葛蘭素史克 (GSK) 2010 Q3 法說會逐字稿

Thank you very much and thank you all for joining us on this Q3 call at GSK.

I am going to take you through just some headlines on the overall performance of the Company and R&D, and then Julian Heslop, our CFO, will take you through some more detail before we open up for questions.

As you have seen from the press release, sales for the quarter were down 2% and up 4% for the full -- for the year to date.

This translates into a quarterly EPS of 28.2p per share and a dividend of 16p, up 7%.

Now I recognize that it is quite tricky following the underlying performance of GSK, given all of the different moving parts.

I just want to take a couple of minutes to comment on that.

First of all, with regard to general macro factors, such as US healthcare reform and European austerity driven measures such as price cuts and delays in tendering, that had an effect of around GBP140 million on sales growth for the quarter.

So in other words, sales would have been about GBP140 million higher if we hadn't seen the additional European price cuts and the US healthcare reform activity that we saw earlier this year.

If I looked at three very specific Company issues I think that is an important opportunity to really to get to what we see think is the true underlying performance of the Company on a going forward basis.

Firstly, obviously Avandia sales, which are now set to decline very quickly following the US and European regulatory decisions of last month.

Secondly, in this and the next few quarters we are going to face a tough year-on-year comparison to last year's significant pandemic product sales.

And finally, we continue to see, although it is obviously coming to an end, the impact of generic competition to Valtrex in America in this quarter.

So although our group level we therefore show this reported 2% decline, when you adjust for those three effects of Avandia, Valtrex and pandemic year-on-year comparisons, all of which are finite and will start to wash out of the numbers in the next few months and over 2011, you'll see that the underlying sales growth for the quarter was 6% and 5% for year-to-date.

I think we have a real sense that GSK's sales performance is beginning to emerge into daylight after a long period of challenge, both from our portfolio and from the environment.

This underlying growth number is indicative of the progress we're making and the disciplined execution of our strategy to shift investment and resources into key expansion businesses.

For example, our emerging-market business again performed strongly in Q3, with sales up 14%.

Vaccines, too, had a very good quarter, up 19%, very good bounce back in our US business.

Good start in America with our new oncology assets.

And some good performance in terms of the reducing our costs and driving up efficiency of our US business.

In fact, since the first quarter of this year we have increased our sales per representative by 36% through a combination of reduction and reallocation of resources in the US.

We are very focused on improving the productivity of the US business, and I am feeling that this is becoming to come back into a place we would be more happy with than where we have been for the last few years.

Consumer Healthcare continued to perform very well come and ahead of markets in which it operates, growing around 4% to GBP1.26 billion in this quarter.

Within that I am particularly pleased with the performance of both the nutritionals business, which grew 12%, led particularly in India, phenomenal performance of our India Horlicks nutritional business, up over 20% in the quarter.

Led by a relaunch of the Horlicks master brand, we have now launched foods as well as drinks in India.

We now so sell noodles, cookies, biscuits, all sorts of things under the Horlicks master brand.

And we are in the process of extending that distribution lead into a further 20,000 villages across the whole of India.

Horlicks is really a tremendous success story for us, and clearly puts us in a great position in one of the fastest-growing emerging economies.

Back in the UK, over 1 million consumers have now tried our new Lucozade Sport Lite.

That is four times the consumption level of our nearest competitor in the UK marketplace.

And just briefly on the oral care business, Sensodyne for the sixth quarter in a row recorded double-digit sales growth.

Moving to R&D briefly, we continue to see very strong performance in our overall pipeline, in particular respiratory continues to be very encouraging.

We presented positive efficacy data for Relovair at the recent European Respiratory society in September.

And several of the key Phase 3 studies for Relovair are now fully recruited.

We continue to see good progress on the rest of the respiratory pipeline, and I am sure in the not-too-distant future you will hear more about that.

That's important, because those assets will really build towards extending our already very strong leadership position in the respiratory business.

If we look at the quarter, our respiratory portfolio grew 5% to GBP1.75 billion.

We remain the clear market leader, and the growth is coming from a broad portfolio of assets.

Advair up 5%, returning back to growth this quarter.

Flovent, particularly strong performance in the US, up 7%.

Ventolin, now 41 years old as an asset up 15%, and Veramyst up 23%.

The respiratory business remains very strong.

Some movement between brands as we see the impact of change in labeling in the US.

But overall our marketshare and our acquisition of patients appropriate for our class of medication looks very encouraging.

Back to pipeline, momentum very good.

Five assets going into Phase 3 at Q2.

We announced this morning the initiation of the integrase inhibitor Phase 3 programs.

And as I said, I continue to expect an increased degree of visibility of further late stage assets in the coming months.

What I would like to do now is pass over to Julian to take you through a little bit more detail of the numbers.

But I think overall I am very content that this quarter demonstrates a very good step forward in terms of the execution of our strategy.

Julian.

Thanks, Andrew.

As usual, I will focus my comments on the results using constant exchange rates and excluding major restructuring costs.

You have seen that the cost of sales margin for the quarter of 27.5% was almost 2 points higher than last year's figure of 25.6%.

This reflects the impact of lower sales of Valtrex and Avandia, both very higher margin products, and the inclusion during the quarter of one-off charges related to Avandia.

If you exclude these one-off charges, the cost of sales margin was 26.4%, and cumulatively the cost of sales margin is 25.6%.

Overall I continue to expect the cost of sales margin to be around 26% for the full year.

On SG&A, costs excluding legal charges were 9% lower than the previous year, and represented 28% of turnover in the quarter.

In the US and Europe regions these costs declined by 21% and 10%, respectively, compared to the previous year, whilst in emerging markets they increased by 10%.

