葛蘭素史克 (GSK) 2011 Q1 法說會逐字稿

My name is Simon.

I am the operator today.

The format of the call will be some opening remarks from Andrew and Simon, and (technical difficulty) --

Thank you very much.

As I laid out in February, we see the performance and the shape of GSK business developing over the next two years.

The Q1 that we have just reported really displays, I think, very clearly that the trajectory that we expected is playing out and that GSK is making good progress against our strategic priorities.

We are seeing continued good underlying sales growth momentum, up 4% in the quarter, and this is being driven by growth from a broad range of the businesses that we have been investing in over the last three years, and particularly the Emerging Markets, Japan, our vaccine business, consumer healthcare, all of which are offsetting the declines you have seen in the US, which, of course, were augmented during this quarter by the various price cuts which are going on.

Just to look in a little bit more detail at one or two of those areas of growth, Emerging Markets in particular, if you look at our Emerging Markets AsiaPac business, which is the business that Abbas Hussain runs, was up 21% in the quarter.

Within that, just to pull out one or two examples, Rotarix up 71%; Augmentin up 25%; Ventolin up 26%; and the Derm range, obviously largely made up of the Stiefel portfolio, up 25%.

Very strong performance across innovative, classic and our branded generic business within the Emerging Markets business area.

The Consumer business continued to perform extremely well, up 7%.

Within that business, Sensodyne up 16%, Lucozade up 5%, Panadol up mid-teens, and the Emerging Markets Consumer business up a full 15%.

So across our businesses, we are continuing to see great responsiveness as we have moved investment resources behind different areas of opportunity.

At a group level, reported sales were down 10%, reflecting the GBP1 billion reduction in sales of pandemic products, Valtrex and Avandia, versus a year ago.

As expected, as we progress during the rest of this year, we expect the impact to decline pretty rapidly as this headwind starts to diminish versus last year's performance.

And we expect our underlying sales growth to translate into sustainable reported growth towards the end of this year and certainly into 2012.

We are also focused on driving operational leverage through out the business.

The costs of our restructuring program are diminishing, while the majority of the benefits are now embedded and flowing through the P&L.

At the same time, during the quarter, effective disposal of non-core assets, for example, our Quest shareholding in Zovirax, has enabled us to release value for the business.

Altogether this is reflected in the improved EPS numbers we report today, both at pre- and post-restructuring levels, up 9% before restructuring and up a full 18% after restructuring charges.

That last number obviously reflecting the deceleration of restructuring charges being taken and the continued delivery of the benefit.

I'm also delighted with R&D delivery and output this quarter.

We received three approvals for new molecular entities -- Benlysta for lupus and Horizont for restless leg syndrome in the US and Trobalt for the adjunctive treatment of epilepsy in Europe.

We are also in discussions with regulators on two new vaccines for meningitis, Nimentrix in Europe and Menhibrix in the US.

Visibility on our late-stage pipeline also continues to grow.

As I set out in February, we are expecting data on 15 Phase 3 assets by the end of 2012.

Remember that is about half of the total Phase 3 portfolio of 30 assets.

And we have received in the first quarter readouts on three of these programs.

In one, otelixizumab for type 1 diabetes, the first trial unfortunately failed to show efficacy.

We continue to weigh further data coming in and continue to assess this molecule over the next few months.

Two of our other trials also reported this time with positive results both in important treatment areas with current limited options, one in Parkinson's disease and the other in sarcoma.

The data for Votrient that we announced today to treat sarcoma is obviously new news today, and we hope to present it fully at ASCO later in the year.

GSK is delivering good progress on a broad set of fronts, and our strategy is clearly working.

We have moved investment resources around the group to drive better, more sustainable growth, and we continue to be able to demonstrate that we are able to do that with a very effective management of our costs.

If you look at the way in which SG&A in particular has been managed during the first quarter, you will see continued reductions in SG&A costs in America and Europe and continued investments behind Consumer and Emerging Markets, exactly the kind of disciplined allocation of resources you would expect.

R&D continues to perform extraordinarily well in terms of output and approval rates, continuing to lead the industry in terms of FDA approvals, while continuing also to demonstrate that we can achieve this with a very tight grip on R&D costs.

This improving operating performance, together with good cash generation, is allowing us to increase returns to shareholders.

We now expect to repurchase shares toward the upper end of the GBP1 billion to GBP2 billion range that we set out in February, and we have increased the dividend for this quarter by 7% to 16p.

With that, I would like to hand over to Simon.

Welcome him once again as the new CFO at GSK.

But now to ask Simon to take you through a little bit more detail on the numbers for the quarter before we open up to questions.

So, over to you, Simon.

Thanks, Andrew.

As we said before, our strategy aims to increase growth, reduce risk and improve our overall long-term financial performance, and we believe our first-quarter results show good progress and delivery of those objectives.

However, there is clearly still more we can do, and I'm certainly very focused on making sure that our financial strategy is tightly aligned with our overall objectives.

Although it is still early days for me, obviously I have a number of areas under review, which I will update you on in due course, but I believe there are still considerable opportunities to strengthen our focus on costs, returns and cash generation, and doing all of this should also allow us greater flexibility to optimize total shareholder returns while being able to continue to invest in our well-established growth strategy where we see attractive opportunities.

Central to that strategy is driving the top line for each of our pharmaceuticals, vaccines and consumer businesses.

Total reported turnover in the quarter was down 10%, but this reflects the expected decline in pandemic Avandia and Valtrex sales, which were just GBP140 million this quarter versus GBP1.1 billion in the first quarter last year.

We continue to expect that the distorting effect of the decline of these products will diminish rapidly during 2011 such that by 2012 reported sales and underlying performance will be much better aligned.

Excluding these items, underlying sales grew around 4% to GBP6.4 billion with Pharma up 3% and Consumer 7%.

