葛蘭素史克 (GSK) 2010 Q2 法說會逐字稿

For this afternoon's Q2 update, I am not going to say very much at all before Julian comes up to take you through the numbers, and I will come back and talk a little bit about the strategy of where we are as a Company.

Just a couple of minor kind of updates on the kind of information we are providing you.

I am sure you have already noticed, but hopefully you have seen that we have given you an extra level of detail on the Emerging Markets business in the release, so you can see now down to product level what is going on in the Emerging Markets.

We know a lot of you are interested in that and very happy to give you that.

You also may have noticed that we have been less forthcoming on the consumer breakdown.

We have come to that conclusion because we have identified and we started to pick up a sense that some of our more pure play consumer competitors who don't necessarily go through this level of detail were using our disclosures against us.

So were using those as ways of trying to predict what we were doing or not doing.

So I just wanted to put into context those couple of points.

We are all for transparency, but not if it costs us competitiveness.

And I think probably you and the shareholders would agree with that.

So that is why you are seeing a little bit less on the consumer side.

We are very happy to show you what we are doing on the pharma side, and that is why it is done on Emerging Markets.

With that I am going to hand over to Julian, who will take you through the numbers for Q2.

Thank you, Andrew.

Good afternoon.

I will focus, as I always do, on the results, excluding restructuring costs, and also talk about growth at constant exchange rates, with the exception of cash flow.

As you can see, it was a flat turnover quarter compared to the previous year, although at the first half we grew 7%.

If you strip out flu pandemic and Relenza, which clearly does distort comparative performance, in the quarter we declined by 2%.

In the first half we grew by 1%.

And as I progress through the slides I will cover the factors that drive that.

If you look at operating profit, clearly a significant reduction year-on-year in the quarter, but that is driven by the GBP1.57 billion legal charge, and also by the much lower level of asset sale profit, which is why other operating income is down.

Free cash flow, very robust, 42% up H1 this year versus H1 last year, so continuing good performance there.

This chart basically provides you with an analysis of turnover overall.

If you look at the US, the US is down 13%.

That is driven by a number of factors.

It is driven by the generic competition, Valtrex.

Clearly the patent went off.

We've got generic competition.

That accelerated in the second quarter.

It is also driven by the timing of vaccine tenders and a faster erosion of the decline of Avandia.

So those are the factors, some of the factors, driving that US decline.

If you move on and look at Emerging Markets and Asia Pacific and Japan, there you see good growth, 17% and 9%, respectively.

You look further up the chart you can see Consumer Healthcare grew by 3%.

That is about 1% above the overall market growth, and I will come back to Consumer later.

This chart is very much a chart I have shown you in previous times.

It is very consistent.

If you look you see that we are continuing to be adversely impacted by products served by basically generic competition.

That is primarily Valtrex -- not only Valtrex, but that is the main driver.

And Avandia, as I said before, continues to erode overall growth.

You can see flu pandemic and Relenza sales doubled.

And you can see that the core, which is pretty much excluding all of those, grew by 3% in the quarter and by 7% in the first half.

Acquisitions, net of divestments, in this table, the impact is about GBP90 million.

So it has an overall effect of just over 1.5%.

If you look at the core, what I am now going to do is look at the various products analysis.

If you look at that there is a whole host of things distorting Advair in the quarter, and not least of which was wholesale of stocking patent in the US.

I am going to focus my comments on the first half.

If you look at first-half Advair sales growth, you've got 1% growth in the US, which interestingly is pretty much exactly in line with scripts and mix movements, so that 1% is almost a direct read across.

5% growth in Europe, 20% growth in Emerging Markets, and 16% growth in the rest of the world.

That is the Advair story.

If you look at vaccines again, you have got that decline in the second quarter.

You have got that small growth in the first half.

Again, within our vaccines business sadly you have volatility.

It is just the nature of the business.

Tenders, government tenders have a big impact on when sales fall, as does supply or shortages.

When supplies go out of stock, then you get distortion in the overall market.

So the H1 view is a much better view than the quarterly view.

Within those overall numbers you have Syncria delivering about GBP83 million worth of sales in the first half, which is a good performance.

You see we continued to deliver good growth with products like Lovaza and Avodart.

And finally within all others of the [bottom] of what is driving that, that is primarily the benefit from acquisitions net of divestments.

Not wholly, but simplistically that pretty much explains that.

The next chart summarizes Consumer Healthcare.

You recall that last year in quarter two within Europe we launched alli, and that creates -- because we launched it in numerous countries in Europe, that created a fairly significant stockpile.

In quarter two last year that created a large sales number.

The comparator clearly drags us down this year; you can't stop twice.

That impact is about 3% in our total Consumer Healthcare business and about 7% on both our European healthcare business and our OTC segment, just to give you an indication of the impact.

Our international business continued to perform strongly across all the category areas.

And in the US business oral care was strong, but OTC was weak, and that explains the flat performance there.

In our categories clearly strong performance from oral care and nutritionals OTC suffering again primarily because of the alli comparator effect year-on-year.

This is a chart which we produce regularly.

I mean, two things fundamentally driving this reduction; our dependence on white tablets.

The first is the strategy, the diversification strategy, things like buying Stiefel clearly helped enormously.

The second is sadly the reflection of patent expiry, which have been expiring on white tablets, and that has been reducing the sales.

Those two things taken together is what drives that overall reduction from 31% to 26%.

This is the chart that shows the first-half margins on the second column.

On the third column it shows our guidance for the year.

You can see cost of sales at 24.7% is about 1.3% below the guidance.

Last year at 25% cost of goods for guidance, this year 26%, so a 1% increase.

But the first half were 0.5% higher, so 0.5%, not 1%, but too early yet to change that overall guidance, so we are sticking with 26% for the full year.

SG&A slightly higher than the 29%.

I expect SG&A costs to come down in the second half and for the 29% to be delivered.

And R&D, a very common picture where often we see an increase in spend in the second half compared to the first half.

I am still expecting roundabout 14% for the full year.

So those at this point in time the guidance remains.

This chart explains SG&A.

The story continues to be the same.

We continue to basically save money in the developed markets, so we have made significant reductions to our US headcount.

We continue to make reductions in R&D; for example, the Verona site was closed in the second quarter, and a number of other sites, which we have announced.

So again, streamlining, reducing those sites, but at the same time reinvesting those in developing markets in markets that we want to grow.

We clearly had a core.

We could have saved the money, let it drop through.

We believe the right answer was to put that money back and grow the top line.

That was our strategy, stays our strategy.

I think it is the right strategy.

You can see the effect of Stiefel.

You can see exchange gains and losses.

Last year, you may recall, that we had about GBP106 million of exchange losses.

This year we have about GBP24 million of gain.

They live in the SG&A line, they do distort it.

I do pull it out for you for that reason.

But clearly you can see the benefit this time.

And other reflects a whole host of things, but including a series of benefit from flu pandemic sales creating a higher denominator.

This was a quarter which was distorted, so all I have done in this chart is to rip out for you the impact of legal, the impact of other operating income.

So what you can see is it is those two factors that take the decline in operating profit of 80%, and as you go back to the trading profit before legal level, you can see a decline of 5%.

It is not necessary most quarters, but I think it is quite helpful to you this quarter.

This chart tracks you down from operating profit to EPS.

If you look at that box on -- the little rectangular box, bottom left-hand corner, you can see that the EPS before legal was the 29.3p.