Cumulatively the SG&A margin, excluding legal charges for the year, was 29.5%.

And I continue to expect these costs to be around 29% of sales for the full year.

R&D costs represented 13.9% of sales in the quarter and were 8% higher than last year.

You may recall from last quarter three's release last year that we benefited from a one-off credit.

And if you exclude this in the comparator, R&D costs were flat.

Year-to-date R&D costs are running at 13.6% of sales.

And I still expect R&D as a percent of sales to be around 14% for the full year.

In the quarter other operating income was GBP95 million and included royalty income of GBP76 million.

Cumulative other operating income for the year was GBP375 million and royalty income within that was GBP222 million.

You will have seen that with the exception of the disposal of our promotion rights to Boniva in the US, we have not made any significant asset disposals in contrast to the previous year.

Consequently, I now expect other operating income for the full year to be around GBP500 million, rather than the GBP800 million to GBP900 million that was my previous expectation.

We remain financially disciplined as a company in both only acquiring assets at a price that provides good returns, but also divesting assets at a price where sales offers greater overall value than retention.

This year has not ultimately offered us the same opportunities compared to last year to divest assets at prices we considered acceptable.

The reduction in other operating income will impact our operating profit margin for the year, which I now expect to be in the range of 32% to 32.5% of sales, excluding legal charges.

The effective tax rate for the quarter was 24.4% and reflects our continued progress in settling historic matters.

And my revised forecast for the effective tax rate for the full year is now around 29%.

Perhaps a word on this.

When we began the year I talked about an expected tax rate of 28%.

Then at Q2 I told you that given the significant legal charges we took in Q2, which had a very low rate of tax relief, and my expectation now is a tax rate for 30.5% for the year.

Then we have had some success in settling historic tax matters, and that has brought that rate down from 30.5% to 29%.

But if you put those one-off factors to one side, that underlying 28% hasn't gone away and is still very good.

So the 29% for the full year is a good estimate for the full year, but the underlying, if you take a one-offs away, is still around 28%.

Earnings per share before major restructuring costs was 28.2p, 6% lower at constant exchange rates.

The reduced sales of Valtrex, pandemic products and Avandia are reflected in these results, as our Avandia related charges of GBP147 million for sales returns, write-offs and other items.

Actual rates EPS was 1% lower than the third quarter last year, and that was the result of a 5% currency benefit reflecting the strength of most currencies, with the exception of the euro compared to sterling.

Restructuring charges were GBP171 million in the quarter.

And net of these we reported total EPS of 25.3p compared to 26.3p last year.

The restructuring program continues to progress well and deliver cost savings to support the business' diversification strategy and overall profitability.

Net cash inflow from operating activities during the first nine months of the year was GBP5.3 billion, some GBP300 million lower than the previous year, despite cumulative cash expenditure in respect of legal settlements totaling GBP1.3 billion over the same period.

In conclusion, it is worth noting that despite these legal payments, the 7% increase in dividends paid to shareholders amounted to GBP2.4 billion, and acquisitions and other investment of nearly GBP400 million, the business was still able to reduce net debt by some GBP600 million to just under GBP9 billion.

With that, I will hand back to Andrew.

Thank you, very much, Julian.

I am happy now to open up to Q&A.

(Operator Instructions).

Andrew Baum, Morgan Stanley.

Three questions please.

First, could you talk about the sizing of your US field force, whether you think it is now the right size, given it is going to be probably another three more years before you have Syncria on the market.

Is there excess capacity which needs to be either taken out or somehow utilized?

Second, perhaps you could comment on the US scripts trends in the pharmaceutical business, which remain underwhelming, let's say, even when you add Advair and Flovent together and you combine [resa] Symbicort, it doesn't paint so pretty a picture.

So whether you could give any color on that.

Then, finally what, if anything, should we read into the outlook for your TD3 diabetes therapy, following the termination of the Lilly macrogenic compound this morning?

I presume you're doing ongoing futility analysis on that agent.

Many thanks.

Okay, thanks, Andrew.

In terms of US salesforce numbers, I think it is really important to look under the surface of what is going on.

So right now we have 5,500 plus or minus people in our US selling organization.

But only about 60% of those headcount are in what you and I would describe as traditional salesforce representative roles -- the first thing I would say.

The rest of them are in specialist or new roles around our account management operations.

So I think it would be a pretty big error to just assume that we've got 5,500 people who are operating in the way that we used to, and therefore need a big primary care asset to keep them busy.

It is not the way the US is structured, and it is really what we have been working on over the last few years to redesign how we operate the US business.

I feel pretty comfortable around that kind of number.

Whether it is exactly the right number, we will have to wait and see.

And we tend to -- that number does tend to bounce up and down a bit according to how we see opportunities, and frankly, see the responsiveness of different assets to different kinds of promotions.

So I am certainly not going to say that number will never change.

I don't think it is massively out of sync with where we believe we ought to be.

As I have said already, only a proportion of what you see as the headline number is actually in the more traditional type role.

I would say that overall number, as I have said already, significantly reduced in the last few months.

We have taken 1,600 heads out in the summer.

That has moved, as I have said already, our sales per head up by about 36% on a very simplistic kind of calculation.

So there has been a lot of change there.

We will see going forward, but I don't think there is any major issue there.

It is also embedded in -- what we have also done is change a lot the way we sell in the US.

So much more account selling; much more direct accountability for individual representatives.

We believe that is the right way to go in the model.

As far as US Rx trends are concerned, actually, you know, I think it is very easy to get the wrong message on the respiratory business.

If you look at our overall respiratory business, our shares are about flat, down fractionally when you combine Advair and Flovent together.

