葛蘭素史克 (GSK) 2011 Q2 法說會逐字稿

Okay.

Good afternoon, everybody.

I will let you all grab a seat.

I think we will make a start.

Thanks very much for joining us for the Q2 results of GSK today.

I'm sure you have all got the press release, and there is a book of the various slides that we are going to present just in a few minutes.

I would just like to make a couple of introductory comments before I kick off properly.

First of all, just to introduce to you, we have got some of my colleagues from the executive management team of GSK here in the room, and maybe they could stand up as I introduce them.

There is Abbas Hussain, who runs our Emerging Markets pharmaceutical business; Deirdre Connelly, who runs our US pharmaceutical business; David Redfern, who is Chief Strategy Officer for the Company also looks after Stiefel and also the ViiV business; Moncef Slaoui, who is the Chairman of our R&D business and also has taken over responsibility for our Global Vaccines business; and, of course, I've got Simon Dingemans here at the front with me, and Phil Thomson, who is our head of Global Communications and IR.

So they will all be here.

If you don't hear from them during the session, you will certainly have a chance to chat to them afterwards when we finish.

More than delighted to spend a few minutes with everybody over there with a cup of coffee if you want to just nail some against the wall and really interrogate them, I brought a few extras for you.

So a great opportunity for you to see them.

Good chance for you as well to hear from Simon really for the first time properly as he has spent the last six months really getting to grips with the organization and really challenging a lot of what we could do and what we could achieve, and I think you can see in the press release today the first really substantive evidence of a new financial architecture for the Company, very thoughtful approach to how we should report going forward, trying to clear up and get greater clarity in the way we present our information, how we drive more value out of the business to generate more shareholder returns.

I.e.

you can see Simon's finger prints all over that part of what we're trying to do is exactly why we wanted him to join the group, and I think you will hear from him during the rest of the session some further insights into the way he is looking at the business.

So it's going to be a great chance for you to hear a bit more from him today.

Before we get to that, I will just give you a quick summary of where I think we are in terms of the group strategy and how things are going.

I think this quarter is quite a turning point actually in terms of GSK on a number of dimensions.

First of all, it is really the -- although we still have some headwind for the rest of this year because of Avandia, Valtrex and Pandemic products dropping out, the rate of that headwind really drops now from this point onwards.

So it is a turning point in terms of the pressure of the headwind, which is running against us.

That is the first important thing.

Secondly, I think you will clearly see in the delivery of new products and pipeline into the organization.

I will touch a little bit more on that in a few minutes.

Thirdly, you will see in the shape of what this business is going to be for the next several years in terms of our geographic distribution, in terms of the emphasis we have across the business, different businesses we have whether it be Consumer, Vaccine, Emerging Market or the traditional pharmaceutical businesses.

You can see that shape really crystallize as the restructuring process that we have gone through starts to come toward an end.

And we put in a couple of comments I made today in one or two of the interviews just a statistic, which I think is just quite shocking actually when you think about it.

When we created GlaxoSmithKline in the merger 10 years ago, the total integration synergies of that transaction were GBP1.8 billion.

The total savings from the restructuring program over the last three years and through to the end of 2012 will be GBP2.5 billion.

So to just put into a context the order of magnitude of change and savings, I think that really crystallizes just how much has happened in this group over the last three or four years.

Huge change in the shape.

25,000 people have left the group.

17,000 people have been added to the group.

Most of the leavers in the West in the traditional Pharma business, most of the joiners in the East in the Emerging Markets.

A huge change in our manufacturing footprint, 111 factories down to 65, added back another 12 factories through acquisitions so we are now at 77, but massive changes in the way our manufacturing footprint looks over that period.

R&D headcount down 27% in the last three years, and yet you can see the size of the portfolio that is coming through that pipeline, and I will touch on that a bit more during the presentation.

And you see a business, which is much more balanced in terms of its exposure to specific risks.

What you also see is a business which is phenomenally disciplined.

So we are focused on ensuring that we allocate all of our investment resources to get the best possible return.

We are focused on managing our expense base aggressively.

You will see and you will hear more from Simon on how we believe we can drive greater financial focus in the organization to, if you will, add a further turbocharger to what we can do organically in the business in terms of value creation.

And you can also see that we are disciplined in not straying off into buying lots of businesses just for the sake of the short-term adrenaline pump that the acquisition gives.

We only deploy M&A at small-scale, and we only deploy even then when we are convinced that the returns are the superior way to deploy the money.

And I think you have seen us resist all temptations to be drawn off that path in the last three and a half years, and I think we have been proven to be right to do that.

It has been the right way to protect the return profile for shareholders, and it has forced the organization to address organically what needed to be addressed to turn the group into what we think can be an extraordinarily competitive organization in the coming period, just as we think many of our competitors are going to go into their worst moments.

So let me start off just by giving you a little bit of a sense of where we are up to.

Just summarizing the growth performance of the business, underlying sales growth, excluding Avandia Pandemic products and Valtrex, Q2 5%.

You can see for the last six quarters now that underlying number has been up 4.5%.

So I think clearly we have got a momentum in our underlying business as I have said already that comparator set of three products, those discontinuing businesses will start to drop away quite quickly as we go through the second half and that we are clearly comforted that we are going to be able to get back to reported sales growth in 2012.

You can see where that growth comes from, and you see the mix of the business as those Consumer and Vaccine businesses have continued to grow faster than the Pharma business.

You can see they become a more and more important contributor of the total, if you will, absolute amounts of growth in the business.

But also you can see that the Pharma business on an underlying basis continues also to grow, and you have seen in this quarter some further improvements, particularly in the US.

So this was just an interesting way of looking at the business.

This is the group, so this is all businesses integrated together, and you can see that 37% now of GSK's business is outside of the traditional North American and Western Europe business areas.

And you can see that that is where all the growth is.

Now we talk an enormous amount about Emerging Markets.

We should not overlook Japan, which continues to be a tremendously exciting marketplace for GSK.

Why?

Because we have got a very substantial new product flow rolling out.