You can see the impact of the legal charge.

You can see the reported EPS at 2.6p.

I think the tax is complicated.

It is almost impossible to stand here and explain a 63% tax rate.

It is, whether you like it or not, a mathematical equation.

25% on your profit, only 14% tax relief on a very significant legal charge.

Mathematically it brings down the profit hugely and gives you that sort of 63% charge.

I think more helpfully to you the guidance for the year now is about 30.5% for the tax rate for the full year.

And that tax rate reflects some benefit off the 28% I gave you as my guidance for the year.

But clearly the adverse impact was much higher -- much, much higher legal charges than we ever anticipated, but at that lower tax relief rate.

So it is a combination of those two.

Net net net I expect 30.5% to be the corporation tax rate for GSK for this full year.

Exchange, we benefited by 7% in the quarter, 4% at the half-year.

Much like you -- every time I look at my results, I use that simple formula I gave you.

It really frustrates me when my simple formula doesn't work, because I find it is a great guide to make sure we've got the right number.

What you see there are all the factors driving the overall exchange position.

Interestingly, Australia and Canada seem to feature for the first and probably the last time in this sort of analysis.

But we had very significant movements on those localities this year compared to last year, plus too the denominator is slightly lower.

Those two things together make them basically give quite a significant impact.

But anyway, that is there for your information.

I think this simple guide we give you on dollar, euro, yen works most of the time; sometimes it doesn't.

This is such a time.

This is the results before restructuring.

The left-hand column results excluding restructuring.

The restructuring in the middle, the GBP590 million.

A significant proportion of that GBP590 million is the R&D closures and it is the US rationalization.

There are other things in there, other rationalizations elsewhere, but those are two key prime drivers.

If you look at where we are to date we have spent about GBP3.2 billion out of the GBP4.8 billion we announced, and the GBP4.8 billion is the GBP4.5 billion of restructuring, GBP300 million relating to acquisitions, GBP1.2 billion to go.

GBP1.6 billion -- sorry, GBP1.6 billion to go.

I expect that to be phased really evenly between the rest of this year and 2011, with maybe a very small amount in 2012.

Overall you can see the results net of restructuring.

Free cash flow, the legal charges did not impact cash flow.

[We expect] that they wouldn't do.

We took the charge in the quarter.

The payment of those legal charges will happen in subsequent quarters.

You look at the cash flow there you see the impact of those legal charges in the total operating profit line.

That is what brings that operating profit down.

If you look four lines down, you see the elimination of that non-cash impact in increase in other net liabilities.

If you take the two together, you get the sense, which is that legal charge hasn't had an impact yet.

It will do in ensuing quarters.

We now have GBP3.5 billion of balance sheet provisions for legal claims that we duly expect to settle at some point in the future.

So in ensuing quarters you will see cash outflows as those basic settlements are finally signed as we make the payments related to it.

That will happen.

Bottom line; very strong free cash flow performance supported by good working capital performance, the significant increase, 40%, up on the previous year.

The next slide shows what do we do with it?

We spent just over half of it on dividends to our shareholders.

We spent 10% of it on acquisitions, and the balance went to reduce overall net debt, which finished the period at GBP8.5 billion.

In conclusion, underlying growth for the six months was 1%.

We have made significant progress in settling historic cases -- historic legal cases.

The way I look at it as a shareholder, while that is a significant charge to do so, and much higher than I ever expected, nonetheless, it takes a huge amount of risk, which is very hard to quantify, out of this business.

I think that is a very positive sign for the Company.

It puts a lot of it behind us, not all, but a lot of it behind us.

Free cash flow continues to be strong.

It enables this business not just to pay a very good dividend, but also to invest behind the future growth.

The Q2 dividend up 7% to 15p reflects a strong free cash flow performance.

So thank you very much.

I will pass over to Andrew.

Thanks, Julian.

So I think you get a sense of the numbers.

What I thought I would do is just reflect a little bit on where we are from a strategic point of view, and to bring out some of the changing shapes of the business that we are moving forward on.

It is just about two years since I stood up for the first time and talked about the strategy of the Company.

I think this is a reasonable moment just to reflect on how that has really played out.

In many regards everything we anticipated about the sector has played out very much as we thought it would.

So increase in pricing pressure, increase in genericization, more demand for differentiated products, all of those pressures that we anticipated have really come true.

I think in many regards we feel probably more confident around the strategy that we are deploying at the Company now than we even did two years ago.

And actually nothing happened in the last two years, which has kind of been a surprise from a direction of travel that we anticipated the environment would go in.

Of course, some things go more quickly than you expect, so nobody really predicted deficit reduction programs in Europe, and therefore not necessarily a new wave of pressure on European pricing.

Those are degrees of movement rather than a directional shift.

In terms of our strategy, obviously, hopefully, you have all got this as ingrained as I have in terms of the three things we are focused on as a business.

We truly believe that getting to a sustainable sales growth is a key value driver for the business.

The best way for us to do that is to ensure that our core pharma business really gets to what it needs to be, which is provide differentiated medicines efficiently through the marketplace, get those priced properly to get good penetration into the market.

We see the need to surround that with a diversified group of companies.

And then we want to take costs out of the business as we simplify our organization.

So if I think about the way I think about this business it is really a little bit along the following lines.

We are doing a huge amount -- I am going to show you a little bit of progress in terms of what we can do to improve our core pharmaceutical business.

And that speaks to everything to do with the core.

We need R&D to be more effective and more efficient.

We need manufacturing to be more efficient, and we need the commercial model to be more efficient.

All of those things have been focus areas for the last couple of years and remain focus areas for us in terms of how we drive greater effectiveness and efficiency in our core pharma business.

But that core pharma business remains potentially a hugely exciting part of our organization.

If you think about where the optionality is on big upside, it is in pharma.

When you strike it right there is a great return.

The problem is as an industry we haven't been striking it right properly, and the hurdle for the definition of right has gone up.

So what would have achieved great returns 10 or 15 years ago, even if they could be discovered today, may not be the same returns.

Hurdles have gone up, but you can jump those hurdles.

The potential upside optionality on success in pharma remains one of the great opportunities that we should try to achieve.

That is why we see that as the core of the Company.

Now the focus of the Company then is how do we improve our probability of that option upside in terms of the way in which we do R&D, where we look, our focus and discipline about guidance differentiation.

How we can make that efficient through reducing cost of R&D.

How we can then develop those products effectively through the manufacturing network and take out redundant capacity and cost of manufacturing.

And then, of course, how do you commercialize what is likely to be a different shaped portfolio.

You have heard me talk many times that we don't want to be dependent on the belief that we can invent a blockbuster, when there is no certainty whether we can or we can't, and when it might happen.

The consequence of that is you must except we are going to have a broader portfolio.

The consequence of that is you need a different commercial model that has to be much more customized, much more fit for purpose, and ultimately much more efficient.

That is the focus of the work going on inside the core.

Around the core you know that we have been investing in these businesses.

These other businesses, whether they are geographic by nature, and this is always a slightly tricky thing to talk about because of course it overlaps between geography and product group or business group.

So what you see going on in the -- this ring of businesses, these are the businesses which we believe we've got a basis of competitiveness.

We think we can win in these marketplaces, and we have been allocating capital aggressively over the last couple of years.