Remember, the Flovent -- the shift, if you will, to steroids is exactly what the FDA are looking for in the asthma marketplace.

So I don't think any of us should be surprised to see that, and that is exactly what the relabeling wanted to see.

It is exactly what FDA wants to see in terms of the change in behavior of the asthma market in the US.

Good news for GSK is we have about 60% marketshare of the monotherapy inhaled steroid marketplace, so obviously we are picking up a lot of share there.

And roughly, roughly the two movements in share are contouring each other -- not completely, we have lost a little bit of share over the last three or four months.

But that is not that surprising, given how strong a market leader Advair is.

By definition when any new entrants comes in somebody has to lose share, and it is going to be the bigger product.

If you look at any analogue of the performance of Advair against now two new entrants into the category, it is extremely positive compared to prior analogues.

If you compare to the performance of Advair in America to the performance of Seretide in Europe, it is very positive.

And if you look at the performance of Advair in terms of its share of patients who are appropriate for Advair, so its share of patients who ought to be going into a product like Advair, over the last six months we have actually improved our position there.

So it was a period where we were losing share of that type of patient.

That stabilized over the last three or four months, and that is a very encouraging sign.

Of course, you're going to see new market entrants with higher growth rates in Advair, because they're coming off a very small base.

So a lot of this, I think, is kind of normal and predictable.

There is one other piece in it which makes things look a little darker than perhaps they really are.

And that is everything is being compared to a very strong early fall or early winter season last year.

If you look at the flu indexes for 2009 versus today, you'll see a dramatically lower level of respiratory disease in the US now.

So there is a general market suppression, which of course, makes the absolute numbers look less positive than you would otherwise see.

But if you look through that, you look at shares, you look at our performance of taking the kind of patient that ought to be going on to Advair, you put this into the context of the relabeling, I think nothing too much to be overly concerned about.

As far as the anti-CD3 program is concerned, obviously we have seen the news this week.

I think this was the third of our major potential competitors in three different classes which have had problems this week.

It has been a busy week for keeping an eye on the competition.

There are some big differences between ourselves and this program, both in trial design and how we think these molecules actually work.

First of all, we think that there is a potential difference in the way our molecule works in terms of downstream immunological effect.

We have a different dosing regime, which we think is very important and relevant.

We have a different primary endpoint.

We don't look at insulin usage.

We do look at C-peptide as a surrogate, all of which were very carefully thought through and agreed with the agency before we started.

And we have placebo-controlled our trial, which we don't think [there] as well.

So there is a tremendous amount of difference here.

I think it would be very premature to read anything across, and we are all systems go on that program.

Okay, thanks.

Thanks, Andrew.

Next question.

Kevin Wilson, Citigroup.

I have two questions, Andrew.

You talked a lot over the last couple of years about simplifying the business, so a couple of questions as part of that.

How many SKUs do you have?

Do you really have 40,000?

And how should we think about you simplifying the business going forward, because I can't believe those 40,000 drive the profit, or whatever the number is?

How should we think about that going forward if you're not going to be disposing of as many bits of businesses as perhaps you would have thought?

So how easy is it going to be to simplify the business if you can't get the buyers for your businesses?

The second question is about US productivity.

If I understood what I thought you said, you say now you're beginning to get to where you wanted to get to with making it more productive.

The question is, why is it taking so long, because you have been working at it for a while?

Okay.

So first things first.

As far as SKUs are concerned, yes, we probably do have 40,000 SKUs.

Remember, we have a vaccine, consumer and pharma business in 150 countries, all of which have more or less different regulatory conditions.

And it is not that surprising you have a lot of SKUs.

Now, is 40,000 too many?

Absolutely, and we have a big program to reduce that number of SKUs.

So, for example, in Stiefel we are taking out a lot of SKUs.

In our European business we are doing the same, and across the whole corporation.

It takes quite a long time, because it has a lot of regulatory complexity associated with how to do this.

It is not about disposal.

It is about actually driving standardization across the business.

And there has been -- next time we meet I can take you through a whole series of very good examples of how that has gone on in areas like Valtrex, the antibiotics and elsewhere, all of which have led to significant improvements.

It is one of the reasons why actually, despite all the price pressure that we absorb and all the loss of ultra-high margin product in the US, our cost of goods remains a pretty decent number, because there is a tremendous amount of work going on in areas like SKU complexity, as well as others, to contra some of the pressure.

Yes, there will be more opportunity for that, and it is very much a kind of ongoing campaign to drive simplification in that area.

It's got nothing to do with disposals.

Disposals really fall into two categories.

Sometimes we have, if you will, tail products which we no longer believe we are the best owners of, and you see that from time to time.

You saw us make disposals like that to Aspen.

I think you'll see us make similar disposals, particularly in the consumer business, going forward over the next few years as we streamline that portfolio.

Then there are other types of assets like equity holdings that we have.

You shouldn't necessarily read across that because we are reducing our expectations for other operating income this year that it is just simply because we don't have tail products to sell.

It is a combination of tail products, businesses and equity holdings.

And we have just taken the view that at this point in time it is not in the best interest of the shareholder to make disposals, which we believe aren't necessarily at the maximum value they could be at.

In terms of productivity in the US, as you know, we have been taking a very clear look at the US business over the last two or three years since Deirdre took over.

I think over the last two or three years we have probably reduced by about half our field force.

I'm going to say roughly half.

I mentioned the latest 1,600.

We've been doing that in a measured way as our portfolio has changed.

I don't think you would have thanked us too much for getting rid of all the sales force before the products went generic.

So we have been working very hard to try and synchronize it with that.

And we have also been working very hard to synchronize it with the change in marketplace.