Overall Pharma sales reflected declines in the US and European businesses, offset by continued growth strong growth in Emerging Markets and particularly strong growth results in the quarter from Japan.

US and European results were both impacted by the effects of healthcare reform and government austerity measures, which totaled approximately GBP85 million in the quarter, and we continue to expect that the full-year impact will be approximately GBP325 million, plus the US industry levy, which will add approximately GBP80 million to SG&A in the year.

Adjusting for the impact of healthcare reform on the sale of Zovirax, the US business overall was down approximately 1.5%, reflecting primarily the impact of a 5% decline in Advair, which was largely due to wholesale and retail destocking.

Excluding this effect, we estimate Advair was down approximately 1% in the US versus last year's first quarter, and this reflects really the net of volumes decline of around 4% and a net positive benefit from mix and pricing of around 3%.

Seretide in Europe and Emerging Markets also reported declines, again primarily due to price cuts from government measures and also a comparison to a relatively strong performance in the first quarter last year.

Elsewhere, across the business, Advair delivered good performances, particularly in Japan where Advair grew around 30% in the quarter.

Beyond Advair, the overall underlying former results of plus 3% reflected contributions from the broader respiratory franchise, vaccines, derms and new products, which grew over 40% in the quarter and now contribute over 11% of total Pharma sales.

Our Consumer business also made a significant contribution to growth, delivering 7% in the quarter, outpacing its markets with particularly strong growth across all categories in the Emerging Markets region.

We are continuing to implement measures to leverage our cost base, and our restructuring program is well on track to deliver the programs annual savings target of GBP2.2 billion with the annualized run-rate now up to GBP1.9 billion.

Overall we are very much where we thought we would be on costs at this stage of the year, and we are making no changes to the expectations we laid out in February.

Specifically cost of sales increased to 27% versus 26% last year, this primarily reflecting the lower sales of high-margin pandemic products in Avandia and Valtrex, but also some mixed effects, particularly in Emerging Markets that we expect will reverse later on in the year.

SG&A costs were 31%, which excluding legal charges, were approximately 3 points higher than last year.

This change is driven primarily by the reduction in pandemic Avandia and Valtrex sales.

More importantly, in absolute terms, SG&A levels also reflected the continued progress in our cost reduction programs, which in the quarter delivered a reduction in SG&A of around 10%, mainly from our more mature businesses, allowing us to continue to invest behind our target growth markets, absorb the US healthcare reform levy, while still reducing overall costs by a net 6%.

As we said in February, we expected the first portion of the year to be more difficult on cost margin comparisons with last year.

But this should improve over the course of the year as our underlying performance becomes clearer and our restructuring programs continue to deliver.

Given the reduction in sales from the Avandia pandemic and Valtrex businesses, we still expect a 1% decline in overall operating margin for the year before legal and other operating income.

But, as Andrew has highlighted, as our cost reduction programs continue to deliver during the year, they are bringing real leverage into the P&L as shown by the earnings performance in the quarter with EPS up 9% before restructuring charges and 18% after as these cost programs come to their end.

Turning to our cash performance, net debt was down GBP440 million to GBP8.4 billion at the end of the quarter.

The ongoing operations continue to generate significant cash, and net cash from operations was GBP1.4 billion for the quarter.

As expected, this was down from the roughly GBP2 billion reported last year, again primarily reflecting the lower sales of pandemic Avandia and Valtrex products.

We continue to focus on business efficiency, improving our working capital performance, and driving cash conversion over the balance of the year.

We also realized proceeds on asset sales of approximately GBP1.3 billion, giving us total cash inflows of GBP2.7 billion covering legal payments of GBP450 million, dividends of just over GBP800 million, and share repurchases during the quarter of GBP320 million.

We have also continued to invest in the quarter with over GBP500 million spent in capital expenditure and acquisitions for Consumer Healthcare and expanding our presence in China.

The cash generation and business performance during the quarter supported our decision to increase the Q1 dividend by 7% to 16p for the quarter.

We are also now expecting to repurchase shares during the course of the year at the top end of the GBP1 billion to GBP2 billion range we gave you in February.

So, in summary, we are very much on track to deliver on the expectations we set out for the year to continue to drive costs out of the business, improve our operating leverage and convert more of our earnings to cash in order to optimize returns across the Company.

And with that, I will hand back to Andrew.

Great.

Thanks very much, Simon, and now I'm very happy to open up the call to questions.

(Operator Instructions).

Andrew Baum, Morgan Stanley.

Two questions, please.

Firstly in relation to the subpoena on Lovaza, if you have further details from [OIG], could you share whether it relates to off-label marketing, is it mispricing, kickbacks?

The second question is from your comments, Simon, should I assume that your previous guidance of further reductions in working capital for full-year 2011 are still intact despite the first quarter?

And then finally, a third question, there are some very vocal investors in GSK who argue that the business, your Consumer business, benchmarks poorly versus standalone competitors.

When you benchmark your business, where do you think it rates versus its peers, and how much further improvement is there possible to do?

Andrew, thanks for your questions.

We have not got much more to say on the Lovaza subpoena than you have seen in this release.

As we said in the release, they are asking us for document related to the marketing and promotion of the product.

So that is basically as much as we have got that we can share with you today.

I think it would be inappropriate to go into too much more detail just speculatively.

We have only just received it ourselves.

Once we get a clear understanding of what it is that they are interested in, obviously as appropriate we will release that.

But clearly the focus looks to be on marketing and promotion, so we will see going forward on that.

Let me hand it to Simon to comment on working capital, and then I will comment on Consumer.

No change, Andrew, in terms of prioritization of working capital.

I think, though, that comment I would make on the quarter is that there are a number of moves which really come down to investment behind some of the growth objectives we have for the year very much as expected.