Of the two big driving philosophies or disciplines around this structure of the Company are to make sure that we are rational in how we allocate capital, and fundamentally in the core get R&D to be more efficient and effective.

That is essentially what we are striving to build over the last couple of years.

If you look at what that looks like now in terms of content, what you see on this slide is a couple of different ways of looking at the data.

So if you look at the four businesses at the bottom -- dermatology, respiratory, consumer, vaccines, those are four of the business groups, the vertical business groups, where we have been allocating capital, either through acquisition or through organic investment.

What you see there, they now account for 57% of the turnover of the Company.

So there you've got businesses, which all have very distinctly different profiles to the classic traditional pharma market.

They are all businesses where we believe we have significant degrees of competitiveness.

And we believe that that network of businesses have very different risk profiles to the classic core pharma business.

But 29% of the cross simply looks at it a different way.

Okay, let's think about geographic diversification.

What you see there is 29% of the business is in our Emerging Markets, Eastern European, Japanese or Asia-Pac business areas, i.e., not Western Europe, not North America.

You see on both dimensions that we continue to allocate resources to push those -- the opportunities up in these other areas, while maintaining the option for significant upside in pharma.

It is an important thing over the medium term that I get across.

Now I just want to pull out one thing on dermatology.

So we bought Stiefel last year, and I think it is always quite good to be held to account.

I'm going to talk a little bit more about some other deals in a few minutes.

Stiefel was a relatively big transaction for us.

In the first half our prescription dermatology business was about GBP530 million of sales.

We had about another GBP150 million or so in the consumer dermatology business.

As you know, we are committed to opening up dermatology as a fourth platform of our consumer business.

That is under way as we speak.

But nonetheless, about GBP530 million of sales in the first half in the derm piece -- in the Rx derm piece and about GBP150 million or so in the Cx piece.

That business, as you can see, grown 5%.

And for your information it is running at an operating margin inclusive of amortization of around 42%, 43%.

So good operating margin.

And we are running about 10% ahead of our synergy targets for the acquisition of Stiefel.

I think -- I just want to give you a sense that when we make these acquisitions we are very serious about making sure we drive value out of them when they get brought into the Company.

We think that is the right strategic investment for us to make.

It is opening up opportunities for us both in terms of our Western markets, a diversified type of product line.

It is opening up new opportunities in our Emerging Markets.

It is allowing us to take new products to Japan.

And it is also allowing us to open up a fourth platform of consumer.

That is why we bought Stiefel, and I think you'll see [in similar] progress (inaudible).

I thought it was also worth just talking a little bit about what is going on then in the more -- other areas of the core pharma model.

I wanted to cover off just a few things, particularly maybe with reference to the US, because the US is probably our biggest challenging marketplace over the last couple of years.

We have seen tremendous impact from genericization.

And it is important that we get our US business fit for the future.

You have heard me talk about that before.

I think we are at a phase now where the emergence of what the new US business is going to look like is beginning to become apparent.

And it is beginning to become apparent on a number of dimensions.

First of all, it is smaller than it used to be.

In the last two years we have taken about 25% of the salesforce out.

We now have a salesforce of around 5,500 people in the US.

If you went back four or five years, even a bigger reduction, obviously.

During the last couple of years significant further reduction in the salesforce.

So the size is small.

We spend about one-third less today than we did two years ago on DTC advertising.

And within our overall advertising environment we spend relatively less now than we did before on TV.

We spend more than we did before on digital.

So a lot of changes going on in terms of both classic dimensions of mix.

If you look within our salesforces in the US, we no longer have the big duplicated primary care salesforce.

We now have a structure where each representative has sole accountability for their customer relationships.

And, in fact, we have very few big primary care salesforce.

What we have moved towards is a much greater portfolio of specialized salesforce, salesforces which are much more emphasized with specific customer groups or specific product groups.

What is then critical is -- are we staying in step with where the customers are going?

The US customer base is changing very dramatically, and healthcare reform is simply putting more and more pressure behind this change.

One of the biggest dynamics of that is the aggregation of customers.

You are seeing customers brought together into integrated decision-making environments, one way or another.

A tremendous number of physicians selling out their practices to hospitals.

They still trade as physicians, but they are essentially buying protection from the hospitals in the environment of the payer world that they live in.

They no longer want to compete on their own.

That requires a big change.

I will give you an example.

The University of Virginia in the US, 18 months ago we had 50 representatives calling on the US at the University of Virginia medical system; so 50 representatives every day going into that institution [to sell] our products.

Today we have one, who then can act as essentially an air-traffic control system to bring in up to five more.

So we have gone from 50 to 1, with an option of five specialist support come in and help work that institution.

That is the kind of change that that you need to start to see.

Now it is very analogous to the leading-edge of the European marketplace.

If you look at the leading edge of the UK market, it looks very similar to where the leading edge of the US market is moving in terms of customers.

Now some of it is voluntary.

Some of it the customers are demanding this kind of response.

So if you go to somewhere like the Maryland Medical System, three or four months ago the Maryland Medical System sent a letter to all vendors.

Whether you sell drugs, latex gloves, soap, anything that you sold into that medical business, all vendors received the same letter.

And that letter basically said, we expect you as a vendor to have only one point of contact with this institution.

We will no longer accept multiple people selling your products into our organization.

Of all the vendors who they wrote to, only one company of all the vendors was able to respond in a way that was acceptable to them.

That is because GSK had been working on how to develop this kind of approach, and when the customers demanded it, we were able to step up and actually continue the relationship we have had.

Those are the sorts of things you have to start to manage in the US market.

But similar if you move, for example, into a vaccine environment, where the vaccine physicians are again becoming consolidated, and again becoming extremely demanding of how they are serviced.

So one of the major areas we have been innovating on over the last 18 months is to create a capability to help the physicians navigate the reimbursement complexity to the vaccine marketplace in the US.

It is one example of how you can add real value to these customers.

So what we are seeing in the US is big changes in scale, much greater degrees of focused accountability in our organization -- we believe that is going to drive much better performance, but then much more alignment with where the customer groups are going.

And the customer groups are aggregating; they're becoming more demanding, and we need to make sure we address that.

That is exactly the kind of shape we are starting to see.

What you will see in the future is a greater and greater demand for comparative effectiveness, and that speaks to making sure that trials and new medicines that are being developed are being developed with that question in mind.

Many of you are very familiar with NICE in the UK.

We will see what the US institutions -- institutional response to this question is ultimately going to be.

No question at all, people are going to want to know what the comparative effectiveness performance of drugs are.

It is therefore important that we are building those into the trial plans -- exactly what we're doing.

Pricing across the world, more difficult in the US, because of the various overlaying pieces of legislation which restrict pricing freedom.

But outside of the US, in particular, we are seeing more and more engagement around flexible pricing, contingent pricing, payment for performance in terms of the medicines.

That is a trend you're going to see, I think, more of in the future.

It probably applies to the more controversial drugs, rather than all drugs, but nonetheless, you're going to see a continued activity of that price stream.

I think we will start to see some of this in the US a little more, but things like Medicaid best price are big inhibitors on innovation of pricing in the US.

So it may take a little bit longer to come along.

So a lot of change going on in the business, and I think particularly for the US we are at the point where the period of very intense change, and you can only imagine how much change happens when you see the degree of product portfolio rotation I'm about to show you, combined with the degree of business model change I have just described.

It has been a tremendous period of confirmation in the US over the last couple of years.