Deirdre Connelly, who has come in, I think is doing an absolutely fantastic job of a whole series of things -- modernizing our commercial go to market, changing the way our sales force operate and competes.

Really installed in a whole new system of incentives and alignment to make sure our US business operates properly.

I think we have built a state-of-the-art discounting and pricing capability in the last 18 months, which is going to give us a very significant edge as we go into a much more complex pricing environment in America.

And I think we are starting to see some tremendous examples of cost effectiveness and competitiveness of our business.

If I look, for example, at our oncology business unit, which as you have seen, we are launching a number of new products this year and last year.

Tykerb is increasingly beginning to come on stream as it gets established.

Lots of exciting new data coming on that in the next few months.

But we have also now seen a good launch for Votrient, a good launch for [Azera], all doing well, all taking good shares against established products in the marketplace.

And we are spending 25% less on [A&P] in oncology in America today than we were a year ago.

So across the whole business in America, I think Deirdre and the team, are taking very prudent steps at the right moments to drive up productivity without putting at risk short-term sales opportunities any more than is necessary.

We all know the US has been an incredibly challenged business for the last few years, because they have lost probably $5 billion or $6 billion of business through generics and Avandia at more than 90% gross margin.

The fact that they have been able to now start to turn that ship, compete very effectively in a number of new areas, redesign the way they operate, and as a corporation we have been able to absorb all of that pain, I think shows tremendous resilience.

And I am looking forward to seeing which other companies manage to do the same in the next four or five years.

Next question.

Tim Anderson, Sanford Bernstein.

A couple of pipeline questions, one generic question.

On the pipeline, a Benlysta Advisory Committee meeting coming up.

At this point the committee documents are out to committee members, then you guys should have a good idea of what the major issues will be.

Can you comment on what you think the major points of discussion will be with the product and your overall confidence level in a favorable outcome?

The second pipeline question on your integrase inhibitor.

I know you're going to begin Phase 3 trials.

What would be the timeframe for finishing those pivotal studies?

And then the generic question is just on Advair in Europe.

What would be the earliest timeline for generic entry that you think is realistic?

Okay, you are specializing in the speculative difficult to answer questions.

Listen, Benlysta, I am going to do the smart thing here, and I'm going to say we're just too close to the meetings and everything else for me to get into a big speculative mode.

We feel very good about this medicine.

There is a tremendous profile, but ultimately we have to go through the Ad Com where everybody is preparing for that on 16th of November.

And let's see what happens there.

I feel very good about the medicine, but we all know we live in a world where you don't take anything for granted.

So we are taking a very diligent approach to this with HGS.

And that is about as far as I'm going to go on it.

In terms of how well the drug is going to do, that is going to depend once it is launched on patient feedback.

I'm convinced in this particular area that if patients really feel the benefit that we believe exists, that is going to be what drives the performance of the drug.

As far as integrase is concerned, you're right, we announced this morning the start of the Phase 3s.

It is going to be an 18 to 24 month program to get us to filing.

In terms of Advair generics, that is probably the question you should have been asking the folks in Switzerland half an hour ago.

Maybe you did, and maybe they gave you an answer and maybe they didn't.

I hold the view I have held for a very long time, which is that the generation of a substitutable generic, either in America or Europe, is very challenging.

I think the potential for an available substitutable generic in the US is far away.

And it is very hard for me to see how it could happen even in the next three or four years in Europe.

Now can I rule out that there won't be sporadic odd generics popping up in non-substitutable ways in Europe?

I can't rule that out.

Do I think there's going to be a mass substitutable product?

It is very hard to see it.

We have seen across all the European filings this year various generic companies withdraw the files that they have had in there for two or three years.

We have seen all sorts of people stub their toe on what everybody thought was a very easy proposition.

We are seeing even in the innovative end of the respiratory business that companies can stub their toe on things like formulation technologies of these sorts of products.

These are -- it is tremendously difficult.

I remain of the view that we are likely to have Advair as a very major product for GSK for a very long time.

And I am of the view now that it is highly, highly likely that we will have by far and away the substantive proportion of Advair before we start there for all the way through the period where we start launching the successive generations of molecules.

And I think that puts us in a good place.

Thank you.

Thanks a lot, Tim.

Kerry Holford, Credit Suisse.

Just a couple of questions on vaccines, please.

Firstly, on Boostrix and Synflorix, they both looked very strong in the quarter.

Was that just a simple thing of tender timings or was there any -- is that real true growth going forward?

Then secondly on pandemic flu, somewhat surprised to see any revenues in this quarter from that item, given that the seasonal flu vaccine now covers that strain of the virus.

So you shouldn't be really expecting much in the way of pandemic flu revenues in Q4, or indeed Q1, next year, please.

Okay, Kerry, listen, thanks for the questions.

Boostrix is beginning to catch on in terms of being a product with scale and momentum across a whole wide range of markets in the kind of adolescent segment.

There is an evolving interest there, and I would say nothing special, but good.

So I think that one looks very encouraging.

It was a little bit turbocharged by some pertussis outbreaks in three or four states in America.

I think, South Carolina, California, Missouri all had outbreaks.

A little bit there, but actually, if anything, that kind of thing is just going to establish the understanding of the need for the vaccine.

Synflorix is a lot to do in emerging markets, a lot to do with Brazil.

But remember what we have done with Brazil is we have signed a 10 year contract with Brazil on a number of things, inclusive of Synflorix.

So I think the right way to look at Synflorix is think about the Synflorix number in Q3, think about it as probably being a number which more normally might have been spread over Q2 and Q3, and that will probably give you a sense.

So you're going to see repeated volumes on Synflorix.

It is going very well.

We are winning a tremendous proportion of the tenders around the world.