This year we launched Cervarix.

Already this year 840,000 girls have been initiated into the Cervarix vaccination program, so, again, strong second quarter in terms of Cervarix.

We expect to see that flow through the rest of this year.

In the last few weeks, we had Rotarix approved for rotavirus prevention in Japan, again the first Vaccine for that particular disease just as Cervarix was first in class.

And we have also had Lamictal bipolar approved.

This is all part of that program that I stood up here two years ago and talked about 40 potential new drug opportunities in Japan.

We are well through that.

We continue to reload that pipeline.

Japan is a great innovation marketplace, and I think the team have really solved how to get product there quickly and in a very rapid flow rate.

Helped also in Japan by the new pricing regime, which has taken away that historic erosion of being a successful innovator.

It is now you are incented to be an innovator.

You will pay the price when the product eventually goes generic just as in normal Western markets, but for a company like GSK where we have so much innovation opportunity, that is why Japan is such an important area for us, and Philippe Fauchet, who is our new head of that business, has really brought now in addition to this R&D focus an operational discipline, which I'm confident is going to continue to allow us to deliver great sales growth in our Japanese business.

It is not just about geography, though.

It's about the kind of products that we sell.

Again, if we go back to where we started where we had a business which was very heavily exposed to a few specific risks, mostly around pharmaceutical pricing and pharmaceutical intellectual property, what we said at the time was we wanted to diminish our exposure to those risks.

We wanted to move away from the white pill Western market domination that the business had seen and where we perceived there to be all of the risks.

And we have done that in a whole variety of ways, partly geographically.

So opening up the Emerging Markets has been a key part of achieving that, of course.

Having different devices, different technologies, moving into biopharmaceuticals is a key dimension.

All the benefits of pharmaceuticals, but in formulations with higher degrees of protection, greater annuity potential than the white pills.

Moving into areas like dermatology, same thing.

Going into business areas which we believe to have less threat than the traditional white pills.

I will maybe just take a second to update you on Stiefel, the progress of that integration.

It is continuing to be extremely positive.

Just to give you a couple of examples, in the manufacturing arena since we have bought Stiefel, we acquired through the acquisition 4000 SKUs, 4000 different pack variants within the Stiefel business.

Already we have got rid of 12% of them without any liability to sales.

That is important.

Even more important we have simplified 24% of the formulations, so we have gotten rid of one quarter of the formulation complexity, and we have gotten rid of 75% of the packing complexity.

That has allowed us to close four out of the five factories that Stiefel used to run.

That is one of the reasons why we are $50 million ahead of our synergy target on Stiefel and why it was such a very positive transaction for us.

Because what it allowed us to do was to deliver synergies up and down the P&L and open up a significant Emerging Markets business.

You will see in the numbers how strong that business has been during the quarter and, of course, all represented in businesses which are a little more secure than the traditional white pills.

Our Vaccine business, alongside Pharma, has also delivered tremendous new product flow over the last few years, and we are just beginning.

There is no question this Company was not the biggest deliverer of new product innovation during the early 2000s.

That is really where the problem started.

But what you have begun to see in the last couple of years is we have begun to start to ramp up the flow of new products into the marketplace.

We have never promised you that we are going to solve this whole thing with one blockbuster.

What we did tell you we would do is deliver a portfolio of small, medium and large sized products over a sustained period, and that portfolio approach would over time build up a tremendous momentum.

And it is beginning, and we are in the beginnings of that.

You can see in the quarter almost GBP600 million of new Vaccine and Pharma products growing over 50% and a further incremental GBP175 million worth of new Consumer products launched in the last three years primarily led by SensodyneRepair & Protect, which continued to allow Sensodyne to grow very strongly.

So that is what is driving the stronger I think more robust business profile that we need to be able to engage, compete and grow during a period which is not getting any easier on the outside.

The outside world is not going to cut drug companies a break in the next three or five years.

You need to be robust to underpin your delivery of growth and to deliver your shareholder return.

Just to look at Consumer, a little bit more detail, this is for the first half in terms of performance.

The overall Consumer was up 6% for the first half, 4% in Q2, a little bit of stock inventory movement going around.

The 6% is much more indicative of what the underlying performance of that business is, driven by Sensodyne, again up 15%.

Just to remind you all that Sensodyne actually is a 50-year-old brand this year.

It was launched 50 years ago.

You can see the scale of that product and the performance of it.

Panadol, again very much driven both of those by innovation.

Lucozade, fascinating to see how Lucozade is driving our African business.

Very strong performance, particularly in West Africa, and you can see the growth that is being delivered there.

Horlicks continues to be an India story.

One in every two families and every two households in India have Horlicks in their kitchen.

That is a great place to be.

When you're talking about a part of the world where all the dynamism of population growth, where all the focus on healthcare opportunity really is going to move towards, to have that kind of distribution capacity, that kind of presence inside every family across India is a tremendous foundation on which we can then build our Vaccine and pharmaceutical businesses.

Horlicks is a strategic opportunity for us in those markets.

The great news in this quarter is that we continue to see our US business turn the corner and come back toward where we want it to be.

This Company was once dominated by the US business, which was great when there were no challenges in the US marketplace.

But, as the US marketplace has continued to get more and more challenging, to be so exposed no longer became a strength; it became a potential weakness.

We have been able to build a business which surrounds that US organization, if you will, take some of the strain off the US organization, but nonetheless it remains our single most important profit generator in the group, and it is critical that this business grows.

I was delighted to see we are back to growth this quarter, and while I'm sure we will have bumpy quarters over the next few quarters, it is clear that the trend is going in the right direction, particularly as the pits of generics recede, and, of course, as our new products start to get traction in that marketplace.

It is worth bearing in mind that the only thing we are stripping out from those growth rates are Avandia, Valtrex and Pandemic.

We are still carrying GBP35 million a quarter of healthcare levy under the health care reform act.

We are still carrying an incremental further $200 million this year on top of last year's $500 million of price cuts from the American government.

All of that has been absorbed by this business, and it is growing.

