 million.

  • Finally, in an effort to improve transparency and understanding of our increasingly diverse business, we have provided more detailed segmental P&L information this quarter, and, in addition, pro forma information summarizing the performance of our global vaccines and derms businesses.

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

  • We increased the quarter one dividend to 15p, and with that, I will hand back to Andrew.

  • Andrew Witty - CEO

  • Thank you very much, Julian.

  • And now I'm happy to open up the call to any questions.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Tim Anderson.

  • Tim Anderson - Analyst

  • On emerging markets' operating margins, as you show, they are a little bit over half of what they are in established markets, and the biggest driver of that disparity seems to be in the cost of goods line where the gross margin percentage is quite a bit lower than it is in established markets.

  • My question is, where do you think operating margins and emerging markets can realistically go from here over the next three to five years given what is likely to be a continual pricing disparity?

  • And then second question is on Avandia.

  • If that product ends up getting withdrawn from that market, why won't that look like another Vioxx in terms of the legal liability Glaxo would face?

  • I think in Vioxx's case that cost mark is around $8 billion or so in terms of US dollars.

  • And is there anything yet in your legal reserves related to Avandia?

  • Andrew Witty - CEO

  • I'm going to ask Julian to begin the response to the first question, and then I will pick up on that and then obviously answer the second question.

  • Julian Heslop - CFO

  • I mean you are right.

  • Emerging markets operating margin is 36%, difficult to predict the future.

  • But I would expect it to stay around that level.

  • I mean that is an indication, but certainly not significantly changed based on everything I know today.

  • But let's put that 36% into perspective.

  • First of all, the 36% operating profit margin in any business is excellent.

  • And secondly, you have got to bear in mind that if you think of our R&D costs, our pharmaceutical R&D costs are about 16% of sales, there's probably only a third of the emerging market business that actually sells products that that R&D is focused on.

  • And you could argue that actually we don't do any R&D specifically for emerging markets.

  • But even if you take the top of view and say, well, I will allocate a third of it; that is a 5% charge compared to 16% for the other sectors.

  • I just think you need to recognize that.

  • Because remember, if you look at our segmental analysis, all the R&D is located under pharmaceuticals' R&D and vaccines' R&D.

  • So I think you have to bear that in mind.

  • But bottom line I think that's a very good operating margin.

  • And actually if you look at the total operating margin of pharmaceuticals, it is 42% and for the whole business it is only 33%.

  • So actually emerging markets has an operating profit margin that is just slightly ahead of GSK.

  • So I think that is a very sound basis to grow that business.

  • Andrew Witty - CEO

  • And Tim, I would maybe just add to that just a couple of comments.

  • It certainly reinforced the R&D point, which Julian has made because there is no question at all that certainly at the moment -- of course, this might change in the future, but at the moment the vast majority of our R&D spend is essentially stimulated by European and the US market demand, and essentially emerging markets then benefit from that but they don't stimulate it.

  • And, therefore, I think it is right to offset that in the way that Julian mentioned.

  • The other thing I would say is that we are well aware that other companies' definition of what is in the emerging markets is different from ours.

  • So, for example, none of Southeast Asia is in our emerging market category.

  • Obviously Japan is not in there.

  • We do not think they are emerging markets particularly, but they are not in there.

  • And it is important when you compare margins that you look at like for like.

  • Because if you look at our Asia-Pac/Japan business, you will see they are very high margin businesses.

  • So actually knowing what is in there is important.

  • Lastly, I would say recall that we have a huge Indian business.

  • And the Indian business is one which is going to put us in a phenomenal strategic position going forward.

  • We are in the top three manufacturers of all types in India.

  • But, of course, we all know that India has historically been a low-price marketplace, and therefore, to some degree that is a slightly different feature of the business, one I'm very pleased we have got, but it is nonetheless a different feature.

  • As far as Avandia is concerned, look, I mean Avandia is a product where there has been so much media debate, sometimes it is very easy to miss what the debate has been at the scientific level.