And I think as they deliver during the course of the year, you will see that unwind, so no change.

And as far as consumer benchmarking is concerned, we do benchmark very actively against not just other Consumer Healthcare companies, but other more general consumer FMCG-type companies further out from the sector.

Across the board, we benchmark very well in most areas.

So, if you look at our profitability, if you look at our sales growth, if you look at our growth versus market, if you look at our concentration of investment behind key brands, if you look at our exposure to global GDP, all of those things we compare extremely well.

Obviously the reshaping of the business we are making with the disposal of a tail simply serves to even further push that ahead.

The areas where we benchmark less well -- working capital, inventory management, obviously two aspects which we are focused on across-the-board as part of our working capital agenda.

Those are areas where we continue to look very aggressively.

Now if you look -- if you ask what more could we do in the Consumer business, actually I think the answer to that lay in these results.

You see a 7% growth rate for the Consumer business as it stands today.

If we had only been talking today about the business, which will remain after we have disposed of the tail, then the business would have grown 11%.

And, of course, what you're talking about then is a business of essentially 15 strategic brands and a very heavy exposure to Emerging Markets.

And we think that is a very exciting profile of a Consumer business.

The change of a disposal gives us tremendous opportunity to further change the way in which we run our Consumer business.

Remember, this has been synchronized with Emma Walmsley coming in from outside of the Company with a FMCG background from L'Oreal.

You are going to see a very significant change in the way Consumer operates.

It will operate on an, I think, extremely competitive basis with any FMCG firm that you want to compare against once we have gone through this change and we have built on the foundations which are already extremely strong.

Alexandra Hauber, JPMorgan.

Let's start with a question on Advair in the US.

I think Simon said that it was the underlying 1% decline was 4% volume plus 3% price, and basically there was for me the big unknown going into here given at least seen across-the-board companies taking big price increases yet again in the US, but we did not know how much is going to stick this year.

Is that 3% going to be the sort of level we should model in for Advair for the rest of the year, or is it really a substantial proportion of that mix, and if so, is that just higher dose?

And the other question I had on Advair is, why do we see that destocking in the trade, especially given that we had this very early on so that the allergy season reported by other companies?

Moving on to Consumer, the oral healthcare business had 12% growth.

Is that all organic, or is there some initial trade stocking in the countries where you launched Sensodyne Repair, which was specifically mentioned in the press release?

And also, I think we can probably work it out, too.

Can you just roughly tell us what the growth rate is of the OTC portfolio that you are actually planning to dispose?

And the final question is on cost of goods.

You have alluded to mix effects that will result in lower cost of goods later in the quarter.

Can you just give a bit more color on that and on those factors that will result in cost of goods going down later?

Okay.

I will try and do my best to cover all of that.

I'm going to let Simon come back to COGS at the end.

Just very quickly, Sensodyne, not massive amounts of impact from stocking.

The product was launched in the quarter at an extraordinarily good start.

This stuff is flying off the shelves, and I have to say as a user it is the best product we have ever launched in the oral care business.

And this is a new market that is going in.

Is that a typical emerging-market rollout, or is it -- (multiple speakers)

No, Sensodyne Repair, it is actually rolling out into all markets.

So we are currently in UK.

We are just launching into some of the other Europeans.

It will be across about 50 markets in the next 12 months.

So this is a major -- if you remember, this is a new technology we have put into the Sensodyne product, NovaMin Technology.

It is a very, very exciting innovation.

It just started and obviously has also allowed us to premium price.

So for those of you shopping the UK, you might know we retail this around GBP3.98 per pack, obviously very much a high-end product.

As I have said already, the shelves are kind of emptying very quickly.

So Sensodyne going very well.

As I said earlier, the growth of Sensodyne around 15%, 16%.

That is actually the eight quarter in a row of double-digit growth of Sensodyne.

For those of you who are interested, this is super justification for the value of the Consumer business.

When you get it absolutely right on a brand, 2011 is the 50th anniversary of Sensodyne's launch, which just gives you some sense of the cash flow generating capability of these brands if you can keep on investing behind them and really making sure you're innovating and getting the distribution.

So here we are 50 years on.

We are putting new technologies into Sensodyne.

We are selling the pack at GBP3.90.

We have just gone into another 20 cities in China.

Across the world, this is going to be a phenomenal product for the Company going forward.

So Sensodyne, very positive.

As far as Advair is concerned, let me make a comment more generally on pricing.

We have observed some really high price increases being taken by other companies in the US.

I think I have even heard of some companies taking price increases up in the 30% range, which I just find absolutely incredible.

We have been I think very much more measured on that front.

We have taken much lower price increases.

If you look at the positioning of GSK, we are very much at the lower/middle end of the pack in terms of companies' ambition.

We think it is probably not the right moment for people to be taking crazy price increases.

We think ultimately that is going to come back to bite.

So we're not going to be up at that higher end.

We will take price where we think we can justify it, but we are not going to go for it simply as a stopgap for performance gaps that maybe explains it elsewhere.

In terms of Advair specifically, there is a number of things going on within Advair in the US.

Estimated volume, as Simon has already said, we think was down about 4%.

The mix of the highest strength drift, which has been going on for a long time, was about a positive 0.5%.

The size of prescriptions has been growing as well, and that's about a 1.2% positive, and then the rest is price.

So you end up with this negative minus 1% combination of volume offset by mix and strength and price, and that is basically what is going on with Advair in the US.

And I will hand over to Simon to talk about COGS.

Was the question COGS or growth rate of the businesses that were being disposed of?

There were two questions left.

One is the growth rate of the OTC that is being disposed, and COGS, what mix effects will help your COGS ratio later in the year?

Okay.

Well, on the first in terms of overall growth, as you will have seen from the list of products that we published a week or so ago, most of those fall into the OTC category and in line with the breakdown in the release.