And that is where we really want to stay focused.

Now why has it grown?

What have we been doing over this period of time?

What has Deirdre and her team been doing?

These are just a few of the examples.

Huge increase in sales force productivity.

Yes, sales have come down, but we have aggressively managed our cost base at the same time, and we have been able to increase our productivity.

50% of the US sales force has gone in the last three years.

That has allowed us to come out of a very challenging period with a very productive organization ready to start to launch new products.

We are the only company in the US who have replaced the historic incentive scheme, pay for prescription incentive scheme.

A lot of people think that is going to cost us business.

We are convinced it is going to be a competitive advantage.

Because what it is going to lead to is teamworking, it is going to create greater access for us for customers, and we are already seeing that.

In my most recent visit with the US sales force, absolutely top of their mind was this is making a difference for the way we work.

It is getting us in to see customers who would never see us before because they just thought we were here to generate a script.

Now they want to see us because they see us as being part of a solution.

Giving us the access gives us the opportunity to do what we need to do.

We have completely restructured the way we discount in the US.

We are seeing benefits in that from our discount levels, but also in the way that our customers view us, recently ranked as the number one company in terms of our relationship with the large contracting organizations.

We have rediscovered how to launch new products properly.

The performance of Votrient, absolutely great performance, not the first in class, but a nicely differentiated product in terms of tolerability in its primary indication supported by a very focused commercial operation already 15% marketshare, growing very strongly.

And obviously in the first half, we saw great data on sarcoma, which will give us when it is approved further opportunity to grow this.

Discounting, as I have said already, we have changed the way we do it, but we have been able to find significant ways to reduce our costs.

One of the reasons Ventolin is growing so strongly is that we have been able to increase our net price of Ventolin by more effective contracting, contracting where we get a return and cutting back where we don't.

Portfolio optimization, we had a big sprawling portfolio in the US.

We have worked hard.

We have brought Levitra in properly, so instead of it being shared with two other companies, two other sales forces running around getting in the way of each other, GSK now owns completely Levitra commercial operations in the US.

Clarity, focus, a chance to drive more earnings.

Entereg ended up being too small for us.

It was a distraction, so we have given it back to Adolor for a consideration.

Just very dispassionate, very objective portfolio management, and then making sure we get the best value out of every single asset we have in the organization.

Lamictal, you all know Lamictal went off patent three years ago.

You can see it is growing again.

It is growing again because we have stayed focused on this product, and we believe that with the line extensions we had, we gave physicians what they wanted, which was a way to continue to use the brand and not the generics.

All of that said, underlying sales growth 3%.

If you look at the 80% of the US business that we promote, i.e.

those products that we believe have potential, they grew at 8% in the quarter.

So you can see that at the core of that US business, there is a very substantial business which is responsive to promotion, and the growth is very good.

Let's move to R&D because R&D needs to feed markets like the US.

The US remains despite all of its challenges a pro-innovation marketplace, and we need to deliver product to it.

This just simply tells the story at a super high level about what has been achieved under Moncef's leadership in R&D.

And you can see that more or less in absolute terms, we spend the same on R&D today in pounds as we spent back in 2007.

We do a heck of a lot more R&D.

For example, we do all the dermatology R&D that we did not used to do.

We do significantly more Consumer R&D compared to four years ago because we know that is a very high return on investment, very high probability of success, very fast paybacks, and we also do more in Vaccines.

Overall that has all been accommodated by tremendous efficiencies within the pharmaceutical business.

You see now on a whole dimension of fronts, the kind of changes we have made, massive changes to discovery.

So we have reduced the amount we spend in discovery as you just saw as a proportion of the total.

Why?

Because obviously it is the late stage which drives short- to medium-term opportunity for the business.

Also, because by externalizing our discovery operations, we are able to do a lot more for less in terms of exposing ourselves to new ideas and new opportunities.

So right now we have 54 external partners, one of the biggest networks of biotech and academic partnerships.

We have 38 in-house discovery performance units.

Those have been running for up to three years.

The newest one, I think, is about 18-months-old.

The original started back three years ago.

We are in the process of going through our first three-year review cycle.

You remember we talked about the Dragon's Den process they had to get through.

We are now into the kind of Dragon's Den on steroids review process that they are now going into and that everybody I can tell you is taking extremely seriously.

Because these teams know that they have a potential of being shut down, they have the potential of being held in the status quo, and they have the potential of having significant money added to their investment curve depending on what they have been able to achieve.

That is what is going to happen over the next few months.

By the end of the year, you should absolutely expect to see some of these teams closed, some re-commissioned at the same rate, and some re-commissioned at a higher rate.

The key point of all of this is that we are going to relentlessly keep raising the bar to raise the quality and the prospect of our discovery operations.

I think if there is one thing that we have done since I took over as CEO of GSK that you would have to drag me out before you could change it, it would be the way these DPUs operate.

Some of you have had the chance to visit with them, and I think when you walk into those labs and you see all the different disciplines working together in a hothouse environment, not having to book meetings with each other, not having to negotiate for time with each other, but literally moving where the science takes them, I'm convinced we have the weight to rediscover success and discovery, and I think the data we are seeing reassures us of that.

We are focused on seven key therapeutic areas.

Where we come up with drugs and, of course, we do from time to time come up with drugs outside of our seven key therapeutic areas, then what we are going to do is what we have already done.

We will create specialist organizations, business units if you will, starting in discovery and flowing through, which will allow us to stay focused.

It is obvious that a company this big can't be focused on 20 things at the same time from a product portfolio perspective.

And so that is why we created ViiV, it is why we created the rare disease unit, and you should fully anticipate we will do more of that as we go forward.

Sometimes those things will be wholly owned.

Sometimes those things will be in partnership with other companies like ViiV, and sometimes they may ultimately be floated off from the group.

That is a dynamic which we expect, we think it is the right way to manage our assets, and we are opening up optionality for us to get the most out of each of our assets while maintaining a core focus for the business.

And all of that has been achieved with tremendous change.