  • And the debate that has been at the scientific level has been robust and it has been in public forum, and it has been an advisory board in the US and a variety of regulatory debate over the last several years in Europe and elsewhere.

  • And the patent of those discussions have been very supportive of Avandia.

  • And if you just think about the US for a second, we had an advisory board in 2007 with a very strong vote in favor of keeping the product on the market.

  • You have seen since 2007 a whole raft of new data being generated from really gold standard trials in terms of being randomized landmark studies.

  • All of that data has essentially served to strengthen the positive risk benefit profile of Avandia when used appropriately in line with the label.

  • And, of course, we have an upcoming advisory board in July where there is an opportunity again for the US to review all of that data that has come together over the last several years.

  • So I think at the scientific level this remains a very dangerous largely unmet medical need disease with very serious consequences of not managing the disease properly.

  • We have a medicine here which is demonstrated to gain control of HbA1c blood sugar over a prolonged period of time based on landmark prospective studies, and we have a raft of landmark prospective studies which reassure us of our view of the profile of this medicine.

  • And that is very much the way we see this.

  • Now obviously we have to see how the advisory board goes, and we're going to have an opportunity to make our case as will others.

  • But I believe that this debate is very different from the situation you described.

  • I think it is one in which we have had a tremendous amount of inspection if I can put it that way, and it is one where the data continues to reassure.

  • And on that basis, I don't think it's appropriate to draw analogies across to other examples of the type you describe.

  • Next question?

  • Operator

  • [Shamus Fernandez].

  • Shamus Fernandez - Analyst

  • Just a couple of quick questions.

  • One on the impact of US healthcare reform.

  • Can you help us think about you talked about managing the impact of healthcare reform in 2010.

  • Can you also give us a little bit of visibility on your views on 2011 and what percent of your overall or at least your US pharmaceuticals business is exposed to Medicaid and Medicare?

  • And if you can include the ViiV healthcare in that forecast.

  • And then separately, as you think about operating margins longer-term, just to kind of expand on Tim's question with regard to the emerging markets, the number of products that you would have potentially launching across those markets and what type of investment spend you have going on in those markets, do you actually see potential leverage in those markets as it relates to your SG&A spend over time?

  • Andrew Witty - CEO

  • Let me see if I can nail those questions for you.

  • As far as US healthcare reform is concerned, as you have seen, we do not believe it has a huge impact in terms of changing our outlook for the year or how we see the year going.

  • We have obviously made all of the appropriate provisions in our Q1 numbers to take into account those impacts which are visible and are immediate, and you have seen I think a very strong overall performance.

  • And importantly, this signals the stabilization and return of performance in the US business even after you take that into account.

  • I think that is the first thing I would say.

  • As far as -- and obviously within that, we paid very close attention to the whole raft of impacts from healthcare reform.

  • You know as well as I do, this is what, 2000 pages of legislation.

  • I think there are 3000 uses of the word "should" indicating some change in policy for somebody in the United States.

  • It's a very complex thing to work through.

  • However, if you look at everything ranging from the simplest calculation, which is increasing Medicaid rebate all the way through to the CPI penalties, the change in average manufacturing price, all of those dimensions we clearly work through and assess what we think the impact is going to be, and we feel that it is very much manageable within our business, and clearly you have seen how we have dealt with it in Q1 as a signal of that.

  • Now, as we move into 2011, there are a couple of things which will kick in fresh.

  • One will be the, if you will, the tax on the industry, the assessment on the industry.

  • And the second will be the closure of the doughnut hole or the partial closure of the doughnut hole through the 50% discount from the industry.

  • Those are going to be incremental potential costs.

  • The extent to which they are going to impact the Company's trading performance really depends on what happens to some of the volume.