I think the overall growth rate of that piece being disposed of is probably around 3% to 4%.

There is a bit of a boost in the quarter from some seasonal effects given the mix of products, but the overall market is growing at similar rates.

So that is probably what you should guide on.

And in terms of the COGS position, I think we're still trying to work through exactly the details of the package that we are going to dispose of.

So I think it is a bit premature to call out, but we would certainly hope that the whole process of separation will allow us to identify a number of opportunities to improve and optimize the margin, and I think we will have to report back to you on that in terms of the detail.

Gbola Amusa, UBS.

Could you comment on a couple of things?

First of all, your underlying growth quarter over quarter, there was a bit of deceleration from the third quarter.

This was mostly just a bit of noise, or is this an impact of reforms austerity?

And how do you think that growth impact will go from here?

Secondly, where is Glaxo in terms of its China rollout in the Consumer business overall?

How many cities were you in in 2009, for example, and how many cities are you in now, and what are the costs associated with that rollout overall?

Okay.

Good question.

So your first question is exactly why we should not get to obsessed about quarters because there is inevitably a lot of noise between quarters.

If we look at Q3 last year, underlying was plus 6, Q4 was plus 2, and Q1 is plus 4.

So we are clearly bouncing around that kind of mid-single-digit type of level that we talked about last year.

What we are not going to guarantee to you is that every quarter is going to look the same.

I'm not going to guarantee it to you on the top line; I'm not going to guarantee it to you on the margins.

Because depending on whether or not tenders come in, depending whether or not particular bits of the business are moving a certain direction in a certain quarter, you are bound to get volatility.

I think that underlying kind of mid-single-digit plus or minus feels like where the pace of the business is.

Now Q1 of this year, of course, we are absorbing a pretty decent chunk of price over last year.

So if you look at 2011 versus 2010, we've got something like an extra GBP300 million pounds of price coming into the business year on year, of which about 2/3 is in Europe, and the rest is the tail, if you will, of healthcare reform.

The bulk of healthcare reform pain obviously got into the business last year, and the tail of it is coming through this year.

But it has been augmented by a very substantial quantum this year.

So I think actually the underlying performance in Q1, stripping out only the Avandia/Valtrex pandemic product headwinds, is pretty credible given the price it has taken, given also it, of course, is absorbed in the disposal of this Zovirax brand and also any other generic intrusions that we have incurred, which include Hycamtin and Rythmol in the US.

So I actually feel like that is pretty reasonable.

Pricing going forward, I do think we are kind of through a big bolus of US government-driven healthcare, government-driven price pressure.

That is clearly moving more into the tail as you run through this year.

Europe at the moment you would expect to have a lower incremental year-on-year price impact in 2012 versus 2011, but obviously that forecast is only as good as the next European country's macro economic crisis.

And there is clearly a very strong linkage between price pressure and what's going on inside these countries.

Now in terms of rollout of Consumer products, just to give you an idea, we now -- we launched Sensodyne in China I'm going to say 18 months ago.

We are now in 120 cities in China.

We have now also rolled out across all regions in India.

We are in 170,000 retail outlets in India, and we are supporting the brand rollout as we have done across all of the Sensodyne history through dental detailing, which in India alone we are calling on 12,000 dentists.

So it gives you a sense there just in that snapshot that a) the rollout is there, first of all, but just the scale of the presence of the Company and its consumer strength, particularly in India, is just phenomenal.

And our ability to build on the bedrock of the Horlicks business, which, by the way, again grew 14% in India this quarter, that our ability to build on that bedrock of consumer distribution presence with a product like Sensodyne is clearly in play as we speak.

Thanks for the questions.

Just really quickly, is it, therefore, more a function of India the growth acceleration in your Consumer business, or is it more China coming online?

Actually, it is really interesting.

It is across the board.

All business is doing fine, but everything outside of Europe and America are doing fantastic.

So Middle East was terrific.

The Middle East business was terrific.

The Chinese business was strong.

The Indian business was strong.

The Japanese business was strong.

It is a very, very strong performance.

So if I give you just a couple of numbers, Latina -- make sure I give you exactly the right numbers -- Latina grew 18%, mostly driven by Panadol and the rollout of Sensodyne Rapid Relief.

The Middle East grew 26%.

A lot of that was Sensodyne.

Japan was up 12%.

Africa was up 17% driven by Lucozade.

China and India both delivered double-digit growth with their priority brands up over 20%.

Overall the ex-Europe, ex-America business grew 15%.

Now you know that is exactly the business we are trying to shape is a strong brand business in America and Europe where we can deliver really good growth rates, augmented by a phenomenal exposure to the fast-growing markets across the world in Emerging Markets.

And the very fact that I can talk to you about Africa, Latina, Middle East, China, India and Japan, there are not many other CEOs who can talk to you about healthcare, Consumer Healthcare products in that way.

People can talk you about Europe or international or America.

We have got a great platform in all of these places.

And that is what we're really trying to shape and focus through the disposal of the tail and in the process release some very good value, we think, for shareholders.

Tim Anderson, Sanford Bernstein.

I have one operational question and two R&D questions.

You report underlying sales growth of 4% in Q1 when excluding certain products from the comparison.

And I'm wondering what the underlying operating income growth or operating margins would be on the same basis, excluding those same products?

And then on R&D, are your current returns on investment above your cost of capital?

I know you have laid out aspirational targets for future returns on your late stage pipeline, but I'm wondering what it looks like today at the present point in time across the entire R&D organization, not just that late stage pipeline?

And the last question on R&D, Andrew, back in late 2010, I asked you a question when you were out here in California about what two late-stage pipeline compounds excited you the most.

You cited the MAGE-3 compound and darapladib.