27% fewer scientists in the last three years, 45% fewer square meters of laboratory space.

You have to do all of that to allow all of this volume of R&D to get done for the same money that we spent four years ago.

This Company has never done more research than it has done today, but it's not spending more money doing it.

This gives you just an update of where we are in terms of the late-stage Advansys program.

We said at the beginning of the year that we would have data on 15 late-stage assets during 2011 and 2012.

These are the 15.

We have already had data on five of them.

All of it has been positive except for otelixizumab.

One of the upsides of it having a setback is we don't have to pronounce the name quite so often.

But even on that one, I think Moncef and I we think that is not over yet.

It may have gone back a couple of years, but we don't think it is over, and we are re-working on what we have to do with that particular drug.

Notwithstanding that setback, four out of the five sets of data we have had so far have been positive, and we continue to be excited about this whole set of assets on this chart.

There is something like 30 more sets of trials to report out in the next 18 months on the programs which are still running or are still on this chart, and it is going to be coming thick and fast.

Now one of the things that is going to drive you a little nuts over this year and next year is we are not rushing out a press release every time we get a piece of information.

We have got so much data coming through, we want to make sure that when we present the information we are really representing to you whether or not we have got a success, a failure or a question mark.

What we don't want to be doing is coming out with one trial saying one thing and one trial another.

Now you might be wondering now why have we said anything about Promacta today.

The reason we had said something about Promacta today, even though we had one trial, it was so positive, it was so positive that we felt it would have been just completely wrong to delay sharing that information with you guys.

There is no question Promacta and hepatitis C by allowing people to use interferon for longer, that is going to be an effective product.

We have got one more trial, confirmatory trial to come.

But the first trial was extraordinarily positive.

Hopefully the second will be the same, but based on the first, we would be very surprised to not see that.

So this is the program.

So this is 15 drugs over the next 18 months.

I did a quick review last week about what is coming behind this portfolio.

Because one of the things I have been very keen on and Moncef has been very focused on trying to achieve is we really want to avoid that history of the 1990s were even a successful drug company succeeded once for two or three years and then had five or six or 10 years with not much else.

The key is not just to have a portfolio like this, but to have a flow of products.

And you might be interested to know that after this portfolio and after the drugs that you can see in the pipeline, we have 25 Phase 3 startup opportunities in the next two and a half years.

Of those 25 Phase 3 opportunities, we think 15 are discrete new drugs or very major new indications.

So right behind this portfolio is the next portfolio, and that is really what we believe is what is required to sustain the business.

Because again what that does in the world we now live in, it diminishes the need for any individual drug to be a blockbuster.

And any business that in today's world of price pressure and access control is relying on one drug to carry them for five or seven years is to be honest delusional.

So that is where we are in terms of pipeline.

Now I also know we get lots of questions about Respiratory, and I thought it might just be worth taking just a couple of slides just to talk about where we are in Respiratory.

Now this just gives you a sense -- I like this slide actually because we get a tick in lots of boxes.

What you can see here is all of the areas in which we are currently working in advanced development.

So this lists -- and to save people their blushes, I have taken other companies names off obviously.

But you can see for GSK we are operating in a whole portfolio of different mechanisms of Respiratory.

Many times people say to me, what are you going to do with Advair?

How does Relovair replaced Advair?

And I have repeatedly, repeatedly said, it is not about Relovair replacing Advair.

It is about the portfolio building on Advair.

Advair is not going to go away.

It is going to have its challenges in different parts of the world, but Advair is going to be a very major product into the future, just like Ventolin has stayed a major product for 40 years, just like Flovent remains a major product.

But on top of Advair, we have the opportunity to significantly broaden our Respiratory offering.

Every mechanism on this chart is in Phase 2B or Phase 3.

These programs are all either in full final development or are moving up to our commit to Phase 3 development.

And you can see that we cover the key known mechanisms, as well as some advanced areas for new mechanisms.

If we look at what GSK Respiratory really is, so what that franchise is that we have built and we are going to defend and grow, you can see that just in these numbers.

Six discovery performance units, so six out of the 38 teams working Respiratory.

And the most important thing on this chart is not the six.

It is that five of the six work in targets and mechanisms for which there is actually nothing out there at the moment.

So the next generations of respiratories beyond the ones I have just shown you were going into completely new target areas, which again signals to you we want to be in this area for a very, very long time on a very substantial scale.

I have talked to you already about the late-stage programs.

Huge clinical trial activity going on.

20,000 patients enrolled as of today.

We expect to enroll another 25,000 patients in the next 12 months, particularly in the comparator studies and also in the various safety studies that are required.

You know the sales numbers.

Between 50 million 75 million patients on the drugs.

We made 125 million Advair devices in 2011.

Just on a side note, on that front we are now in our manufacturing operations.

Over the last five years, we have been able to take Advair from 200,000 devices per manufacturing employee to 1 million devices per manufacturing employee.

Huge increase in productivity of our factories, which has underpinned a sustained reduction in the cost of goods for Advair over the last several years which we expect to continue.

We manufacture globally 0.5 billion inhaled devices.

As you know, each of these come off the spoke production lines, which themselves are extraordinarily expensive to build, and we have been in this position for 40 years.

This is a business that we are determined to stay on top of, and I think oftentimes you see people talk about how -- one company is going to come along with one product and enter this marketplace.

What you see at GSK is we are continuing to move through the generations of discovery and development that we have been through.

Ventolin, then into steroids, then into the combinations, as you can see here into multiple new mechanisms and multiple new combinations.

So this is a continuation of what has been an extremely strong story for us.

But it was worthwhile just to summarize where we are own Respiratory.

So, as a group, we feel very confident about where we stand today.

The bottom line is we are on track.

We are on track with the strategy we set for ourselves, and we are on track with the delivery that we set for ourselves.

We believe that we can get back to reported sales growth in 2012, and we believe that we will be able to begin to drive operational leverage from 2012 onwards.

Now it is important that we recognize that what we are looking to do is get a nice trend going in terms of improving sales, improving leverage.