  • So whereas most of the coverage extension, which is foreseen in the healthcare reform bill is not going to obviously happen until the 2013, 2014 timeframe, as soon as you start to see the discounts go into the doughnut hole, that starts to address one of the key areas where coverage has historically been patchy where patients have hit the doughnut hole and have either begun to ration or cease drug treatment because of the costs associated in that doughnut hole.

  • And so the real question is, to what degree is the doughnut hole discount cost, which is really the incremental charge of 2011 if you put the assessment to one side, to what degree is that going to be offset by volume?

  • We can have 20 people in the room and probably have 30 different opinions.

  • My view is that there is every likelihood that a lot of that is going to be offset by changing patient behavior.

  • I think this is a very positive thing for patients.

  • It is exactly where if the companies had to put money on the table, this is the kind of place we should put money on the table because it helps patients get through the doughnut hole without interrupting treatment.

  • Of course, my guess is the net net of that is not going to be very big in terms of impact on us.

  • Then the industry assessment is the industry assessment.

  • That is a charge we're going to have to take obviously in 2011.

  • But in the scheme of a company of GSK's size, it is not something that is going to dramatically change our future one way or the other.

  • So from that perspective, I really don't think this is something to get overly excited about.

  • These are obviously significant contributions to the challenge of healthcare reform from companies like GSK, but we are big companies and our job is to deal with it and make sure that we can work our way forward without this kind of thing knocking it off track, and I'm confident we can do that.

  • Now in terms of where our split of business are, essentially we have around 7% of our business in the US is in Medicaid.

  • Around 13% is in Medicare Part D, and we have about 2% in what is called Managed Medicare -- Medicaid.

  • So this was the part of the Medicaid business where the states had outsourced to managed care companies the management of their business.

  • HIVB is a little more exposed than the average because obviously there are more HIV lives in the Medicaid marketplace.

  • And the last question, could you just repeat the last question?

  • Shamus Fernandez - Analyst

  • I think the second question -- the first question was on healthcare reform.

  • I'm actually forgetting my own second question, so I guess the second question would really be if you wanted to address, it would be healthcare reform potential changes in Europe, as well in the context of the current crisis.

  • Andrew Witty - CEO

  • Okay.

  • Again, it is a big question, it is a good question.

  • So, context, over the last six, seven years, I think it is a reasonable rule of thumb to work on the assumption that on the average we take about a 3% price cut across the whole of Europe every year.

  • So we have a European business which is used to that kind of pressure.

  • Typically a 3% price cut on the average for the whole of Europe might have been constituted by four or five countries doing something relatively dramatic, and every year you have got a different four or five countries.

  • The question is whether or not we are going to see something different here.

  • Are we going to see four or five countries do something which adds up to 3% for the whole year, in which case it is kind of normal?

  • Or are we going to see something substantially beyond that?

  • I think it is premature to take a view on that, to be honest with you.

  • Of course, we see countries like Greece clearly beginning to wrestle with some very, very serious fiscal issues under great pressure.

  • It is obviously that we are going to see some kind of impact in some countries.

  • I think this is the kind of thing that as we go into Q2, Q3, it is going to become clearer about whether or not the European level impact is going to be a much off-trend or not.

  • At this point in time, it is very difficult to call.

  • I think the right thing to do is to be alert, continue to manage the business as we always have done, which is we don't expect price increases in Europe.

  • We expect there to be price pressure.

  • What that speaks to in volume, value for money propositions, introducing new medicines and making sure that we can deliver to customer expectations both at the patient and government level, and let's see how it flows out through the rest of the year.

  • So definitely a subject to watch.

  • Will it be a huge issue?

  • I would say we are relatively less exposed than most of our peers for all sorts of reasons, not least because we diversified the group so much in the last few years.

  • And so again, we will have to wait and see what happens, but I think we're in a relatively decent shape for whatever might come.

  • Shamus Fernandez - Analyst

  • And I apologize.

  • It was not leverage in emerging markets was the question.

  • So from an investment phase, are you in an investment phase right now on the SG&A side, and do you see that as a leverage opportunity potentially over time?