That is now beginning to emerge, and I think we will start to see the benefits of that play through over the next couple of years, both in terms of portfolio and skill set capability in the US.

To rattle that up a little bit, I just thought I would show you where we are moving resources in the business.

This just gives you a real sense -- and Julian made, I think, a very important point.

We could have simply taken cost down and delivered it to the bottom line.

We didn't.

We made the decision that we should reduce costs in our developed markets and in areas of the business where we believe we could drive greater efficiencies.

And for the sake of today, after all these investment divisions and efficiency divisions, what you can see here is what we have been doing in terms of headcount and in terms of our overall SG&A in terms of reallocating resources through the Company.

So you can see that in the Emerging Markets very significant increase in headcount.

It is around 10,000; and then in terms of taking heads out of our more established or the support organizations of the business, around 13,700 heads coming out.

You can also see a big shift in SG&A allocation for the investment market compared to those which we believe we can extract resources from.

That has been the reallocation of resources and capital that we have been following.

There is obviously more to come on this.

So of the R&D centers that we have announced we would close, we have closed Verona.

We haven't yet closed Harlow.

That will happen in the second half.

Tonbridge will happen in the second half.

Zagreb will happen in the second half.

So you will see continued reductions in activity in R&D as we go forward in the rest of this year.

And you will also see continued reductions in manufacturing as we continue to tighten up our manufacturing network across the world.

That gives you, I think, a good sense of the scale of shift just in a two-year period.

I also thought you might be interested, because we have also been spending quite a bit on acquisitions, clearly compared to our historic trends.

As you know, up until 2008 there wasn't really all that much activity in this field.

We have done a lot more.

This is listed directly from the Board paper that was reviewed by the GSK Board last month.

Essentially what it is is a summary of an audit we have undertaken of all of the transactions which the Company engaged in over a period between '06 and '09.

I think there were 55 projects altogether covered by this.

On the left you can see where the value was.

So you can see that most of the value was obviously in acquisitions and JVs.

Clearly Stiefel would be the biggest part of that.

Then you see CapEx, R&D in-licensing, so these would be the externalization of R&D.

Then at the top, the very late-stage marketed product licensing deals, which are pretty unusual and don't count for very much.

On the right is the assessment of whether these deals performed.

Now not surprisingly, because this was up -- the analysis we have done after everything, including anything we contracted the day before, a proportion of these were a little bit early to be definitive about.

On the left what you can see is that the vast majority, over 95%, were on track.

Now what does on track mean?

It means it is meeting or exceeding our financial metrics.

So that means when we go back, we look at all of these transactions, it means we are meeting or exceeding them.

What are our financial metrics?

Well, the most challenging, of course, is the return on invested capital.

For the Western type businesses we look for about 8%.

If you were buying a business in Pakistan, we are looking for 20%.

On all of our CapEx, all of our acquisitions -- sorry, all of our other acquisitions if you look at internal rate of return we are looking to be around 14%.

So pretty decent targets.

And you can see the overall good performance.

In terms of those which are under-delivering or terminated they are all R&D early-stage targeted, which is not that surprising.

So the areas where we have failures is where we have gone into a technology or a licensing partnership with an R&D company, and it just doesn't work out.

And even then you can see it is relatively small.

So that gives you a sense of where we are allocating our acquisition capital.

I go to R&D.

To give you a little bit of a feel for the metrics of R&D, a lot of change.

And the key here is how do we make -- there is a very tricky operational needle to thread here.

There is a world of difference between making a business lean and mean or thin and miserable, and that is kind of the balance.

If it is all about cuts, you end up with nothing at the end.

You just create a downward cycle.

And particularly in a field like R&D, where creativity is an important dimension, do not want to fall into that trap.

So getting through reduction in scale and driving efficiency while somehow maintaining creativity and productivity is a very tricky needle to thread.

I think that is working.

I really believe over the last couple of years we have made real traction on this.

So, again, you could see here just a few headline numbers; big reduction in headcount, big reduction in the amount of space consumed on labs, platforms, infrastructure, so meters squared is a good metric for infrastructure.

So the more meters squared we can take out and the more fixed costs we are taking out of the business, the more you will vary the lines in your R&D budget.

That number probably will be 20% by the end of the year, by the time the residual sites I talked about get taken out.

You can see the big reduction in our complexity; so 30 CROs, down to just a couple, a good example of how you can just drive complexity out of your organization; a big benefit.

We said we would deliver biopharm pipeline; now a huge increase in activity in biopharm.

More importantly, 20% -- about 19% of our clinical pipeline is now from biopharmaceuticals.

The biopharm, as we said two years ago, we would get from a [standing chart] for something serious, we now have that.

We have 20% of the programs are in biopharm.

That is two approvals, that is five Phase III assets in biopharm.

We have also shifted resources to the late-stage.

So we spend less relatively early.

And out of this huge debate about externalization of R&D, we are externalizing much more the early phase.

So that we want to be very open, very diverse, very accessible to invention early.

Then we are really focused on deploying our resources at a late stage when we are spending relatively less than we used to on believing that we are going to invent everything.

We want to be open and then opportunistic to drive forward those opportunities.

That is why you see -- that is a lot of resource in the right space.

It also reflects the fact that the late-stage pipeline is of course big, and has stayed big over the last couple of years.

If you look then at how we spend overall R&D -- so those numbers I just gave you were pharma R&D, which is clearly the piece we started with, and we needed to work on.

If you look at how we have allocated resource then you can see that pharma R&D is receiving less of the pie of total investment in GSK than it ever has.

What we have done is we have increased the amount that we are spending in other areas of the business.

So we are increasing the amount significantly in vaccine R&D.

You can see we've increased the amount in consumer.

We have created the biopharm R&D and pharma as a proportion of size shrinks.

Again, what you're seeing is R&D at GSK is a world of difference from where it was a few years ago.

The pharma piece is smaller.

It is more straightforward.

It has got huge emphasis on trying to be open and creative and innovative at the front-end.

It's got much more accountability in it.

And then it's got a focus on delivering the advanced platform of the basket, enough resources to bring those products through with differentiated claims.

That is pharma.

The consequence of that being a smaller number has freed up resources, but has significantly opened up our consumer vaccines and other resource areas.

And, in fact, just this week we have decided to increase again our dermatology research activities, as we see further opportunities coming in from Stiefel, which were not being funded by the previous.

So it is that kind of reallocation of R&D budgets which is a real opportunity.

Now to the point of is it lean and mean or is it just thin and miserable, I think the evidence is that it is lean and mean.

So when you go into this organization -- of course, we have been through a period change, but if you go into this organization now and you talk to the teams, you get a real sense of energy.

I know some of you have spent some time visiting various of our facilities.

Any of you are welcome any time to come and visit with any of our discovery units or any of the MDL teams to get a feel for yourself about what it feels like inside GSK R&D.

But it has dramatically changed.

This is a different type of R&D organization, and it is delivering.

We've got five assets here going into Phase III; a long time since we put five into Phase III in one quarter.

You can see here we've got two melanoma molecules.

As many of you know, melanoma is one of the most intractable of tumor types.

It turns out melanoma drugs are just like London buses, you don't get one forever, and then two show up in one quarter.

You can see whether it is Prosensa, the muscular Duchenne medicine, zoster vaccine or the integrase, some interesting and potentially very differentiated medicine.