It is not all going to happen in 2012, but you are clearly seen the turning point, and you can see the direction that we want to go in.

Now what I would like to do now is ask Simon to come up and address for you a few things, mostly for him to lay out for you how he sees the group and the opportunities from a financial perspective, the areas that he has already found to further accelerate value creation for the business.

Everything I have just touched on really talks about the organic substance of the business.

It takes us down to the operating profit line that I have just said we expect to be able to get leverage on.

There is a heckuva lot that goes on after that, and some of the opportunities there Simon has already started to address.

Simon has been in the group for six months.

He has made a phenomenal start, and it is just before he comes up I would just like to say a couple of things.

First thing, it is obvious that he is going to focus on things like the interest rate and cost of funding and those sorts of areas.

And you are going to hear that, and he has done exactly what I would hope on that front.

What you will also hear, I think, is that Simon has come in with a real focus on how to manage our cost base.

A huge amount of the cost base sits now directly underneath Simon, unlike in the previous organization, so that he controls all of our shared services, all of our core business services across the business.

He has a direct ownership of a very substantial part of the cost base, and he has come in and earned great credibility already in the first few months in terms of his focus and ability to look for opportunities there.

So I would like to ask Simon to come up now and give you his sense of where we are at and what he is going to do.

Okay.

Thanks, Andrew.

And before I start, I just wanted to add my particular welcome to all of you as I think for many of you this is the first chance we have had to meet face-to-face, and I'm very much looking forward to getting to know all of you a bit better over the coming months.

We will turn to the quarter in a minute, but before we go there, I wanted to take a few minutes just to really describe for you, as Andrew said, my long-term priorities for the group, and in particular how I'm translating that into a new financial architecture that we are rolling out across the group.

And that is going to drive my overall financial strategy for the group, but it's also going to drive our planning priorities, how we think about allocating capital and in particular how we report going forward so that you can see more clearly and more transparently how we are going to drive the group going forward, how we should be measured and what are the kind of key performance indicators that we are using to monitor the business going forward.

When Andrew and I were talking before I came on board, we could see clearly a number of opportunities to drive the strategy harder and most importantly to drive improved returns from that strategy.

Now having been on board for about six months now, it is quite clear that those opportunities are very real, they are deliverable, but they are only going to be accessible if we take a different approach, and that is really what my financial architecture is about, is making sure that those priorities are clear to the businesses -- (technical difficulty)-- driving operating leverage into the business, delivering improved financial efficiency to the bottom line and improving cash conversion and free cash flow generation.

And together those elements should allow us to deliver sustained superior returns to shareholders over time, and I will come back to the detail of that in a minute.

But let's turn to the quarter, and Andrew has obviously covered a number of the highlights of this, so I will keep this at a relatively high level.

But you will see in the press release today a refocusing of how we are communicating the business performance of the group, simplifying a number of the different measures and categorizations so that we are really focusing on the group's performance -- (technical difficulty) and the drivers behind that in terms of Pharma, Vaccines and Consumer -- (technical difficulty) and then looking at the geography across the group where particularly, say, in Emerging Markets, we see our businesses more and more converging and our performance in those markets very much feeding off each other.

And, as you can see in the press release as well, today we have around 37% of our sales outside the US and Europe, growing at over 15%, and that really illustrates how those businesses are beginning to combine.

So, at the top line, you can see very much the impact of the continuing roll-off of Pandemic, Avandia and Valtrex products, which leave reported sales down 2% in the quarter.

Below that, if you strip out the decline and remember the decline is over GBP470 million of sales in the quarter alone, you can see the underlying performance up 5%, and that reflects a contribution from the Consumer business of 4%, up 5% from the Pharma and Vaccines business.

And then within Pharma and Vaccines, again Pharma up 3%, Vaccines very strong at up 19% on an underlying basis, really reflecting very good progress across the portfolio, but particular contributions from Synflorix and other new launches.

Emerging Markets is a key part of that growth, and Emerging Markets is a key part of the growth of Pharma, Vaccines and Consumer businesses going forward and overall Emerging Markets and Pharma and Vaccines up 20% in the quarter, driven across the portfolio, including good contributions from Respiratory, as well as from the Vaccines business.

Japan, as Andrew described, also a good contributor, less on the Vaccines this particular quarter, but more expected during the balance of the year with good progress also on Respiratory and a number of other new product introductions.

Elsewhere in the world, the US returned to growth, and that 3% growth on an underlying basis that we reported, particularly driven by the recovery of the Respiratory business from the first-quarter levels and I will come back to that in a minute, but also a number of other product introductions across the portfolio, so not just from the Respiratory performance.

Europe also produced a good performance, down 1% in reported underlying sales, but that really reflects a 6% drag from European government price cuts during the quarter.

And, as Andrew highlighted, we continue to see that as an issue for the balance of 2011 -- (technical difficulty) but within the framework that we have already set out for you and we continue to expect that overall austerity cuts in Europe and the US combined will impact sales by around GBP325 million over the balance -- over the whole of 2011.

So if you turn to the product contribution to the top line, our Respiratory franchise is the biggest contributor with strong contributions from Seretide/Advair, from Ventolin and Veramyst.

On the Seretide/Advair front, 2% up over the quarter, and that is really reflecting good progress in the US at 2% in Europe as well at 2%.

But remember underneath the 2% performance in the US, that reflects a mix of volume down 7% and a net benefit of around 3% from pricing and mix.

So we think the underlying performance is probably down about 4%, which really reflects a mix of stocking patterns between the first quarter and the second quarter.

And, as Andrew said, going forward you should really expect the quarterly progression probably to be a little lumpy, but overall we see encouraging progress on that front.

Below the top line, the operating level EPS and free cash flow levels you can see a significant impact from the Pandemic, Avandia and Valtrex rolloff, and that is really driving the margin performance and the declines that you see at each of these levels, although EPS also affected by the loss of the associate income from Quest following the disposal of our stake earlier in the year.

But I think the main message from this performance recorded on the slide is we are where we expected to be.