  • Sorry.

  • Andrew Witty - CEO

  • Yes, we have been in the leverage phase for the last two years really.

  • And so essentially every dollar -- so at a group level, pretty much every dollar we have spent in the emerging markets has been at least paid for by a dollar less than in the West, just to be very simplistic kind of rule of thumb.

  • So we have been downsizing and restructuring in the West and investing in emerging markets.

  • For the first time over the last three, four, five months, we actually now have more sales personnel in the emerging markets than we do in America and Europe combined just to give you a sense of the quantum of shift, pretty big.

  • What you will now start to see you absolutely will see leverage.

  • Because, as we have built up that infrastructure, as we have moved our selling capacity up, we are obviously able to now drive through a greater portfolio of products.

  • I think we have got much greater coverage in places like China.

  • We have got much greater coverage in places like Russia.

  • And so no question you are going to see leverage.

  • Now having said that, if we see opportunities to continue to invest whether that be organically, through further distribution capability, or whether that be through further bolt-on acquisitions, as you know, I think we did 11 bolt-ons last year and most in the emerging markets, we are not going to shy away from those opportunities.

  • This is one of those moments where we are seeing fundamental economic shifts go on in the world economy.

  • For sure we will see volatility in the growth profile of emerging markets.

  • But they are directly going in one direction, and this is the moment to make sure that we are invested properly in terms of our structure, in terms of our resources, and in terms of the product portfolios, and in terms of the way we staff and then put together creative price strategies.

  • And yes, we should be looking for leverage, but this is still a time to look for those opportunities and invest behind them when we see them.

  • Next question.

  • Operator

  • Mark Clark.

  • Mark Clark - Analyst

  • A question for Julian.

  • Prompted by the table on page 23, which talks about the vaccines, dermatologicals and all other pharmas, I just wanted to doublecheck, firstly the GBP94 million COGS write-off is included within that table in the vaccines total of GBP389 million.

  • If that is the case, then, if you like, the underlying profitability there would have been substantially in excess of GBP800 million and the incremental margin of the delta of sales over the last year in excess of 80%.

  • I just wanted to work out if I'm reading that correctly because clearly this is bearing a big imprint from H1N1.

  • Julian Heslop - CFO

  • Yes, I think the write-off in the H1N1 is in the vaccines' global numbers.

  • But clearly large H1N1 sales in the quarter does distort the operating margin.

  • If you were to look at it on a normalized basis without that sort of peak, I would expect you to see on an ongoing basis operating margins for global vaccines of around about the 35% mark, somewhere in that sort of level, you know, normal course.

  • That is normal for the year.

  • Operator

  • Michael Leacock.

  • Michael Leacock - Analyst

  • I've got three of these questions if I may.

  • Firstly, on the exchanges, the Eagles, Julian, if I calculate correctly, that is about GBP100 million or so benefit in the quarter.

  • Is that correct that that goes into the SG&A line, and is there anything that you can tell us that might give us a chance of being able to model that with any degree of veracity?

  • Secondly, could you talk about your working capital changes and the ongoing projects there?

  • And thirdly, I know we have only had one quarter of historic data, but I wondered if you could talk about the trend in the emerging markets where clearly the cost of goods is running up in line with the sales growth with the SG&A certainly for the comparisons to Q1 running as fast.

  • Is that a trend that we could realistically expect to continue?

  • Julian Heslop - CFO

  • Okay.

  • Sadly my answer to your first question about exchange gains, are they predictable, I struggle to predict them myself.

  • So I fear I cannot give any guidance to help you there.

  • I mean just to put it into perspective, they were GBP85 million in quarter one, and last year in quarter one they were GBP11 million.

  • Overall in 2009 we had a hit of about GBP103 million, and in 2008 we had a gain of about GBP137 million.

  • So it is volatile.

  • Clearly the more currencies move, the more you get it.