We're pretty excited actually about the way Synflorix is going.

The absolute scale of what you saw in Q3 is probably a bit higher than you would normally expect in a quarter.

It is probably a bit more sensible to think about it as a number over a six-month period.

Pandemic vaccine, all sorts of bits and pieces.

Mostly what you saw in the quarter was Japan.

And I would guide you to say, don't expect very much at all, but there will be bits and pieces.

And some quite interesting governments who talked -- started to talk again about pandemic.

Everybody has got over a little bit what happened last year.

But I wouldn't guide you to say it is going to be very material.

You will see bits and pieces, so don't be surprised if you see bits and pieces pop up, but I wouldn't go further than that.

Okay, thanks.

Thanks a lot, Kerry.

Next question.

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

I've just got a few on the litigation process.

I was just wondering on the cases that you said that you started to -- are continuing to receive in the US, could you just give us an update on how many new cases are being filed since you announced the provision in July?

Second is a question on the legal process.

If you could just remind us if a case has been filed does that indicate that the statute of limitations has already been deemed by the court not to have passed or can those cases still be dismissed due to the expiry of statute of limitations?

I was wondering could you also give us an update on the Colorado litigation.

I didn't see anything new on the release in that.

Thanks.

Okay, as far as the Avandia case is concerned, obviously, a lot has happened in terms of regulatory action in the US over the last -- since the last quarterly update.

There has also been a lot of advertising from litigation -- from plaintiffs' lawyers looking for cases.

What we are told is that there are more cases.

We haven't yet seen -- we haven't had a chance to see all these cases, so we don't know whether they are precluded by the statute of limitations, whether the cases are real or not real.

So what -- I think what we have done today is try to take a prudent approach, which is a signal that we know -- people are telling us that there are more cases.

But we have no intelligent way of actually assessing whether these cases are significant or not in terms of our litigation load.

I think obviously what we will be aiming to do, and I hope we will be able to do, is be able to get through that analysis over the next few months before we get to the year-end.

So it is -- I would say a little bit frustrating for you.

I can assure it is frustrating for us as well, kind of having that sense that there might be more, but we just don't know.

I really can't guide you whether it is going to be a lot or not much at all.

So you just have to bear with us a little bit on that.

We are trying to get to it as quickly as we can.

Then as far as Colorado there is nothing to tell you, no particular events to report.

And we continue to work with the Boston office to try and bring this to a satisfactory settlement, but nothing to report today, I'm afraid.

If I could just ask you, I have one follow-up, just on the Avandia returns provision.

Is that your best estimate for all future returns or you do expect to be booking for [further periods] in Q4 and into next year?

Now, that is our -- so that is our best estimate of everything, including returns, any inventory we have work in progress we have, capital equipment that needs to be written off.

Leaving really the only question is on the litigation side.

Do these cases exist?

Are they significant?

Do they go beyond what we have provided or not?

So the only area I think you need to pay any attention to really at all on that regard is the litigation element.

The rest of it I am confident we have essentially captured in all of these numbers.

Great, thank you.

Thanks.

Michael Leacock, RBS.

I have two questions, if I may.

Firstly, on consumer health and the US business, you have listed (inaudible) them on page 5 of your release, what you say the problems were in consumer health.

I am interested in what you are planning to do to try and get this important part of the business back onto the strong growth track you have indicated you expect in the longer term?

Secondly, I just wondered on the seasonal flu vaccine, how you have seen demand this year compared to previous years.

Has the swine flu epidemic enhanced demand or has it somewhat dampened it down?

Great questions.

US business, so somewhat affected by general market environment.

We feel generally speaking our competitor's performance isn't too bad, but there is a macro trend, and there is a lot of down trading continuing to go on in the US from a higher price product.

So things like alli have got hurt quite a bit.

We have done well actually in smoking sensation cessation.

Although it is down, the launch of the Mini-Lozenges in the US has really done well in terms of share and competitiveness, but the overall category is suppressed a little bit.

The key to going forward in the US is all about innovation.

So we are increasing our investment in our innovation activities.

We are really challenging the organization to step up our brand innovation dimension for the US.

I think there is a lot of interesting stuff coming on the Sensodyne portfolio.

That is going to be a major opportunity for us over the next couple of years with some very key innovations coming.

So I think we've got a lot of opportunity to do better there in the US.

But quite a bit of what we are feeling is more of the kind of environmental economic pressure on the portfolio.

There is quite a bit of that at the higher price points in our portfolio.

If I look at flu, just to give you a sense of that, we have -- I will give you the exact numbers, actually.

We have -- in Q3 2010 we shipped about 25 million doses of seasonal flu vaccine.

That compares to 17.5 million a year ago Q3.

We would also expect to ship more in Q4 than we shipped in last year's Q4.

Then ex-US we would -- we have shipped in Q3 17.5 million versus last year at 16.5 million.

And we would again expect to ship quite a bit more in Q4 this year than we shipped in Q4 last year.

Now two things going on.

There probably is a bit of an increased demand, so I think everybody's sensitivity about flu is higher.

But the other thing is we have been able to get our production schedules accelerated so we were -- particularly for the US -- we were able to get very significant volumes earlier in the season.

One of the keys in the US is to be there early.

It allows you to capture higher price and obviously higher share.

And so, actually, that is looking like it is playing out to be quite a nice story for us this year in both US and non-US.

Andrew, thank you very much.

Thanks, Michael.

Next question.

Gbola Amusa, UBS.

I have a couple of questions.

On Tykerb, first of all, would you give a general comment on your pricing policies outside the US, Europe and Japan?

And to the extent the data in Herceptin, i.e., breast cancer is positive, just broadly how flexible would those pricing policies be?