This continues to hold the pipeline around that 30 Phase III assets, which means again, as we have taken medicines out into approval, we are able to replenish that pipeline going forward.

And if anything, I would argue that the quality of the medicines going into this pipeline are ratcheting up all the time.

So when I look at how many first-in-classes we have, how many points of key differentiation we have, every time we review the pipeline it looks better and better.

That is because that is what we are tracking R&D to deliver.

And we are terminating the drugs that we believe we can't deliver a differentiated profile.

The only way we get the upside optionality on the core is to have differentiated medicines like this coming.

I just wanted to touch a little bit then on, as I wrap up, just some of the other change in the business.

This is on the less positive side.

This is where we spent the last few years saying goodbye to a whole bunch of products.

This is just US sales, GBP4.2 billion in 2006 driven by this portfolio of products.

So if you had gone back a few years you could've added Augmentin to this.

And you all know we have had a sustained period of genericization in the US.

Of those GBP4.2 billion, we lost most.

It is down to GBP800 million.

This year in the first -- sorry, for 2009 -- these numbers exclude Avandia and Valtrex, and so that immediately gives you that sense of how much the US has been affected.

That is why we have made so much effort to change.

What we have also done in the US is launched all of these products.

You've got 17 or 18 new products being launched.

We all know that none of these are individually going to solve all the problems.

But the reality is that gradually as they build up they all contribute to create a much more diversified growth platform in pharma.

This headwind on the left is clearly being now replaced by a growing tailwind.

It is growing because we are adding more and more products every year to the right.

And as they go through their early phases they are beginning to pick up momentum.

You can see in the quarter again, particularly if you adjust for Rotarix, which obviously is a very unusual kind of one-off period for the quarter, we saw those new products launch in the last three years grow by another 23 (inaudible).

A substantial block of business, [end] of the GBP43 million of business, so 23% in the quarter, all driven by all of these different individual products.

It is fascinating as well to look at the performance on some of these drugs in the US, which we would all say are more specialty than mass market, compared to those products, which from other companies were intend to be blockbusters is actually the [Company] products.

Because what is going on in the US market, it is all of the new products are going through much slower uptake as the effect of regulatory conservatism, post-market surveillance and payer pressure begins to bite in the US; so all products are effectively in slower take-up curves than we have seen in the past.

If you look year-on-year you see that phenomenon.

The curves are being (inaudible) for each generation one after another.

So in reality the performance of a lot of these drugs is holding its own very well against products which with many other companies have been anticipated to do much, much better relative to their place.

This is a big change, and it -- I think the sign of an end of an era in the Company.

As we work our way through the final vestiges of the portfolio that built the Company, you're going to see the effect of these products flow through.

The point of the model is to keep feeding that as we go forward.

Now during that period, and if I call out -- let's just describe what I have just discussed as the patent cliff is here today coming to an end, during that period this shows you what the performance of the Company was.

So this is basically the numbers are CER and the bars are the absolute reporting numbers.

So you can see the effect of currency jumping up and down from time to time.

But during the period when we lost all of that product to generics you can see that we have been able to, on the whole even at CER grow our turnover, certainly in currency grow our turnover.

At EPS -- you can see we have grown our EPS.

You can see the free cash flow generation.

You can see the growing dividend, and then you can see the very significant increase in return to shareholders that we have been pushing forward as a Company over that period.

That has been in the period when we have been losing GBP4.2 billion and of US sales, probably an average gross margin of 85%, 87%, and Valtrex.

And that is what we have been able to deliver.

If we can do that during the headwinds, you can see why we're confident about the future in terms of what we can do as the tailwinds start to dominate.

So as a business you can see the structure of what we have been building over the last couple of years.

I hope what you can see from what I have just described is some pretty clear evidence of the traction we have been able to get around this strategy in the Company.

And pretty clear evidence that the two big philosophical commitments we made, which was to really fix R&D and to really be disciplined about how we allocate capital to drive growth, are driving the decisions we are making in this Company.

As a consequence, what you end up with is a business which has those sorts of characteristics.

That is what we are doing at GSK.

I think after two years, as I said at the beginning, we feel the strategy is absolutely appropriate for the environment we're in.

I'm delighted we started doing the things we did when we did, because I think it puts us in a relatively better and more confident position for the next period in this industry change.

There is no question this industry is going through a massive, massive transformation, only just begun for many companies.

I think where we feel at GSK has put many of the building blocks in place to be very well-positioned even through a pretty tough period this industry will face in the next 10 years.

With that I'm going to stop and open up to questions; ask Julian to come back and join on the stage.

So can I ask for a first question?

(inaudible).

Just a couple of quick financial questions please.

The first one on cost of goods.

Your press release said that there were factors specific to the quarter.

I was just wondering if you could run those by us now and also quantify the impact roughly on -- in terms of debt on the cost line?

Then, finally, also on taxes I just wanted to clarify your best guess for the run rate of an underlying tax rate -- so on a quarter, a year when you don't have any significant legal charges, would that still be around the 28% level, or is there reason to believe that is coming down, because even the underlying tax rate was quite low in the quarter?

Thank you.

In terms of cost of goods, the one-offs are very much around the inventory provisions we make, and then sometimes release of a good product then becomes more probable -- more probable of success.

We invariably have these pluses and minuses in the cost of goods area, which can still comparisons from one quarter to the next.

Overall in the year I don't think it will be material.

In terms of tax, look, I think 28 -- you will always have one-offs that may be favorable, it may be adverse, but putting those to one side, I think in a sort of normalized year 28% is still a good rate.

I think the 30.5% for this year is simply a reflection of that big legal charge.

Thank you.

It's Mark Purcell from Barclays Capital.

A few questions.

Firstly, we have estimated that the US, and as they stand, European reforms will impact GSK earnings by -- in 2011 by about 6% and 2%, respectively.

Is this in line broadly with your view?

Secondly, which GSK products are most exposed to CMS and European government reimbursement audits?

Thirdly, on the 572, the integrase inhibitor, are you planning to do head-to-head trials versus Isentress?

Fourth, on the MEK and the BRAF inhibitors are you going after just patients with mutations in this disease or are you going after a broader population with a combination approach?

You have a unique opportunity there.

I am just wondering whether you're going to take advantage of that in melanoma as well as other tumors.

Then lastly, the market has focused on negative surprises for some time now.

So for a company of GSK's scale, before we get into 2011, 2012 and the pipeline news flow which could deliver the free call options you discussed, where could the positive surprises come from?

Okay.

Thanks for that.

I didn't write all those down, so we might have to come back to a few of them.

In terms of pricing, my expectation is the European pricing -- I still think it is a bit early to say at the moment whether or not European price impact over the next 18 months is going to be much different to what we normally see of about 3%.

I don't -- if we see a lot more governments start to act, then maybe -- then, yes, it is going to be more than 3%.

I don't currently expect that actually.

So we are seeing countries like France and the UK actually not particularly vibrate on this issue.

So I think the European number probably is somewhere in that 2%, 3% territory, at least today.

We will see what happens.

US is probably in the 5%-ish territory.

But what we have made clear is the IV pricing is -- you have to deal with it.

And in terms of how we perform, we have to find ways to offset that within the business, which is why when healthcare reform was passed, we didn't come out and make a big deal about, oh, here is a big adjustment to what you should be thinking about GSK.