  • But, as to predicting, it is very difficult.

  • Unless the trend in currency is very smooth clearly.

  • But otherwise very hard.

  • So that hopefully covers that one.

  • Sorry, your second question was --?

  • Michael Leacock - Analyst

  • Working capital.

  • Julian Heslop - CFO

  • Working capital.

  • Yes, in terms of quarter one, not much progress in terms of the numbers.

  • The working capital you will see an adverse in quarter one.

  • A few reasons for that.

  • The flu pandemic receivables were higher.

  • That is point number one.

  • Invariably when we compare quarter one to quarter four, there is always a lower level of payables that is historical.

  • So the payables stay the same, but there is an adverse hit there.

  • But otherwise, pretty flat.

  • In terms of days, inventory days slightly better, payable days pretty flat, and receivable days largely adverse.

  • In terms of the year, I'm anticipating cash generation from working capital this year, not just obviously from lower pandemic receivables, but also from all the other actions we are taking.

  • So you will see that come through as the year progresses.

  • Andrew Witty - CEO

  • And then in terms of emerging markets, I mean I think the best guidance we can give you is that overall we are aiming for that business to be, as you have heard already, operating around the mid-30s.

  • And I am going to reiterate, Michael, that the SG&A, we are not going to manage that business to a ratio while there are so many hot opportunities around if they are there.

  • And obviously if they are not there, then that is a moment to consolidate and manage to the right margin.

  • But there are -- I really want that organization.

  • That is why I run it as a separate business.

  • I want an organization to be really entrepreneurial in terms of chasing after the opportunity and to really establish ourselves for the long run in these countries.

  • So I cannot give you a trend on that because I really think we ought to be ready to respond to every drug opportunity we see whether it be organic or inorganic.

  • Next question.

  • Operator

  • Steve Scala.

  • Steve Scala - Analyst

  • A few questions on the possibility of Advair generics in the US at some point in the future.

  • What is your competitive intelligence on the Sandoz/Oriel acquisition and its ability to develop an A-B rated Advair in the US?

  • And maybe similarly what is your understanding of where Vectura stands in the EU?

  • And is there any evidence that the FDA will issue by bioequivalence guidelines for combination respiratory products in 2010?

  • Andrew Witty - CEO

  • On the second part of the question, we have absolutely no insight into what FDA may or may not do.

  • So I have got no intelligence to say that anything is going to happen ever when -- no idea.

  • As far as the first two or the first part of your question, I'm not going to comment on other people's development programs.

  • But I'm going to reiterate what I said many times before, and all the evidence of corporate behavior, other corporate behavior in the last few months, has reinforced my view of what this situation is.

  • One has nothing to do with the primary patent.

  • So the notion that there is some great event to happen when the primary patents expire on the molecules and the combination is not the trigger.

  • It is all about whether or not people can manufacture product, which can pass muster with the various regulators of whom the US FDA is by far the most challenging.

  • To achieve a substitutable approval is an even greater reach than simply an approval of a non-substitute, all of which you know.

  • But the reality is, it is exactly as we have said, this is very, very difficult.

  • And I think we are seeing decision-making and behaviors and timings and all sorts of things that are completely consistent with our view of how this was going to play out.

  • I still right now for me nothing has changed in terms of the way we view this.

  • We view this as a marketplace where Advair remains a very strong product, up 9% in the quarter.

  • It is a product we remain extremely committed to in terms of resourcing for growth, and we expect to be doing that for the foreseeable future, and we are moving full pace ahead to bring our own MTE programs through.

  • You have seen the Relovair program now up and running on all fronts, and you will see later in the year I expect some very good progress in the rest of our respiratory development portfolio.

  • So -- and I'm really going to be -- I'm not going to go into the individual products of the competitors because they have got to deal with their own problems, and it is for them to talk to.

  • Operator

  • Kerry Holford.

  • Kerry Holford - Analyst

  • I just have a follow-up question on Advair actually.