Then, secondly, there was a bit of deceleration in your emerging markets business environment in pharma in the quarter relative to second quarter.

Clearly that could just be normal quarter-to-quarter fluctuation.

But do you have any view as to whether fourth quarter in terms of obvious factors might be more like the third quarter or more like the second quarter?

Okay, thanks.

A couple of good questions.

Tykerb, we basically, just as we do on most of our products, we employ a tiered pricing approach.

Higher GDP per head markets pay higher prices than lower GDP per head markets.

So we do have a more flexible approach than many of our competitors to pricing.

Across -- and I think there is no exception to that with Tykerb.

It must be fascinating, actually, if you look at India.

We had a tremendous takeoff for Tykerb in India.

We have priced it lower.

It is still a significant price in the Indian context, but we have had a tremendous performance from the Indian business.

And that will continue.

I am a big believer that we need to have a more flexible approach around the world.

In terms of the performance in the emerging markets, it did come off a little bit -- a little bit of price in places like Turkey, so you've got some price impact coming through the system.

A little bit of acquisition washout in terms of contribution, because remember last year we did a lot of acquisitions.

We haven't done so many this year, so it is a bit of acquisition washout in terms of the sales numbers.

I think I still feel very confident around the kind of midteens type of growth rates for the emerging markets.

So I am not unhappy about where we're at.

I think sometimes we might drift slightly below that; some quarters we are going to go about it.

I am pretty comfortable about where we are at.

Thank you.

Florent Cespedes, BNP Paribas.

Thank you for taking my questions.

First of all, regarding the healthcare reforms, could we have an idea of the magnitude of the impact from the healthcare reforms in Europe and in US going forward?

Because you give a number for Q3, but it would be great if we can have an idea for the going forward.

Secondly, on the rest of the world performance, could you tell us why it was so soft in Q3 after the good Q2?

And last, regarding the pipeline, could we have an idea of when we will have an update on [Almarison] and Promacta CLD?

Thank you.

Okay, as far as the last question is concerned, I would expect something sometime next year.

So I don't think you should expect anything much before that in terms certainly [Almarison] or Promacta.

So we will update you as soon as we know.

I will get results for some of the studies, which are ongoing at this point in time.

In terms of the impact of pricing, essentially let me just take you through that a little bit in a granular way.

Hopefully, it will answer your question.

If I look at Europe, as we said before, we normally anticipate something like a 1% to 2% price -- around a 2% price cut a year on average in Europe.

What we are seeing for this year, so our full-year estimate for 2010, is that that 2% is probably running somewhere closer to 3.5% roughly.

It is not a super precise science, but somewhere of that order.

At the moment we would expect that next year it is probably in the 5% to 5.5% range, given what we know and what we expect.

So that gives you some sense for Europe.

For the US in 2010 roughly, roughly the impact has been about $500 million in 2010.

We expect in 2011 the impact to be around $250 million.

Now in 2010 the majority of -- or a very big chunk of that is the industry assessment or the so-called [throma tax], which kicks in for the first time at the beginning of 2011, but was part of the Health Care Reform Act.

So roughly, roughly you see a bit of an uptick in rate of price impact in Europe next year to this year, and actually see a bit of a deceleration of rate of impact in America year-on-year.

Hopefully that -- and your second question?

Regarding the rest of the world performance, which was minus 1% in Q3 versus growth in Q2 -- the rest of the world pharma.

Yes, I don't think there is anything particularly dramatic there.

It is a little bit to do with flu, so nothing very significant.

Okay, thank you.

Seamus Fernandez, Leerink Swann.

Thanks very much.

So we are seeing a lot of accumulation of cash on the balance sheet if we take out the movement on the settlement.

I am just wondering how we should be thinking about cash deployments as the years move forward.

Should we be thinking about acquisitions and partnerships and deals in emerging markets?

Should we be thinking about more acquisition activity, share repurchase?

Again, I just think the possibility that we will see accumulating cash on the balance sheet may not be reflected in the earnings in terms of how you deploy it.

And I just wanted to know how you are thinking about that going forward.

I will make it an overarching set of comments, I am going to ask Julian to comment specifically on how he sees the current cash position and make sure -- I would like Julian just to go into a little bit of detail around where the legal provision is, and what has gone out, what is going to go out, and all that kind of thing.

It is really important for everybody to be on the same page on that.

In terms of a couple of overarching comments, let me just lay out very straightforwardly how we view this.

Number one, obviously, we run the Company.

Whatever cash left goes to -- number one priority, drive a progressive dividend.

You have seen that go up 7% this quarter.

You have seen over the last three years since I had been in charge we have been absolutely relentless to drive up our dividend in a progressive way to our shareholders.

The cash left after the dividend we would prioritize then to go towards value creating M&A, bolt-on acquisitions, not big classic acquisitions, but bolt-on acquisitions which support our strategic direction.

So typically emerging markets, consumer vaccines are going to be the most likely places, and certainly things to try and diversify our risk portfolio.

Those bolt-ons, of course, particularly when you are as strict as we are about making sure we hit our metrics, you can't guarantee you're going to have a flow of bolt-on deals the same year in and year out.

So that will mean over time, and particularly as the Company strengthens, and gets much more into a sustainable growth phase, of course, then there is going to be periods where we have surplus cash.

And then that cash we anticipate going back to shareholders either through share buyback or special dividend.

We fully anticipate retaining a degree of debt on the balance sheet.

We have no intention to pay down that debt.

We think it is good to have a balance in terms of how we run the business and a balance of stress on the balance sheet.

So what we will see is over time years where there will be cash available for share buybacks, because we haven't done as much bolt-on activity as maybe we would have done in previous years, and/or because the business is spinning off a lot more cash.