I think we have to recognize that negative price pressure is likely to be the order of the day for a while, and therefore we need to be figuring out ways to deal with it.

I'm not going to get into the Phase III designs of the drugs, for all sorts of good reasons.

I think today we are simply announcing that we have made the decision to move them forward.

The detail of those designs, as you might expect, continue to be finalized in terms of exactly what we do, and we will talk about those as we get there.

So that probably knocks three or four of the questions.

There are two more.

What were the other two?

One was positive surprises before the pipeline delivers.

And the other one was if there are any GSK products that are particularly exposed to CMS and European government reimbursement audits?

What do you mean by reimbursement audits?

Things like national coverage assessment -- we've seen a situation with Provenge in the United States.

Germany is looking at end marketed products starting in 2011 to actually change reimbursement.

No, we don't see any particular exposures on that kind of thing, so no.

In terms of positive surprises, first of all, I don't really -- I don't view them as surprises, but I think we are going to deliver sustainable, strong growth in those group of diversified companies.

So I think that is very positive.

I do think one of the things I would ask you to start to think about is as the balance of this business evolves, this is as much about can we keep consumer going at 6 and 7, as it is having one new big drug pop out of pharma.

The language subtly changes.

Absolutely pharma remains an upside option, but actually what makes or breaks this Company is does consumer stay at 6 and 7.

Does vaccine stay in the teens?

Does the emerging market stay in the teens?

Those are going to be the big underpinnings of performance.

Then there is going to be the upside option of if the Syncria data is great, boom; if darapladib is great, double boom.

Right?

I mean you've got some real opportunities there.

I think that is the way I would ask you to think about the Company going forward.

I think increasing that, I know it is a bit frustrating from a model perspective, but increasingly we are not going to be a company where you can necessarily be looking for single molecular catalysts, because that is -- if you look at the strategy, the strategy is we expect to bring portfolios of products forward, and we expect to do that within a portfolio of businesses.

So kind of by definition we are going to be a little less the big catalyst.

Thanks for the question.

Andrew?

I've got paper now, so you could ask a 14 parter if you want.

No, it is just two -- I'm easy.

Andrew Baum, Morgan Stanley.

A couple of questions.

Could you just talk us through the decision to settle not just Avandia, but also Paxil and [Setra]?

I am sure that partly is timing, but partly there seems to be a change of strategic intent?

And obviously Dan Troy came onboard recently, and (inaudible) had the pleasure of working with BP.

But could you just outline why you made the decision and how it impacts your business, both from reputational, but also your balance sheets and what it facilitates you doing?

Obviously, I am thinking about leverage and whether leverage may be applied.

So that is one question.

My second question is next-generation flu you highlighted have had some issues.

You are running an [app control], if I remember properly, it wasn't just an immunogenicity trial.

Could you just provide a little bit more clarity?

And how you're going to resolve this, are you going to continue to allocate capital to that?

So in terms of the legal continuum, there is really -- from when I took over and then when I hired Dan, I have always had the view that some of these things we could try -- we should try and move forward.

Some of this stuff has been around for 10 years.

Not all, but some.

So for a while we have been of the view that we ought to try and get resolution of these cases.

Now remember there have been other things which have come up, and of course, they offer the opportunity.

One of the things which -- you all, I am sure recognize that when you look at any kind of legal exposure, you could have a real range of potential outcomes.

You can win or you can lose very badly or you can end up somewhere in the middle.

So what you have to do is really assess from a strictly kind of investor perspective, you really got to assess where do you think the reasonable outcome would be, given a portfolio of possible outcomes that could occur; particularly when you think about the US environment, where jury-based trials aren't the easiest environments for big companies to get complicated messages understood or necessarily supported.

But that is the context in which you work.

Both Dan and I have the strong view that we could get to eventually some kind of settlement on these sorts of cases, and we have been working that way.

Now as you have seen, and I know it is frustrating to you, and I wish we could do it a different way, we just can't -- as you have seen there was an acceleration in legal provisioning over the last couple of quarters into what then became this final kind of big, big kind of provision that you saw.

That really reflected the beginnings of our successes to start to get visibility on an end game.

What we decided to do, and I suppose was a strategic decision, we said, look, if we can do it in one class of -- okay, let's do it, let's go everywhere.

Let's really try and move this as an overhang away from the Company.

So really that was the strategy.

It ramped up over the last 12 months.

And then it really -- I suppose by chance as much as anything else, a whole series of different issues all started to move towards finality in the last three months, which is why we have got clarity in this quarter about what it would really take to get these big things resolved.

And as a consequence we've got the vast majority of what has been overhanging the Company, not necessarily in terms of volume, because we have lots of cases, but in terms of potential financial liability to the Company, the vast majority we dealt with.

Now we still have the Colorado sales and marketing investigation.

We have very clear that one is still out there and we are working through how to deal with that.

But excluding that, all of the big ones that we are aware of that we were really concerned about, we have really brought in to the endgame through this process.

Julian and I were looking at it the other day, I think if you look at all of the legal provisioning the Company has made over the last -- how many --?

4 1/2 years.

4 1/2 years.

About two-thirds of it all is associated with these cases.

So the majority -- this portfolio has been what has driven two-thirds of our whole legal agenda for the Company.

So our view was if we can find what we think is a reasonable, and of course, with the numbers we are talking about, you have to take a very deep breath before you conclude it is reasonable.

But if you can conclude that these are reasonable balance points to get these things resolved, then we take away from the Company a very major overhang or cloud, which of course, influences the degrees of freedom we feel we have for allocation of capital and other things.

Because if you always sat there thinking we might have an unquantifiable big number which we are going to have to resolve at some moment, you are always reticent.

I am not saying it has stopped us doing anything in the last couple of years, but you could imagine a scenario where it might.

You can imagine a scenario where that becomes sufficiently concerning to inhibit our freedom for maneuver.

And we want to take that off.

And we felt, to be honest, that this is the right moment, and we have the right -- we got to a place where we feel this was the right balance for the investors.

In terms of flu, next-generation, we are still analyzing the (inaudible).

So the trial -- so the work we have been doing on flu next-generation is a trivalent flu.

It is -- so the trial -- we are not happy that we've got the right product, but there are some -- but it is not a failed trial in the sense of it, I think, is going to give us the information we need to get the product right.

So there is no doubt at all that the prototype vaccine that we put into this trial is not going to see the light of day.

But there is -- I think we see what we need to do to get the next version to the market.

So it is a -- I describe this as, yes, it is a failure, but not of the program, more of the prototype.

And the trial itself looks like it has given us some quite important information to be able to get the next one tuned correctly.

And we will talk about that I would have thought probably at the year-end.

I would anticipate by February we will have clarity to tell you what that looks like; so a bit of a setback, but not end of the program by any stretch.

Alexandra Hauber, JPMorgan.

Obviously quite impressive moving five products into Phase III.

The question is, how come that is five all of the time?

Did you go to your development team and say, look, I'm going to give my two year review and I need to deliver something on -- deliver more product of value?

Or did you have a recent sort of assessment of what is in the early pipeline, or is it just the serendipity of R&D?

Basically what I would like to hear -- ideally (multiple speakers) what I ideally would like to hear that you're saying that early R&D has now reached a stage where we could see these products becoming more regularly rather than --.

So I think the short -- so I'm going to tell you something, which you can believe me or not.

We actually looked at whether we should announce seven, and we decided to delay two.