  • We saw very strong growth particularly in Europe in the quarter, I think it was around 10%.

  • Can you just detail what is driving this?

  • Give us an idea of the components and growth specifically in that market.

  • Andrew Witty - CEO

  • To be honest with you, it is nothing more complex than just very good execution performance.

  • European business has been an extremely -- obviously we have been in this business for a long time in Europe, and I think that we had a period where we continually go back, refocus what we are doing with the product.

  • We always have had a very high market share.

  • I think we have retained something like 70% of the combination market throughout the period of the Advair or the Seretide/Symbicort competition.

  • And I think what you are seeing is across Europe a very strong execution of our operations, but the whole thing is driven by volume.

  • There are no price increases in Europe, and it has been a very good period.

  • Operator

  • Andrew Baum.

  • Andrew Baum - Analyst

  • Just one question following from the guidance from the FDA regarding LABAs.

  • I mean [Dr.

  • Chaudhuri] and the FDA have referred to wanting to see LABA volumes drop in the US and working with various stakeholders to achieve that goal.

  • To what extent do you think that is a reality, or do you think the focus of the FDA is far more on monotherapy, i.e.

  • non-concomitant use with steroids, and, in fact, you will not actually see rigorous enforcement of looking for reductions in volumes of combined therapies?

  • Andrew Witty - CEO

  • I mean to be honest with you, although there has been a variety of communications over the last few months, as you know, the final FDA or the, if you will, next iteration of FDA addition on this has not been communicated to us or anybody yet.

  • So I think we have to wait and see how that initial sentiment actually translates into whatever the next position we get from FDA.

  • And, as you know, they have pushed back that date once or twice in terms of when they said they would be ready to talk to stakeholders about it.

  • So to be honest with you, I don't think it is right to react to the initial statements when we know that they are looking at all of this -- they have not finalized or they have not finalized what their next position is on it.

  • It may well be the same; it may be different.

  • I don't know.

  • So if you don't mind, I'm going to kind of plead the fifth on this one.

  • Because until we actually get greater clarity about what FDA really wants having now received stakeholder feedback and as you know there is quite a lot of stakeholder feedback, particularly around the outcome that took place on a completely different subject.

  • So I think that is all I would say.

  • I cannot help but take this opportunity, though, with you, I do recall a CC we had a year or so ago when you asked about talents in consumer and whether or not we were really committed to our consumer business.

  • I just wanted to remind you we have now hired a fabulous new leader for our consumer business from the pure-play consumer world.

  • And I just wanted to add to that, in the last 12 months, we have hired 20 vice presidents or directors of our consumer business around the world, all of whom came from FMCG companies and none of whom came from Pharma companies.

  • So I just wanted to let you know your question was listened to, and I wanted to give you some feedback on it.

  • Operator

  • James Millet.

  • James Millet - Analyst

  • First question on Benlysta.

  • Based on the full data from the (inaudible) controls, what is your view of getting a steroids bearing claim on label?

  • And secondly, on the Relovair Phase 3 program for asthma, have these trials been agreed with the FDA, and are they sufficient for US approval?

  • Andrew Witty - CEO

  • As far as Relovair is concerned, as you know, there is still debate going on at FDA about what the safety trials are required to -- for registration or perhaps as a post-registration commitment for a new product is going to be.

  • So we have initiated these trials because we believe Relovair even excluding the US is an extremely exciting opportunity, and that is particularly reinforced when you see the phenomenal growth rates of Advair/Seretide in the rest of the world.

  • So we are obviously getting on with it.

  • A very large amount of what we are doing with Relovair has, of course, been discussed with FDA, whether it is a dose or all those sorts of things.

  • And we believe that in the event that there is some clarity from FDA on the trials, there will still be -- there may be a possibility we have to slightly amend the Relovair program.

  • We think we can do that.

  • So, at the end of the day, by definition this program is not yet completely in step with what the US might want because they have not clarified what they want.