And if you had to pick two today that excited you the most out of the 12 that you talked about, would those still be the two?

Okay.

Thanks for the very big trap you just dug for me.

So, in terms of the underlying numbers, let me ask Simon to quickly answer that one, and then I will come back to you on the two R&D questions.

Yes, I think the difficulty is in focusing on one quarter in particular.

As I said in my remarks, we have seen considerable distortion in the overall margin because we're rolling off in this quarter alone GBP1 billion of pandemic Avandia and Valtrex sales.

I think over the year, particularly getting into the second half of the year, we will see those margins begin to true-up to the guidance that we gave you at the beginning of the year, and we feel very much on track with the cost reductions that go into that.

So the underlying performance I think I kind of take the measures that we have given you for the full year as the marker.

Thanks, Simon.

As far as R&D is concerned, the last time we did a very full internal rate of return analysis for our overall R&D business was coming up for 18 months ago, I guess, maybe two years ago.

We intend to update that formally for full-year results next year, so February 2012.

So, first of all, you should put that date in your diary for a kind of proper full re-analysis.

Having said that, when we looked at this data a couple of years ago, we think that our overall rate of return on our R&D operations is around 10%, which is higher in vaccines than it is in Pharma but around 10%.

And that clearly exceeds our cost of capital.

So, at this point in time and particularly recognizing that since that analysis was done we have cut costs in R&D and we have increased output, my expectation is that that statement is still true.

We have not done the analysis for a couple of years.

We will do it toward the end of this year and publish it February.

So February is going to be quite an interesting time from an R&D perspective because we will have an update on the rate of return analysis, which obviously will have taken into account the various changes in the cost base.

Remember last year we took out all the neuroscience investment across the organization about GBP250 million of costs coming out prior to the end of 2012.

You have seen a good flow of progress.

We continued to be the leader in the industry for FDA approvals over the last three or four years.

So you will see all of that.

What we are also doing in the last quarter this year is it's coming up to our three years review cycle for our discovery operations.

So the discovery performance units, the 36 or so discovery teams in the Company, are going through their review as well in the fourth quarter, and that will be a very interesting period because we will be able to share with you where in the early phase have we made great progress and we are carrying on, where are we refocusing and where are we stopping at the same time as we will be able to talk to you about what's happening with the rate of return.

So I think that will be a very interesting capsule of information for you to really get a clearer view of exactly what is going on in R&D, particularly in the discovery field, and then in the background, you are going to have all of this news coming through on the Phase 3 development pipeline to give you a sense of what is happening on the late stage of the pipeline.

So I think over the next 18 months you are going to get a lot of light shown on the R&D operations, probably more than you have ever seen from any other Company about how we are making decisions, where we are investing, transparently showing you where we are pulling back, where we are advancing.

I think it is going to be an interesting period from an R&D perspective.

Now in terms of your question that CEOs should not answer about which is they really are excited about in the pipeline, I continue to believe MAGE-3 is super exciting.

Of course, it is very high risk.

We are looking to do something very unusual, but we are far down the program.

Yes, MAGE-3 remains one of the things I am most excited about.

Darapladib, yes; absolutely.

I have been so pleased with the speed with which those trials enrolled and the efficiency with which that entire program has carried on.

So yes, darapladib.

If you will indulge me for a couple of others, I would say that the BRAF and MEK programs look very exciting within the oncology area, and the one that we should all be excited about, although I know is not necessarily going to make a lot of money for anybody, is we may only be six or nine months away from having the world's first vaccine for malaria.

And I think as a corporation which is trying to do more than just make money, that is one we should all feel pretty excited about as well.

So we have a lot going on in this pipeline.

We have got some very big exciting ones.

But nothing is over until we finish the finishing line.

We have got to get all these programs to the finish and see what happens.

And, as we saw in Q1, not everything goes perfectly.

And so we saw with otelixizumab another product which would have been fantastically exciting.

First trial is a disappointment.

We have to decide whether or not we go forward or not with the program, but it just is a solitary reminder that not all R&D news is going to be good.

Naresh Chouhan, Liberum Capital.

A couple of questions for me, please.

Firstly, on R&D would I be wrong to assume that if roughly 60% of your R&D spend is in Phase 3, then once these current batch of 15 assets near completion of their Phase 3 program, then we should see a market reduction in R&D spend, or the kind of post-marketing studies that may happen once all these products have come to market, that we may then end up -- actually R&D may end up not coming down as much as we may think?

And then secondly, on the OTC divestments, you told us that excluding the products we divested, the Consumer segment grew at 11%, which implies a 30% decline in the products that we divested.

Could you just help me with this?

Is this a clean number?

Because this way, by the end of the year, we will have just GBP350 million of sales rather than the GBP500 million we had last year, which we just put down a model for 3 times rather than 4 times.

It leaves about a GBP1 billion difference between what the market currently is expecting in terms of divestment prices and what you might actually get.

So what I'm asking for is just some help on the trajectory of the sales, if we can give an idea as to what the buyback potential might be next year?

No, in terms of that second question, the year-on-year adverse comparison is all to do with alli.

Because last year you were at the peak of the European numbers.

That has come down, significantly, in terms of where we are in terms of run-rate going forward, it looks like a very good, solid stable portfolio of business.

So I would not have any anxiety.

This is not going to suddenly become GBP300 million in 12 months, and I would not worry about that at all.

It is simply an artifact of the prior period comparator of alli, and it's an alli-only issue rather than anything else.

So I think work on the numbers that we have published in terms of what the turnover of that business is in terms of your models, and then I guess the multiple would just be a function of how many people bid on it, and so far we have had a lot of interest.

So we will see how this runs through the rest of the year.

In terms of your R&D question, about 60% of the R&D spend is own Phase 2b, Phase 3 and postapproval regulatory trials.