We are on track with the second-quarter outperformance that we were planning for, and we are on track for the first-half performance that we were planning for.

So overall, as Andrew has highlighted, we are on track in terms of our expectations.

So given the amount of noise, I just thought it was worth highlighting how we see the Pandemic, Avandia and Valtrex products rolling off over the balance of the year.

And you can see already significant reduction H1 to H1, and in H2 2010 GBP558 million of sales from those products.

We don't expect it to go completely to zero, but you can see that very quickly through the balance of 2011 that distraction and that distortion to the numbers should disappear.

And we remain confident that as we move into 2012, we should see underlying sales growth converging with reported sales growth.

At the operating level, the margin again on track with our expectations moved back about 1%, and that really primarily driven by the impact to the rolloff of Pandemic, Avandia and Valtrex products on the COGS line where COGS has increased in the reported numbers about 1%.

That actually benefits from a number of positive inventory writebacks we had in the quarter, so the underlying position is probably around 25%.

And remember the indications we have given you previously are that we expect overall COGS performance over the year to be around 26%.

SG&A really reflecting a mix of issues both in terms of the Pandemic issue, some currency adjustments, but also offset by operational excellence gains and greater efficiencies in the business, leaving it relatively neutral.

And on the R&D expense, we have also seen operational excellence benefits reinvested in the late stage pipeline, leaving us overall flat for the quarter.

So overall on track, and we remain in line with our guidance for margin upturn for the rest of the year.

Over the first half, we have generated around GBP2 billion of free cash flow.

GBP750 million of that has gone to fund legal outflows during the quarter as we have paid out settlements previously provided for.

But probably the biggest factor is GBP300 million swing in working capital, which really stems from the first quarter, and reflects inventory build ahead of the launches of a number of new products in the Vaccines and Consumer businesses and a number of other Emerging Markets sales initiatives that we are expecting to play out over the balance of the year.

But you can imagine this is a big focus for us, not just in terms of the overall amount, but in terms of bringing that back in line and making sure that we are converting that inventory into sales performance going forward.

Overall that leaves net free cash flow for the half at GBP1.2 billion combined with the disposal of profits of around GBP1.3 billion.

We have now paid out a little over GBP2.5 billion in distributions reflecting those inflows in dividends and buybacks.

So we have left the overall debt position unchanged until with a few bolt-on spends and other items we pushed the debt level at the half-year up around GBP400 million.

And so looking back on the half, you can see that we have basically paid out all of our free cash flow and the disposal proceeds, reflecting that capital allocation decision that we highlighted back in February where we are going to balance the opportunities to reinvest in the business with share buybacks and other opportunities to invest and where do we see the best return?

And overall at the moment we continue to see M&A opportunities outside the group as relatively expenses and generating less attractive returns, and we are continuing to actively purchase shares in the market.

We are up to about GBP900 million by the end of the first half, on track to execute at the upper end of the range that we gave you back at the beginning of the year.

So let me go back to the financial architecture.

And, as I said earlier, what this is about is trying to create a simple and straightforward framework so that we can use it to drag the business internally, but more importantly from your point of view that you can measure us, and you can determine our progress from the outside.

And what that is designed to do is to take the sales growth that you can see beginning to appear on an underlying basis and convert it into operating profit and then convert it into earnings and then convert it into cash.

And by doing that, we will hopefully be able to drive for you attractive earnings per share growth going forward and free cash flow that we can ultimately then use to generate returns for shareholders.

So what are the key elements of that multiple?

And you can see here that we have simplified it down to kind of 4 pillars so that we can drive that into the business in a consistent way that it is clear what people are being measured on, and it is clear on what basis people are expecting to report back their returns and their growth going forward.

And the focus on EPS and cash flows really because that is what I see as the foundation for generating superior returns going forward.

Because the combination of them and our ability to then choose where we put our cash having generated the earnings and converted it into cash in the way I have described is what ultimately going to secure the long-term future of the group.

So it's about balances and choices, using a very rigorous capital allocation process based around CFROI metrics that will allow us to be consistent across all the businesses in a way that perhaps we have not been before.

So let's take each of these in turn.

At the sales level, this is about managing the matrix.

We got to balance product and geography.

We have got to decide where to put our resources, and we have got to decide where we are going to generate the best returns.

And in order to do that, one of the things I have done since I came on board is reorganize the finance function to put it much, much closer to the business so that it can work with the businesses down at a country by country, region by region level to help drive the decision-making that is really going to get this matrix right so that we are generating the best returns.

I have stripped away and centralized under the common functions that Andrew described, which I also have under my brief a number of the sort of shared services and sort of common finance functions to give more time to the finance organization to be able to really drive this strategy going forward.

And I have also made a number of new appointments, including a new CFO in the US business and aligning the financial leadership of our R&D and Vaccines business so that we can really drive this matrix as hard as we can and make sure that we are putting real rigor into the decision making and that we are driving the best growth out of the allocation of the resources that we are giving it.

Below that at the operating level, we think about this very much in terms of operating margin and operating profit growth.

In the past we have talked a little bit about the individual lines leading to that.

But the way I think about the cost base of the Company is in three buckets, COGS, SG&A and R&D.

All of them cost, but all of them costs that we can trade off against each other to drive operating margin and drive operating profit going forward.

And you can see that a little bit in the cost base of the Company when you look back over what we have done over the last two or three years.

And Andrew has described for you the amount of change that has gone on.

You can see that, even though the mix looks broadly similar, look at the margin structure, and you can see that in certain areas we have taken the savings and the restructuring benefits that we have created, and we have reinvested them, and in certain areas we have dropped them further to the bottom line.

But overall what we have also been doing during that period is fighting the headwinds of genericization, the loss of Avandia, both of which produce very high margin, strong cash conversion products.

And if we had not dropped some of that benefit to the bottom line, then the operating margin, which was 34% in 2007, would probably have been closer to 20%.