And obviously a lot of the folks on things like working capital is to spin off more and more cash from the business anyway.

So that is the strategic approach.

I just wonder whether Julian could take you through a little bit of detail of exactly where we are, so we all start on the same page, because it is easy to get a little bit lost in what is going on.

Thanks, Andrew.

We have net debt at the end of September of GBP8.8 billion, which is clear from the release.

Don't forget that we have a legal provision as at 30 September of GBP2.5 billion.

I just simply add on to the GBP8.8 billion to get effectively what I see as a net debt position.

Because, remember, we are making rapid progress in settling litigation, but also in paying it out.

So far this year we have paid out GBP1.3 billion.

We have paid out GBP876 million in three months the last quarter.

So I think it is really sensible to add that GBP2.5 billion on.

So that gives us a starting position of GBP11.3 billion of adjusted net debt.

Then, clearly, as Andrew said, dividends is our priority.

Bolt-on acquisitions, which are both strategic in nature relevant to our Company, but also have to deliver good returns to our shareholders come next.

And we are not about to generate significant reductions in debt over time, so we plan to basically use the rest to the extent it is not used in the correct bolt-on acquisitions to other returns to our shareholders, whatever the appropriate methodologies, we will decide at the time.

So that is how we see it.

We clearly have to operate in the constraints of credit rating.

We have come out publicly and said we believe in an A1/P1 short-term credit rating as a minimum.

Which reads across as a minimum to long-term ratings one notch below where we are today.

We are very comfortable where we are with our credit ratings, but we certainly -- the Board has set that as a minimum, and that gives the A1/P1.

And that gives us flexibility going forward to do bolt-on acquisitions that we need to.

But in essence, we have GBP11.3 billion of debt.

We have very clear priorities to what we intend to do with our future cash flows -- dividends first, value returning bolt-on acquisitions, second, others share returns to shareholders, third.

Great, thanks so much, Julian.

I hope that -- let me just go back into just check Seamus out.

Does that answer your question sufficiently?

I know it a really -- a lot of people are interested in this, and I just want to make sure that we have clarified it for you.

That was very specific.

Thank you.

Okay, thanks so much.

Next question.

Alexandra Hauber, JPMorgan.

I have a question for Julian.

It comes back down to the change in the guidance.

I think, Julian, in the past you have emphasized that disposal gains are part of the ongoing business, and that they are also a tool to protect the margins.

But now you actually sacrifice the margin, because -- sorry, if I misquote Andrew at this point, but because it is not the best time for shareholders.

So I am actually just wondering what this means for going forward.

Does it mean that disposal gains will play a less important factor for your margin going forward, and we should probably should all assume somewhat lower levels, or that actually suggest a GBP500 million level of other operating income as a more meaningful number to work off for future years, because these things are essentially unpredictable?

Or should I actually read this as that 2011 margin is still facing significant headwinds, and therefore it is actually better to preserve disposal gains in 2011?

First of all, I think I've always been pretty clear actually.

When people ask me about margin, I always say we run the business to enhance our earnings per share on an organic basis, and ensure we deliver returns from acquisitions that rapidly deliver and exceed the shareholder cost of capital.

So I have never been beholden to the margin.

I think the best way to explain that is, if you look at our consumer healthcare business, it is roughly 20% margins, well below the group.

Having said that, we have very focused on taking cost out of our core business.

We are very focused on being more efficient as a business, so for a given level of business we make the highest operating profit margin we can.

But I just wanted to caveat it in that context.

In terms of 2010 -- by the way, I have never, ever seen actually other operating income as a means to buffer a margin.

I think other operating income to me is two things.

It is royalty income, which quite frankly I see as very high-quality income, and our aim is to maximize that, clearly as time moves on.

And, secondly, asset sale profits, which really I am very keen on, where the value of divestment is greater than the value of retention.

We have done some, I think, great deals in the past, where it was no doubt in my mind that was the case.

It was more valuable to others, less valuable to us, we sold the assets.

We will obviously give you guidance vis-a-vis 2011 next year.

What I would do, if I look back over the last five years and I average out what LOI has been, and broadly if you strip out the (inaudible), which clearly shouldn't be taken into account, it averages about GBP500 million.

It is purely coincidental this year's GBP500 million is simply result of making the right decision for the shareholder, nothing to do with the margin.

If we found some better assets to sell and we got good value for them, we would sell them.

But our view is that this is what it will be for this year.

I will guide you on next year.

You have seen our history.

I will leave it at that.

But thanks for the question.

Thank you.

Thanks, Alexandra.

Next question.

Justin Smith, MF Global.

Thanks for taking the question.

It is just two questions.

The first one was just on the reason news on rare diseases.

I am just trying to understand the direction.

I know it is kind of biopharma like, but I am just interested in your comments on scalability.

Then the second question, Andrew, is just on Relovair.

I know it is probably very early to talk about this, but I was basically interested in those slightly bearish comments you made on US pricing at the sell-side breakfast a few weeks ago.

I'm just trying to understand if there is a scenario where if the data is good you can price Relovair at a premium to Advair?

Okay, thanks very much for the question.

Rare disease -- so rare disease are really interesting areas.

As we have said, we are targeting about 200, 250 areas.

It might sound like beach number.

There are actually something like 7,000 rare diseases.

And although each rare disease is very rare, I think actually something like 7% of the population have a rare disease, which is pretty staggering.

So it is really an interesting area.

Tremendous amount of opportunity.

We think there are some really very creative ways in which we can re-task historic molecules into this space.

So molecules we have very significant data on we believe can be re-tasked into this opportunity for various reasons.