As the pipeline progresses through, you would absolutely anticipate to spend less associated with individual product unless you pick up very, very substantial postmarketing approvals, of which there are more, let's be honest, than there were.

But, for example, if you look at the current pipeline, a very substantial amount of cost is absorbed by Tykerb in the various adjuvant and new adjuvant trials.

And, as they come to completion over the next couple or three years, that in itself is going to lead to potential freeing up of costs.

Now what then happens to the R&D budget is going to be very simple.

It all depends on the success of R&D overall.

So if we continue to deliver good high quality output, then we are going to continue to invest in R&D.

If we don't, then clearly we are going to ask ourselves some very fundamental questions about how much we want to spend on R&D.

And the scale of spend will be a function of the opportunities that come through from the discovery organization, and obviously we have been through our discovery performance units, through all of our external research partnerships, the 54 discovery engines on the outside of the Company.

We are building up what we hope is a very productive discovery flow to backfill what we are promoting from Phase 3 into the market.

And it is interesting, last year I think we had six products to be promoted out of the Phase 3 pipeline into the market, and we had 10 new entries.

So so far our flow rate, if you will, of new opportunities is very, very good.

So if that continues, you would expect R&D and absolute level to carry on more or less like it is.

Now if there were a situation where our flow rate of discovery opportunities began to dry up, we are in a much better position today than we were five years ago to be able to flex the R&D budget downwards because we have moved much more of our research away, our research costs, away from fixed infrastructure to flexible, and we do much more externally versus internally.

So by having more of the research done outside, all less of the costs associated with buildings and more of the costs associated with late stage, that number is much more flexible and can be much more responsive to a drop-off in R&D throughput.

So although that is not the primary objective, if it turned out that our throughput from discovery began to dry up, you would clearly see us be able to pull down our R&D spend.

Now clearly plan A is to make sure that we keep this big pipeline of advanced products going forward.

We get a substantial amount promoted into the marketplace.

That drives forward the Pharma aspect of the business complementing vaccines in Consumer, and we replenish it.

And that's really what we are trying to do, and we are going to see in the next two years whether we can pull this off.

Because we have got 30 assets in there right now, 15 of which we are going to know the answer on before the end of 2012.

We are going to show you again what our rate of return looks like, which, as I have alluded to, I suspect should be encouraging.

I think we are going to see just whether this whole model is working or not.

Seamus Fernandez, Leerink Swann.

So, Andrew, maybe you can just update us on your thoughts with regard to price pressures as we think about Japan heading into the 2012, and if there have been any indications from the government that austerity measures may be coming into play next year.

And then, also, maybe you did mention potential countries we could see incremental austerity measures in Europe.

Which countries are you focused on most right now in terms of just being prepared for potential changes?

And then lastly, in terms of pricing freedom in the US, obviously some of the competitors taking dramatic price increases.

It begs the question of pricing freedom in the United States.

So just your thoughts on perhaps just the [IPAP] situation and then also recent legislative proposals that we are seeing from the White House?

Thanks so much.

So let me try and cover the areas.

Japan, nothing so far, but I think we would all be -- I think it would be naive to believe there is not a possibility that something may come up as the Japanese government come to wrestle with the various macroeconomic issues that they now have to deal with.

As you know, the new pricing regime which was implemented last year is a very positive one for innovation and encouragement of innovation, and GSK does particularly well within that.

I think we had twice as many products in the preferred pricing status as the next biggest company, something like 68 different products were in that box, and that left us with the lowest exposure to price reductions in Japan and the best prospects for the future in terms of pricing.

Now let's see what happens.

I think it is just a bit early to call.

Nothing so far.

In terms of Europe, places to watch.

You might be surprised to hear this.

We should keep an eye on the UK because the PPRS is clearly coming to an end.

The PPRS has been the price system for over 50 years.

There is clearly a commitment from the government and a commitment from the industry to negotiate a new system not likely to become implemented until 2013 or 2014.

But nonetheless, that's a very major European market with a new pricing system coming into discussion.

So I would be remiss not to at least highlight the UK as one that we are focused on.

Of course, to be honest, I guess we follow the same markets that you follow in terms of those which have the biggest risk of debt default, and that is where our attention often lay.

One of the things we have also been very focused on is recovery of debt, and one of the reasons why you have seen our working capital perform well, particularly during the end of last year and partly in the first quarter of this year, is we have done very well at recovering sovereign debt from a number of European nations for exactly a related reason to the concern for price is obviously that sovereign debt may be more vulnerable going forward than it has been in the past.

So we are very focused on that.

I would say actually practically we can do more about debt recovery than we can around avoiding those Sunday 11 PM phone calls when you get summons in to see the Health Minister and told you're taking a price cut on Monday morning.

Those are not the easiest things to avoid, and they do happen to.

As far as the US is concerned, I don't like IPAP.

I don't think I have meet anybody who does like IPAP, mostly because it is essentially a non-accountable organization to the political system.

And also, it appears to me to have a too narrow a brief, so it is given a job of reducing costs.

But it only focuses on one or two aspects of the cost chain, including drugs, and I think that is really totally the wrong way to approach cost management.

You need to look at the full value chain and recognize that by simply saving costs in the pharmacy budget, if all that leads to is more beds being filled up with chronically ill people, nothing much has been achieved.

So I think that, frankly, needs to be rethought.

I think the scope of it at the very least needs to be rethought, and I know there is a lot cross political divide concern around that.

I do, however, think that companies taking overly aggressive price increases just seems to me completely at odds with the reality of the world we are operating in, whether you're in the US or you are outside of the US.

And I think that ultimately that is not a sustainable position and does potentially create tenable arguments for critics of the industry to try and push policies which will be more detrimental to the industry.

That is why I think at GSK we are trying to follow a very much more reached trained approach where we think we deliver value.