So you can see that we have already put some of this back to the shareholders, but we have also invested a material amount, and we estimate around 40% to 50% of those benefits reinvested over the period, depending on which category you are looking at, to drive the restructuring and reposition the group going forward.

And so when we look at the leverage that sits underneath the headwinds, you can see why we begin -- why we have begun to say that going forward into 2012, as those headwinds dissipate, that the leverage that is already in the system will begin to show through.

But on top of that, we also think that there is a process of being able to scrub down the OE program and generate greater savings out of what we have already done.

Just to pick a couple of examples, I mean the other day I was in around our Spanish respiratory plant, and the line manager was showing me through the Ventolin production line where they have a significant project to reduce the cost of goods of Ventolin, and they estimate that they can take the cost of goods down by 10% or 15%.

But that is only being possible because of the previous phases of the restructuring that they did, which has allowed them to unearth the processes in a simpler way and then take it to the next level.

Same thing going on in the oral care business in Consumer where they have halved the number of tube varieties within the Macleans range within Aquafresh and within Sensodyne.

And across the board, you can see that adds real cost reduction, but it is only made possible by the first phases of the operational excellence program.

And so when you look across the group since I came on board, as Andrew said, I have scrubbed down that program, and we have done two things which have made a number of savings in the overall cost of it.

But we have also identified another GBP300 million of savings that we can generate from that program without any additional cost.

And that has allowed us also to include in the overall total the restructuring of the Consumer business that is going to be necessary when we sell off the tail brands that we have already announced, and that will come within the original targeted cost of GBP4.5 billion.

And so those savings are already playing off in terms of additional benefits to the group.

So this is one area.

And in terms of how we choose to apply that GBP300 million, well, clearly, as with the existing program, some of it will be reinvested, some of it may go to the bottom line.

It will depend where we see the best returns going forward.

So it is likely to be a progress that is going to lead to operational leverage going forward on a relatively gradual basis.

We have said it will begin in 2012, but it will flow into the years beyond that.

On top of those benefits, however, we also see another area of opportunity, and that is really in terms of taking the group's restructured cost base and looking for new opportunities to make savings without incurring significant additional restructuring charges.

So two buckets of opportunity.

And just to give you a sense on this second category, if you just think about the way in which the cost base has been restructured and the way in which the manufacturing operations in particular have been restructured, it has opened up a whole series of areas where we can centralize and standardize some of our common functions, so particularly IT where today I think we have around 4500 software applications in the catalog.

By standardizing the software platforms across the group, which is something we are in the process of doing, we will be able to significantly reduce those which have real and tangible benefits.

Equally in procurement, I have just tired a new procurement head for our indirect businesses, so that is outside manufacturing.

That's a total spend of over GBP1 billion, and I have deliberately gone to a Consumer company to look for someone who is really going to drive that harder and faster and challenge us in a different way from what we have done previously.

So you can see that there is a number of areas where we can add going forward.

But to repeat, I think these are going to take some time to come through.

They will begin in 2012, but they will flow forward from there.

And so in the shorter term, I think we have already identified a number of savings.

But, in particular, over the last few months, I have been focusing on the group's financial efficiency and how we can drive further benefits from that going forward.

And a number of areas which I am focused on, first and foremost, I should reiterate there is no intention to change the group's commitment to its short-term credit ratings.

We see those as very important to how we access the markets, and balancing off our ability to access funding and liquidity relative to returns is obviously a critical component of this strategy, and no change there.

But within that framework what we can do is look at how we fund ourselves and how we manage our cash balances relative to our debt portfolio.

And over the next couple of years, as we have said in the press release, we expect to be able to realize savings so that our effective net interest costs or funding charge will reduce by 200 basis points.

And that is despite the fact that net debt levels are likely to go up over that period, reflecting the reduction in cash balances.

And clearly the reduction in cash balances is going to be an important part of that because currently today you earn very little on your cash balances, but it is also part of refinancing approximately GBP4 billion of debt that comes due over the next 24 months in a different mix in a different funding structure than we have today so that we can take advantage of some of the attractive interest rates around today.

The second area is on tax efficiency.

And, as Andrew highlighted, the shape of the group has changed materially over the last two or three years.

And by aligning our tax affairs more tightly with that changing shape of the group, we think there are a number of opportunities that will allow us to drive the tax rate down by 2 percentage points by 2014.

So in 2014 we are expecting that the tax rate will be 25% compared to the 27% we have indicated we expect for this year.

And then finally, on share count, where returns are attractive we will continue to look to acquire shares and repurchase shares in the market, and that is going to be a relative judgment against other opportunities that we see out there.

But you can see that putting those together, again driving EPS at the core of this model, that those should make a significant contribution.

The last piece is cash flow.

These businesses are very cash generative, but there is a lot more we can do to improve their efficiency, to improve the conversion and ultimately release resources that we can choose to reinvest in the business.

And so just thinking about how that converts, restructuring charges as the [OU] program comes to an end should be reducing, and you have seen some of the impact of that in the first and second quarters.

But by the end of this year, we will have spent the vast majority of the charges that flow into 2012 and 2013 in cash terms but again reduce very rapidly.

So that is going to contribute to overall cash flow.

CapEx, absolutely rigorous process bound into the kind of relative judgments I have described for you elsewhere.

CFROI is a key measure, looking at the overall returns, what is the timeframe, and we will be working hard to try and reduce and save where we think that is appropriate while also protecting the integrity, safety, and security of the business.

So that is a difficult balance to make sure we get right, and we are always going to err on the side of caution.

But we think there are opportunities there as well.

But perhaps the biggest is in working capital.

Now on this one I'm going to highlight a few in the first quarter that we saw an outflow of around GBP300 million.

That is not where we wanted to be clearly, and if you look at our performance relative to many of our peers, then you can see that, while we have made some progress since 2009, we have still got a long way further to go and particularly in relation to inventory.

And so since I came on board, I have restructured the way in which we think about working capital.

It used to be run through a central project, and I pushed it right down into the business.

So consistent with the reorganization of the finance function that I described earlier, I have embedded the working capital responsibilities with the local finance directors.