And we also see some very good partnership opportunities, which we can get into without having to do lots of nuts M&A big, premier type of deals.

We see those drugs being potentially developable in quicker ways with harder endpoints than we see in some other areas.

So those are all the reasons we like it.

I personally -- what I want to do, and I am not sure if I'm picking the right analogy or not, I want to be the Michael Dell to rare diseases.

I want to find a way to bring -- I think there is an opportunity to bring scale and efficiency to this marketplace, bring down the prices in this.

I think it is a great model for the company who does that.

So we are not going in this to try and be a mini me version of companies who are already out there.

We are in it to do it differently, and we think we've got a way of doing it creatively, which is exciting.

I think it motivates our people enormously.

And I am pretty optimistic about it.

As far as Relovair is concerned, my view on US pricing is it is going to get very rational very fast.

US prices -- the days where pricing is essentially set by the company, and then there is some kind of argument over discount between the buyer and the seller, but it is just an argument, whoever shouts loudest wins.

It is going to be replaced by much more of a cost-effectiveness value for money type of debate over the next 5 to 10 years.

I think you'll see things change pretty quickly over that time period, and therefore the pricing of Relovair, I think, will be a direct consequence of the value we can demonstrate from the drug, which is why we are investing so much in the comprehensive program.

You'll hear more about some fairly interesting aspects of that in the next few months.

And actually the price of Relovair will be driven by the profile of Relovair, and it will have very little to do with the existing price of products out there.

That is what everybody is going to have to get used to.

Pricing products vis-a-vis a product that was launched 10 years ago or five years ago isn't going to be the game.

The game is going to be around what value can you prove from your medicine vis-a-vis the economics of your payor.

It is where Europe is going on the leading edge.

It is where the US will go.

My expectation is the US will go quicker than Europe, because the private sector will be much more rapid adopting these techniques and technologies.

And that is why we have been changing everything we do in GSK R&D to deliver much greater evidence and rationale for the value creation of the product.

I think we have time for one last question.

[Brian Bodai], Barclays Capital.

Thanks very much.

I would just like to link into this and ask you about some of the commercial challenges faced by new competitors, the (inaudible) generic respiratory space or the novel respiratory space, particularly with regard to the importance of device.

You have talked about Ventolin, an old product, where clearly having the right device has made a difference for you.

Could you also talk about how much friction there is with regard to physician reception towards new types of therapies?

I guess that goes for your competitors as well as for you.

If you could talk about those things please.

Thank you.

Okay, respiratory medicine and drug development is a heck of a lot more difficult than a lot of people will tell you.

One of my favorite kind of statistics, if you think back to the whole therapeutic area for asthma -- inhaled asthma and COPD drugs, you have essentially got two short-acting bronchodilators that made it and were commercially successful, one of which was from GSK.

You've essentially got two long-acting bronchodilators, which made it commercially, one of which was from GSK.

You've got four inhaled steroids that have made it commercially successful, two of which came from GSK.

And then you've got the anticholinergics, which essentially both came from the same company.

This is an area where despite all the efforts of all the companies over 40 years, you have essentially got three companies who know how to do this, and have demonstrated on a repeated basis they can.

That is molecular design and selection.

That is a critical area.

And a lot of people think they have cracked it, and they haven't, or they haven't necessarily done it.

And we have seen them run into issues.

That is the first part.

The second part is particle size and device development.

The two things are different, but completely related.

Every time you see a device go down in development what almost always has happened is they haven't been able to figure out the particle size, or it is an unpredictable particle size produced by the device, both of which are killers of the program.

And you see that time after time after time with generics and novel products.

Now then you have to focus on how good is the device for the patient and the physician, to your question of friction or stickiness of your device.

It is incredible to me that I'm still seeing companies develop devices which are single capsule devices.

That is a bit like saying to somebody who takes a 200 dose Ventolin inhaler, why don't we go back to a single dose inhaled rotacap that you have to change every time you want to inhale.

People aren't going to go back to that.

It is like asking somebody who is driving around in a Ferrari, would you like to down trade to a Mini.

No thanks.

So the whole device issue is tremendously important.

Now if you look at GSK, A., we have been in all of these generations.

B., we have learned a tremendous amount around things like particle size, where the issues pop up.

It is why we have taken -- I make no apology for the fact that we have done the biggest ever Phase 2 set of programs on our molecules going into our inhaled program, because we try to dismiss all the risks before we go into the big pivotal trials.

That is exactly the product of all the experience we have had.

If you look at our devices which have been developed, we have Diskus out there today.

We are just bringing on stream our high-speed Diskus production lines, which massively improved our productivity on Diskus.

And we are commissioning our Gemini production lines, which will be the device for the next-generation combination products.

If you look at what we are doing there, is we are upgrading our technology.

We are developing our technology and then we are bridging and going into the next generation of devices.

So we are keeping consistency on the things that we know have to be kept consistent.

That is where we have a tremendous competitive advantage.

It doesn't mean nobody is ever going to be in this space.

But I have said from the minute I took over, this is a more difficult space than people predicted it to be, and it is exactly what is happening.

There are no guarantees for anybody, including ourselves.

But quietly and surely we are delivering on what we said we would do, which is to bring a significant portfolio of new molecules and new devices in a portfolio of different deliveries for patients.

I think, and my goal is for us to continue to grow marketshare over the next 10 years in respiratory, not lose it.

With that, I really appreciate all of your time today.

It has been a busy quarter for us.

I think that things are moving well for GSK.

And we look forward to having the opportunity to talk to you directly in the next few weeks.

Thanks so much.

Thank you very much.

Ladies and gentlemen, that concludes your call today.

You may now disconnect.

Thank you for joining.