Of course, we want to price fully for it to reward our shareholders, but we are not going to simply go after substantial price increases to fill shortfalls in performance.

I think that is the right approach, and it is the approach that we are deploying.

Kerry Holford, Credit Suisse.

I have some questions, please, first on the regional performance, and then a question specifically on Advair.

So, firstly, on the regions, if we look at the EM former revenues, they looked particularly weak in Q1, down 1% over currency, compare that to a run-rate of around 20% through the course of last year.

The margin was also down.

The margin decrease I'm sure reflects this reinvestment in SG&A, but what is driving that topline weakness for the EM Pharma business?

Yes, that is pandemic vaccine and Relenza.

So if you look at EM alone, this is Abbas' region, excluding Australasia, they were up 23%.

And if you look at Abbas' current region, which is EMAP -- so Emerging Markets plus AsiaPac, Australasia -- that was up 21%.

The number you are looking at is the reported number inclusive of pandemic vaccine and Avandia, which obviously is not there.

You are absolutely right in terms of margin.

That is just a phase-in of SG&A activity in the market.

And then up-phasing of SG&A you spoke of was in the context of the US region, even if we adjust -- if we look at the margin of the US Pharma business, if we adjust for the disposal gains in ROI, still the margin in that region was somewhat higher than it was through the course of last year.

Is that sustainable going forward?

Simon, do you want to answer that?

I mean I think, again, you have got a phasing issue with the mix of products going forward in the EM, and I think we have been pretty clear on the underlying performance.

So I think it's kind of above where you would expect for this quarter, and it will balance out during the balance of the year.

But my advice to you would be I would not get too bogged down in cherry-picking a region or a business in a quarter.

I think better to be guided by the overall mix.

So, as we have said, we are not changing any of our margin guidances for the Company.

For example, in Emerging Markets, we made it very clear that we expect that to be around a 35% trade in margin business.

We have seen that over the last year or so, and nothing changes on any of that.

And it is one of the slightly oddities of the quarterly reporting is we all get very fixated on what are just kind of completely misleading factoids in the system that have no real bearing on the outcome of the year.

Okay, lovely.

And then a quick one on Advair.

You touched on this earlier, but should we expect that destocking effect that we had seen in Q1 to reverse fairly quickly through the course of this year?

I would expect so.

We have seen a bit of it through April, so we will see when we get to the end of April just how much.

But we have detected some of the reversal there.

So let's see, but I would have thought that it would come back.

And I think our view is it was related to wholesaler expectations around price adjustments at the end of the year, which they do that from time to time.

So my expectation is that that will come back.

Whether it will all come back in Q2 or not, we will see, but I certainly would detect some of it already in April.

Michael Leacock, RBS.

I might just ask on Cervarix, which clearly was a stellar performance in Japan, how quickly can you capture those entire five cohorts that, I think, the Japanese government is willing to pay for?

And could you make any comments about the pricing of Cervarix in Japan at least relative to other countries if not on an absolute basis, please?

Yes, so it has gone very well in Japan so far this year.

We have, I think, in the first quarter we shipped something like 900,000 syringes into Japan, a very, very strong performance.

So we vaccinated so far this year, we think, about 1 million people.

They are talking about five cohorts of 600,000 people or girls, so obviously there is a lot still to go.

Pricing is very similar to the European price of around EUR70 a dose, GBP70 a dose, sorry, GBP70 a dose.

Mark Beards, Goldman Sachs.

Thank you for taking my questions.

Two really, one on the sarcoma Votrient data, can you give any more detail on that?

And secondly, you stated, Andrew, that you see Advair as a low growth, long-term opportunity.

Given the lack of willingness to take larger price increases in the US, the volume pressure and generics potentially entering Europe in the next one to two years, how should we see where that growth is going to come from?

So, as far as sarcoma is concerned, I am not going to give you any more details today.

We have adopted an approach at GSK to govern our scientific engagement where unless we are obliged to, for example, because of contractual partnerships with other companies, it is going to be our intent to publish detail of clinical trial results at congresses or in journals.

So I'm going to frustrate you a little bit on that.

There is good reason why we do that, and I think it is the appropriate way to communicate this information.

But that is why we're not giving you any more detail on Votrient today, and it will frustrate you in the future in other areas.

So, for example, on Relovair highly unlikely that we will not publish data as soon as we get it for exactly the same reasons.

In terms of -- sorry, your second question was?

Was where should we see the long-term growth coming from?

Yes, so Advair -- what we will expect to see over the next few months, years is a stabilization in the trends in the US.

Obviously there has been a shift downwards in terms of asthma scripts.

We have seen a relatively quite COPD market for a year and a half, and whether you look at our business or the anticholinergic business, it is pretty much true across the board.

So you would expect to see some kind of stabilization and volume growth come back to the US market at some stage.

We clearly expect there to be some level of modest price benefit in the US going forward.

We would expect to see the European volume number -- this is assuming there is not more macroeconomic setback in major countries -- we would expect the European volume to come back to reflect on growth as growth, whereas today it is all being absorbed by price reductions through austerity measures.

And, of course, we have got an ever accelerating and bigger base of business in Japan and elsewhere in the world.

So those are going to be the mixes of growth.

Now the question then is, okay, so are there going to be more out-of-the-box price reductions?

I don't know, but obviously if there were, that would change our expectation negatively.

And is there going to be material genericization?

Now we don't expect that at all in the US, and I think we have been through that many times.

We don't know yet about Europe, although clearly it's more possible in Europe than it is in America.

But even if it is possible in Europe, it's not at all clear to us that it is going to be substitutable at the pharmacy level.

And so, at this point in time, I think it is a reasonable planning assumption for us to expect that we are going to hold onto substantial amount of the marketplace in Europe, that the generic pressure, if it does come, is likely to be more at the margin.