  • But we are getting on with as much as we can possibly do because there is no point holding up the rest of the world for it.

  • We believe that we could probably accommodate what they might ask us for, and, of course, in terms of the fundamentals of what Relovair is, that has all been discussed with the agency.

  • As far as a steroid sparing claim is concerned, obviously the data trends numerically the right way.

  • But ultimately this is down to the review.

  • It is very hard to speculate how that is going to go.

  • This is the first modern medicine for lupus.

  • I think we have got a terrific data set to support registration in terms of meeting the primary endpoints, meeting the pre-specified endpoints.

  • We have got certainly a regulatory package to get this medicine approved.

  • What the fine detail is of the various dimension such as steroid sparing, I think we just have to go through the process and see how that plays out.

  • But bottom line is this program absolutely delivered, and we continue with HDS to be very excited about the opportunity and confident about our ability to get this approved.

  • Operator

  • Gbola Amusa.

  • Gbola Amusa - Analyst

  • UBS.

  • A question on Japan.

  • If I understand correctly, your vaccines sales in Japan a couple of years ago were almost 0 with Japan roughly 10% of global pharma.

  • Could you tell us what you hope Japan could contribute to your overall vaccines franchise in the next five years just directionally?

  • Andrew Witty - CEO

  • You are absolutely right.

  • There was virtually no vaccine sale, as you might also know, virtually no vaccine sales in any foreign company, and that is not much very very much vaccine sales even from local companies.

  • It is a very undeveloped vaccine business.

  • We obviously had a terrific success in terms of being able to get our pandemic flu vaccine imported.

  • We took the biggest share of that order.

  • It was the first time that any flu vaccine had been imported by the Japanese government, a very significant win.

  • Obviously it's adjuvant, a very significant fact.

  • We have also had Cervarix approved, and that is just beginning to get going in the US.

  • And you will also be aware that we created a joint venture with a company called [Capsucuscan] to develop a further seasonal flu product.

  • So we have a very aggressive agenda to develop our vaccine business, and we see a raft of potential vaccine opportunities over the next five or six years.

  • And a bit like the pharmaceutical business in that if you went back five or six years, you would see that we had very few new products being approved in Japan.

  • Over the last two or three years, in fact, I think we had 13 line extensions on new products approved in 2009.

  • We had between 30 and 40 line extensions on new products to be approved between '09 and 2013.

  • That has all been because we have figured out how to get pharmaceuticals registered in Japan.

  • By changing our clinical development program, by working closely with the regulators, we are doing exactly the same with the vaccine business.

  • The fact that we got Cervarix approved miles ahead of Gardasil.

  • The fact that we got pandemic vaccine in, the fact that we have put together this JV tells you that we are beginning to work through how to ramp up our vaccine business.

  • And, in the medium run, you have got to believe that we can build a business there which proportionally delivers just as much from vaccines as anywhere else in the group.

  • Gbola Amusa - Analyst

  • Okay.

  • And if I may ask a quick Emerging Markets question as well.

  • You had this 15% compound annual growth objective in December.

  • But it was for a narrower definition of Emerging Markets than your peers give, and it seems specific to your pharma business.

  • With your consumer business growing very robustly in emerging markets and all contributing to an overall franchise that is perhaps 24% of your sales, would you be able to say at least directionally whether your objective for growth in the broader definition is close to 15% as well?

  • Andrew Witty - CEO

  • Well, what we have said is, on the pharmaceutical emerging market business, we want to grow ahead of the marketplace and grow market share, and we are clearly doing that.

  • And that is certainly the goal we want, too.

  • As far as the consumer business is concerned, at the global level and, of course, the Emerging Markets is a big contributor to that, we want to be in a position where over the next five or six years we can double the size of that business organically, and that is pretty much the set of goals that we are setting for ourselves.

  • No question.