Just because we didn't want to overreach on anything.

So this is absolutely a fair and square -- these assets naturally came at this point.

It so happened to be in this quarter.

Can we deliver five every quarter?

Absolutely not.

Nobody is promising we can do five every quarter.

Can we deliver -- are we more confident now than we have been for a long time that we can deliver a sustainable flow of assets year on year?

Yes, I think we are.

I think you will see as we go through the balance of this year, assuming a couple of things go okay, you will see more go forward into Phase III.

There is no question.

Now a lot of this, of course, isn't directly a consequence of what we started in the [DPE] just two years ago, because obviously it takes much longer for this to work through.

But this is all reflective of the change in behavior in this Company.

So the integrate actually is a direct consequence of hiring Zhi Hong, really directing our HIV DPU and really focusing on how to fund the drug from the previous sales program.

That is no question about that.

Prosensa is all about our commitment to go out and externalize and bring assets in.

[Thusta] is a classic straight from the core of the vaccine organization, targeted how we think we can differentiate from the existing market a product with an adjuvant (inaudible) vaccine.

It is a very interesting program.

Then the two melanomas, that is all about what we did by integrating our full development with our discovery group in oncology and (inaudible) really -- and Perry Nisen who are too senior scientists in that area, really going back in and aggressively driving drugs out of the very early discovery phase.

So they are all a bit different, but I'm not going to say there they are because of one thing we did.

But they are there because of a -- they are all there because of the way we are changing the way R&D works.

You're going to see more of this coming through as we go forward.

So I think it is indicative of an improvement, it is not giving you the exact number.

Right.

I just have to ask a follow-up question, because you have also been very good in getting -- doing more with the same level of resources, and you have shown us some of the tools how you got there, but you are already down from the [32] to two CROs.

So the question is -- the question which we have been asking for years, how much longer can you stay with the relatively flattish kind of R&D budget, or if that is all becoming -- if the early part is all becoming more productive is there much more to go you can do on productivity?

Well, you can do more because you start to make different choices.

So when this all began everybody -- the first -- if you went back 10 years -- I remember being in a room where people said, well, it is impossible to do anything else without another GBP200 million.

There is no oxygen in the R&D budget.

Fast forward six or seven years, people say, okay, we can start to do procurement savings.

You fast forward to now, and people will say, actually, let's make really tough resource allocation decisions.

We really think we can win in -- I don't know -- patent recognition primary discovery.

We think that is a major breakthrough area.

Okay, I am just -- you know what, we just don't think we can win in CNS drug development, so let's make a difficult discovery and close down the whole of CNS drug development.

That generated huge amounts of savings for the Company.

Closing Verona and Harlow, taking out that whole vertical stream of activities.

And that has reflected a different way of thinking about how to save money and how to make choices.

That is what you're going to see in R&D.

You're going to see us be -- this notion of rational allocation of capital is not above grade, it is a really focused culture we are going trying to drive into the business, and I think that is what drives it.

Now, of course at some point there isn't any more to go.

But we are not there yet.

And we are continuing to see further reductions in our pharma R&D.

I showed you that pie chart deliberately, because when you say you're going to have to hold your pharma budget pretty flat, you're right.

But actually we've been dropping our pharma R&D budget significantly and using the reductions to fund all the other areas where we have been growing, like vaccines, like consumer and other.

So I think there is still scope for further efficiency, but it is going to be more around tricky choices or difficult choices.

I think the Company is ready to do that, and we are demonstrating that.

By the way, we will also -- the deep -- at the same Board meeting we talked about the acquisitions, we also reviewed all the DTUs.

So exactly same analysis to say, let's look at all those discovery operations, all of the partnerships with all the external companies, and where do they stand in terms of exceeding expectations, [need to] in trouble off track.

Again, by applying this kind of discipline we quickly can start to go in and turn off the things which aren't working for us.

Again, that isn't a characteristic that you would see in R&D of 10 years ago.

R&D of 10 years ago you would drift on for a decade before somebody stops you.

It is very sorts of shifts that you're starting to see, and that releases a lot of resources.

[Nick Turner], (inaudible).

If you look at the patent of sales development in the respiratory franchise in the US, negative sales development of Advair and Serevent in the second quarter, do you think any component of that is due to the changed FDA guidance on lava use in asthma?

And if so, do you think that is also reflected in the wholesale destocking patterns?

I just wondered whether you might be able to come up -- whether you could -- if that was the case, whether you could foresee negative developments in Advair and Serevent sales through the rest of the year?

Well, I think Serevent and Advair are two very different animals in this context.

So, for sure, I would expect to see continued reduction in Serevent sales, no question at all.

And no question of monotherapy, Lava, whether it is Serevent or Foradil, I think those for asthma clearly you would expect that to go to zero.

And clearly there's not that much use of these drugs in monotherapy in COPD.

So I think for Serevent that is clear, and that is a very marginal financial product for us in any case.

As far as Advair is concerned, I think the wholesale (inaudible) is completely irrelevant.

I think it is just one of those -- it has got nothing to do with this, it is just one of those things that flows through quarter to quarter.

I wouldn't worry about that at all.

It is not related.

There is no question there has been an overhang over this sector.

And actually this quarter has been a very -- it is a very unusual quarter for us, because we have had all these one-offs, many of them short and like Rotarix, things like that.

But we have also had some very important clarifications of big overhangs.

Legal is one example where a lot of stuff that has been hanging over us for a long time is gone.

Advair labeling another.

We have been waiting for 18 months to clarity on what the Advair label would or wouldn't be.

And that is now here.

I think that uncertainty has no doubt contributed to the slowness in this marketplace, not least (inaudible) for example, have been up there with DTC, which is one example, because nobody knows -- nobody knew what the positioning should be or where the FDA was going to come out.

So you've got that overhang for sure.

I think now you've got clarity.

I think this will -- this is an important label change.

It is one that we are working with FDA about how we now promote in line with their label change.

But I think it now a basis on which we can go forward.

I think that is actually good news for the Company.

I would combine that with the other good news during the first half around the setbacks that a lot of the [fugitive] generics have been running into in the Advair field.

If I look at Advair as a total, I think some of the big kind of uncertainties have receded or become clarified, and as we go forward from here.

Michael Leacock, RBS.

You have clearly made great strides in de-risking the business over the last few years.

I just wondered what is left on that de-risking agenda?

That's a good question.

I suppose it is more of the same.

At the end of my letter and the results that you have seen in the last sentence it talked about -- I can't remember what it said, something like more business transformation or something like that.

And the point I'm trying to make there is it is not over.

It is not that we've got some new shoe to drop.

Aha, here is this brand-new idea that we haven't told you about.

It is just this is -- I think we are now in a mode of we really -- for R&D I really feel like we have broken the back of what we needed to do, but now we've got to just grind through this confidently on all fronts.

I am increasingly sure we are there in the US.

That we have started to really see the shape of what we think the US needs to look like in the future and now we've got to push through on it.

We need -- I'm very comfortable with our tight diversified group of businesses.

I'm not going to go running off, buying any consumer companies just because it happens to be in play.

I am going to stay focused on how do we invest behind diversified businesses like consumer, where we've got strong science linkages and expert endorsement woven back into the core business?

But what we need to do is keep finding ways to fuel that, putting more resources in.

Can we do more in consumer R&D, for example.

We do [18] innovations a year.