We will see.

Maybe that's not right, but that probably is a safe, although kind of appropriate view for us to take at the moment.

And we think the net of all of that gives us something which is a low growth business going forward, and that is the base on which we're planning today.

Now obviously if one of those assumptions, if there was three years of sustained price cutting going on or if there was a very different change or very different assumption on generics, then clearly I would change that view.

But, as of what we see today, we kind of see it is that package of puts and takes, and that will give us something in the low growth area.

Florent Cespedes, Exane BNP Paribas.

Thank you for taking my question.

First of all, could you update us on the the Benlysta launch in the US?

The second question will be a follow-up on research.

Andrew, could you tell us what are the most meaningful (inaudible) that should be reported this year would be in respiratory, would be in oncology or other areas?

And the last one and the last one on oncology, can we have an update on the discussions you have with the FDA about Benlysta in the US and not only the potential safety trial admitted.

Are you considering enough that the existing program is sufficient to answer the potential FDA questions?

Thank you.

Okay, thanks.

Very early days for Benlysta, but so far very encouraging.

Very anecdotal, but all the noise so far we are hearing is very good.

We've got, I think, better than expected coverage so far in terms of reimbursement.

We are worried that that might be quite a major delayer.

So far, so good on that front, and feedback from physicians is encouraging.

So very early days, encouraging.

I would reiterate what I have said many times before.

I think the real potential of this drug will only become clear six or nine months from now when patients have a chance to be exposed to the drug, had a chance to feel what the drug can do, and then are fed back to the physicians.

And I think it is going to be that feedback cycle which really makes -- will make or break the scale of what this product is going to be.

But so far, so good.

Very happy with the start.

The collaboration with HGS in the field is working very well, and we are obviously making progress with our regulatory dossiers outside of the US, as well as obviously now launching in the US.

As far as more specific timing on the assets, which are coming through to results in the next year, we are not going to be more specific on that.

We have told you we've got 15 assets between January 1 of this year and the end of 2012.

We are not going to get into precise forecasting.

I don't want you all sitting by the phone waiting for us to call you and then getting disappointed if we are a day late.

So we are just going to avoid giving you that level of specificity.

In terms of content, though, obviously there is a lot of very important molecules in there.

So we have got the Relovair program.

We have got albiglutide.

We've got the oncology programs, a variety of vaccines.

So there is a nice variety, exactly a reflection of the breadth of the GSK pipeline coming through, and as you have seen already, those programs are real.

Three have already started to report out, two of which are positive.

So we are off to a good start.

In terms of Relovair, we have nothing new to say really on Relovair.

We remain comfortable with the program we have.

Obviously we have been working with FDA on the safety studies for Advair.

The FDA are well aware of the trials we are doing for Relovair, and we will see as we go through the next year or so whether or not there is anything else required on that either pre- or post-approval, but I have got absolutely no news to give you today.

Clearly we are very focused on listening to what FDA has to say and making sure that we are putting together a file which we believe has a very strong probability of approval, and as of today, I feel very good about that.

And I think when you look at the progress we are making on the Relovair program and also the full initiation of the dual combination program of the 444 and the LAMA, I think the GSK respiratory advance pipeline looks very exciting and very comprehensive.

I think we have time for one last question.

Mark Purcell, Barclays Capital.

It is actually [Brian Bordeaux], one of Mark's colleagues.

Just a follow-up question on respiratory, please, and also one on perhaps gross margin ambitions.

I was wondering if you could give us any insights into what is driving FDA's seemingly very high degree of caution by imposing these new outcome study requirements on Advair and possibly Relovair?

Given that we have seen this new requirement recently and we have also seen an adverse label change for the class, over and above recommendations from an external advisory committee, how generalizable FDA's extreme level of conservatism is to maybe non-LABA respiratory drugs in your view perhaps?

And then secondly, just on the gross margin, I was wondering, I know you have only given financial guidance for 2011, but you have talked about business prospects beyond that, and I was just wondering what your ambitions are for the gross margin ex-royalties?

Whether you hope to get that flat going forward beyond 2011 or whether it should decline as your business mix changes?

I think on that one I would simply reiterate what we said at February, which is, as we come out of 2011, we would expect to be able to deliver leverage on our operating margin going forward.

Obviously that is going to be a composite of gross margin and all the other cost lines which happened inside the business.

We are not going to get more specific than that today.

In terms of your question on Advair and the safety studies, actually the suggestion to do safety studies was actually a recommendation of the advisory board.

FDA has been for 15 years extremely focused on LABA safety.

You will remember that this had its origin in fenoterol, a product which was around in the 80s, and that is really where this all began.

Then it moved on to the long-acting beta agonists, salmeterol and formoterol, and essentially I think what we got here is the combination of those anxieties having now gone through ad wars, all the data being analyzed, labels have been changed, trials have been determined, and we are obviously all going to go forward to deliver those trials for the FDA.

I think the encouraging thing is we continue to develop next-generation, hopefully better products, and we are working closely with FDA to make sure we do those in a way which meet their expectations.

But clearly this is an area where people do have anxieties, and they do have a relatively high threshold for satisfaction, and therefore, we need to be very focused in making sure we are delivering programs to the highest standard to meet those expectations, and that is what we are obviously committed to do.

With that, everybody, thank you very much, indeed, for your attention today.

It is much appreciated.

I hope very much you have got what you needed from GSK today, and I would just like to reiterate I think the progress the group has made over the last several years has been extremely robust.

I think you're beginning now to see the pieces really start to fall into place in terms of the sales performance and what the shape of the group will be in the future.

Thank you very much.

Thank you, Andrew and Simon.

Thank you, ladies and gentlemen.

That concludes your call for today.

You may now disconnect.

Thank you very much.