  • If you look at the consumer business and by the way this is something we can talk about off-line with anybody on this call -- the opportunity for GSK consumer brand in the Emerging Markets is absolutely phenomenal.

  • If you just look at in some unexpected areas, right -- so you look at the functional drinks business that we have in the shape of Lucozade and in the shape of Horlicks, just in the Emerging Markets, that marketplace for beverage is worth about $200 billion.

  • Absolutely massive.

  • The drinks business in China is a bigger opportunity than the OTC pharmaceutical business.

  • And so what you are going to see GSK doing is why it is so important that we continue to have this diversified portfolio.

  • We have so many opportunities open up Emerging Markets business streams, whether or not it is a pharmaceutical product, whether it is a vaccine product, whether it is a dermatological product, whether it is a drinks products, a toothpaste product or an OTC medicine product.

  • And, as a result, I'm very optimistic notwithstanding the occasional ups and downs every emerging economy is going to have, we have got a really strong portfolio of brands to be able to open up the market.

  • I can tell you I was in India three weeks ago and Horlicks, believe this or not, in the Indian survey of the most trusted brands in India, Horlicks ranked number six.

  • Out of all brands, all industries, all of India, Horlicks is the sixth most trusted brand in India.

  • That is the kind of strength you need if you want to build up a strong Emerging Markets business on consumer.

  • So what I net out of all of this is that we are focused on really investing behind a fundamental shift in economic activity in the world.

  • We are ready for the ups and downs exchange rates fluctuations might come.

  • We are not going to get knocked off course because we have got great products, which play exactly into this marketplace.

  • Combine that with our distribution power, combine that with our willingness to price properly in these marketplaces, that is what is driving our growth both in the pharmaceutical and the consumer business.

  • We have got time for a last couple of questions, I think.

  • Operator

  • Eric Berg.

  • Andrew Witty - CEO

  • Maybe you can go to another question.

  • Operator

  • Justin Smith.

  • Justin Smith - Analyst

  • Just a very quick one on Cervarix.

  • Andrew, I think you mentioned that the fourth-quarter results you're expecting a big quarter in the first quarter for Cervarix.

  • I just wanted to check you were happy with the performance in the first quarter and also if you could just share a few thoughts with where the key wins in Europe for Cervarix have come from in the first quarter?

  • Andrew Witty - CEO

  • Well, I am pretty happy with Cervarix in the first quarter.

  • Of course, it is mostly driven by Europe and rest of world performances.

  • Most of the business, these are wins which we got last year and they are obviously flowing through, but they tend to be a little bit lumpy because you get very government centered on these big vaccination campaigns, and they order -- they tend to order six months of inventory in one chunk, which is why you get some very quiet quarters and some very busy quarters.

  • And within Europe the real standout would be UK, Netherlands and to some degree other parts of Scandinavia such as Sweden.

  • The one area where I think we have got real opportunity, if you will, to enhance the growth rate is obviously the US.

  • We have got the approval in the US.

  • We are just going through the final stages of getting the reimbursements sorted out for Cervarix under the various vaccine reimbursement programs.

  • That is imminently going to get resolved.

  • Once that is done, then I think the US will come on stream.

  • The great news as well obviously is that, as more data got generated for Cervarix, the profile really firmed up, really looks very good, very competitive.

  • We have got the amendment to the US European label going through as we speak, and that will continue to strengthen, I think, our competitive position.

  • And we have got Japan underway without any other competitor in the marketplace.

  • So yes, I was pretty happy with it.

  • I am keen to see the US kick in during the rest of the year, keen to see Japan kick in.

  • But overall I think good progress with Cervarix.

  • Thanks very much.

  • Thank you also to everybody else.

  • I think we are out of time, and I very much appreciate the questions.

  • Obviously if you have more questions as you reflect on the results, the IR team at GSK is available for you to call any time.

  • In the meantime thanks for your attention today.

  • Operator

  • Thank you very much.

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

  • You may now disconnect.

  • Thank you for joining.