We launched 18 new product forms a year into the global market into about 500 -- so we have about 500 unique launches in the consumer business.

Can we make it 120 innovations?

Can we make it 1,000?

That is what I would like to see us do, drive down each of these lines, whether it is R&D, consumer, vaccines, emerging markets, and just keep driving that forward and not -- that for me is how to de-risk it.

It is not -- I don't think there is -- maybe there is and the smarter people in the world, they can think of it, but I think we've got a great plan.

We've got to just drive down each of these lines and deliver the end game.

Kevin Wilson, Citi.

Two questions.

When do you think US consumer is going to start growing again, and at what sort of a rate?

And you have got new management there, you've got management change in the whole area.

I know it is not the biggest driver of the business, but you have talked about it a lot in recent quarters, so it would be interesting to get some sense of when that might take up into the positive territory.

Secondly, you also talked a little bit about Emerging Markets, which was last year's theme, now it is in this year's theme, I think.

But if you look at your numbers in the half-year and throughout the H1 (inaudible) in Relenza, I think you are running at something like 15% in Emerging Markets.

Is that a run rate that you think is sustainable?

And on a long-term basis clearly can you give us a breakdown by product, so we can think about that?

So run rates in consumer, run rates in Emerging Markets.

And finally the certainty you have of cash flow, if you like, because you now know you're not going to be, we hope, surprised with some additional legal provisions.

Does that make you more confident that you can find -- do more deals?

We haven't seen many from you of a sizable nature, because the growth rates are there, but you could imagine that an acquisition could drive quite significant change.

Great questions.

So in terms of US consumer, the drag on the US consumer is alli and nicotine smoking cessation.

Sensodyne is going fantastic.

I think there is no question the US consumer market is a pretty dull place at the moment in terms of (inaudible) a lot of down-trading gone on over the last couple of years to owned label.

We have seen an improvement there.

New management in the US under Roger is I think really getting to grips with that business.

There has been a huge amount of change in that business.

I am optimistic about it, but we need to get onto a level playing field with the alli and the nicotine comparables.

In terms of Emerging Markets, actually, there was one vaccine shipment in Emerging Markets, which if it had come three days earlier would have added back 4 percentage points to the growth rate of Emerging Markets.

I have no concerns about Emerging Markets.

We will just pray to the bizarre quarterly reporting world we all live in, where we all get terribly excited strategically because something moved on a Monday instead of a Friday.

And I just don't think we should worry about, and I'm not.

So I think Emerging Markets, I feel very relaxed about.

In terms of cash flow, just a couple -- I want to make a couple of clarifying points, because I don't want anybody to miss.

First of all, Julian made actually -- just because we put it on the chart, the cash hasn't got out of the building yet.

So there will be outflows of cash to settle these things.

And my expectation is as we run through the balance of this year and during next year you'll see that.

So even at the end of this year, if you see a lot of provisions not utilized, it doesn't mean we somehow avoided the payment.

These things take 6 to 18 months to actually go through the final payments.

So don't miss that.

Secondly, on legal again I will reiterate we have discharged the vast bulk of it, but there is still the Colorado case.

I just, again, want to make sure you understand that.

Having said all of that, we continue to look at M&A, obviously, in terms of the bolt-on acquisitions that we have looked at.

We did two during the quarter.

We will have another one to announce very soon.

So we are very active, but we are very active within our disciplined framework.

We are just not going to pay -- I'm not paying 37 times earnings for an Indian company, I am just not.

And I am not -- we are just not going to get drawn into those sorts of things.

There is always another target.

And I would rather wait for that opportunity, and we will deal with it.

We're not going to get drawn into the bidding frenzies.

We are going to walk away from opportunities that go out of our price range, and where we don't think we can drive value for our shareholders.

If that means we get a bit of lumpiness, and we do three or four and then we don't do any, fair enough.

But I would much rather we look our shareholders in the face and say, we have bought smart, we really believe we can deliver value.

I would much rather be standing in front of my Board in 2012 showing a slide like the one I just showed you, than the opposite.

I think that is where we are at.

I don't think we would want to get drawn off that kind of disciplined approach.

Kerry Holford, Credit Suisse.

A couple of questions please.

Firstly, on legal charges, obviously we have seen the big charge this quarter.

I am wondering if you're willing to make any comments on what is an appropriate annual charge to SG&A going forwards?

Historically that has been around the GBP400 million mark.

Is it appropriate for us to assume that is significantly smaller now going forward?

And then secondly, a bigger picture strategic question.

We have talked a bit about the cost savings through R&D and the reinvestments that have been made to date.

What are your views on margin expansion for the near and the longer-term?

I wonder if you're able to give us a bit more guidance on if and when we can expect to start to see the group margin expand as a result of these cost savings coming through?

Maybe -- why don't you comment on the legal forward look.

Many, many quarters ago I told you that I couldn't predict legal charges going forward, and I think the quarters that have followed proved the wisdom of those words.

I really don't think, for reasons that obvious, you can predict legal charges going forward.

I think I'll just reinforce the point Andrew made.

When you look back over the last 4 1/2 years all of legal charge that we've taken, which is very significant, and you then say, well, if I look at the matters within the announcement we made last week of either being resolved or we have agreed in principle to resolve them, they represent two-thirds.

So I think that can help you in your determination, much as it helped me in mine.

But I have to add the caveat, which I started with, you really can't predict how some of these legal charges are f going to pan out.

As Andrew said, there is still -- there is still a Colorado one out there.

So you can't predict them, but I think the history and resolution of them -- I think the real key point for the shareholders and for you is, the fact that we have taken so much of it off the table in terms of resolution does actually put the business in a far better position going forward.

That is the only sort of pointer I can give you here.

As far as the margin is concerned, I am very loath to predict that the margins are going to grow.

So, yes, we can -- so first of all, as you have seen, we are in the business of driving efficiencies in our established markets, to invest in growth, the first piece.

Even absent that, there is no question that we are in a dull economic environment macro.

Call me a pessimist, but I just don't think we are going to see that massively transform in the next three or four years.

And there is no doubt at all we are in a price pressure pharma market environment.

So I just feel like to sit here and say, oh, now we are going to increase margins, I just don't think is credible.

I think there is a -- we clearly are in the business of maintaining our margins in the short run, as we have described.

Obviously, that is what we would love to do.

I just don't think it is right to say we are going to be able to build on this 34%, which is a pretty decent margin anyway.

We're going to build on this 34% -- remember, 34% is a pooled business incorporating a consumer division doing 20% or 19%.

So you've got -- that really is a pretty, I think, healthy margin.

I don't think it would be sensible for us to be predicting we are going to move that forward.

And I wouldn't encourage you to be thinking that way.

Equally I would say we are not in the business of letting this margin erode.

We are going to be disciplined around it.

What might erode the margin is if we saw some acquisitions which were operating at lower than 34%.

Obviously, if we saw a business we feel we could do brilliantly with at 24%, we would buy it.

So we are not going to be a slave to that margin, but we are not going to let it fall apart just through neglect.

And we're not going to promise you that it is going to suddenly, miraculously go up in what I think is going to be a pretty tough pricing world for the next few years.

I don't think I can get any more straight than that, to be honest.

Any more questions?

No.

Well if not, thank you very much.

It is very kind of you of you all to come out today.

And we will see you, I guess, at the year-end in February.

Thanks a lot.

Thank you.