I have also appointed a new team inside manufacturing led by the finance head for manufacturing that are in the process of driving a really targeted project to go after our top 10 to 15 products in terms of the inventory that we are carrying across the supply chain and looking at it on a real end-to-end basis.

And clearly we will be targeting to make some progress there, which will contribute to cash flow going forward.

So overall, if you step back from it, you can see, put all those four together, you drive earnings-per-share, you drive free cash flow, and then ultimately depending on what you do with that cash flow and how rigorous you are in terms of how you measure it, we can reinvest to deliver returns for shareholders.

So alongside that new model, as you have seen from the press release today, we are making a number of changes to the way in which the group reports.

Now not all of them are in today.

We have tried to give you a clear sense of the direction, and we will come back before the end of the year to give you the metrics, the comparators, re-stated numbers, the adjustments you should make.

So don't worry about that in terms of today, although we can talk about some of them.

But we will give you that measure going forward.

And, in particular, we have already started to simplify the topline disclosure, but at the operating level we are going to move to a core measure of operating profit and EPS.

This is consistent with what most of our peers do.

We believe it is a better measure of underlying performance.

And, as you can see from the way I had to run through the quarter, there is a lot of noise in the numbers.

Now some of that is going to come from the headwinds that we have just been describing and will diminish going forward, but we want to be able to give you the clearest measure we can to track our performance going forward, and we think core earnings is the right way of doing it.

And it's also consistent with our focus on looking at operating margin and operating profit rather than the individual cost lines, particularly as we see those as being able to be played off to drive operating profit going forward.

And then, finally, down at the earnings-per-share level, that will also give us a cleaner measure of that going forward.

Given that we are also now coming to the end of the operational excellence program, we think it is appropriate at the end of this year to end the middle column.

So consistent with that second category of cost savings that I describe for you, future restructuring will be in the business, will have to, therefore, generate returns in a much more transparent way, and will hold us to account in terms of generating the benefits going forward.

But we think there are real savings to go after there, and we will report on those on an ongoing basis.

And then finally, the working capital metrics, which I have just showed you, is something that we are going to be tracking going forward and highlighting to allow you to measure our delivery against those objectives.

So overall the financial architecture we believe is simple, is one that we can apply to the business.

And in terms of the progress going forward, this is not a change that we are going to do in the future.

This is a change that is happening now.

We have already applied this to a revamped and reorganized planning process, which I have put in place since I came on board, and we are just beginning the first cycle under this new framework now, and that will flow into the plans for 2012 and beyond.

And part of that planning process in its new form drives these metrics all the way through the business down to every single country, across the Consumer business, the Vaccines business and the Pharma business.

So that is in place, and that's going to be driving our performance, and that is how we expect to be measured going forward.

And with that, I will hand back to Andrew.

Thanks, Simon.

Great.

Thanks very much.

Okay.

So let's open up now to Q&A please.

Go ahead.

Mark Dainty, Citi.

Just a couple of financial questions actually.

The GBP300 million of savings you have identified for 2012, should we assume all of that falls through to the bottom line or some of it is reinvested?

And just on working capital, if I look at some of your peers in inventory, they have sort of targeted around a 90-day days inventory outstanding.

Is that something that you think is achievable given your business mix, Advair complexities, etc., etc.?

Let me ask Simon to respond to the first, and then I will pick up on inventory if necessary.

I think as I said in the presentation, the GBP300 million and how we will treat that going forward will very much depend on where we see the best returns.

I think, however, you should not expect all of it to drop to the bottom line.

We used a measure of around 40% to 50% in terms of the pre-existing OE benefits.

We will take decisions going forward as those benefits are realized.

And on working capital?

On working capital, remember that our mix of business is quite different from many of the peers at the bottom end of the range.

And, in particular, our Vaccines business has very long lead times, which is always going to mean that where we can get to it we will probably be some way back from then.

Equally we think about the risks quite differently.

You got to trade off what you do on the supply chain versus what you do on the way through in terms of delivering to customers.

So I'm not in a position where we are going to give targets at this point, but I think there is clearly a significant amount that we can move forward from.

There is no question.

As far as inventory is concerned, we absolutely recognize this tremendous scope to bring that down.

We've got to be just -- put into a simple target, particularly a benchmark target from outside with very different business shapes, would be crazy.

I mean if you just look at Vaccines, Vaccines typically has something like a six- to seven-month release time post-manufacture.

So the minute you have a Vaccine business, you automatically have a big working capital number compared to somebody who does not.

Equally you work with biological products, these are processes where you are more likely to have variation because it is a biological process.

Again, you want more inventory to protect yourself from the unexpected biological variation that might come along.

So you are going to see different numbers to the benchmark, but it can come down materially from where we are now.

So I think over the next two or three years you should expect to see us bring that down aggressively.

The last two years we focused very obviously on receivables and payables.

We made good progress on that, and it has been just-in-time in terms of Southern Europe.

So if you look at our exposure to the Southern European states, it is very much down from where it was two years ago.

We have done that, and now we have got a crack inventory.

Graham Parry, Merrill Lynch.

A question on Promacta to start off with.

You said that it was positive data, and you talked about reducing or increasing the ability of patients who take interferon.

Can I clarify, did you actually hit the primary endpoint of a SVR response rate on that trial?

Moncef, do you want to specifically answer that?

Yes.

(inaudible) -- significance that make you feel very confident.

And second question is on [Alto].

You talked about recruitment being complete for that.

I just wondered what your expectations for the first-stage readout would be?

And then the final question was just on the GBP300 million of savings.

I am just wondering if you could give us a bit more color on exactly where they are coming from?

You talked about Stiefel (inaudible) on that as well.

On Alto, as you know, this is an event-driven trial.

So it would be totally inappropriate to predict.

I am going to tell you, I hope it is going to be as late as possible because it means the effect is bigger.

(inaudible) is complete.

On the GBP300 million, I think if you worked on the assumption of the mix being similar to where the existing OE benefits have come from, which is roughly about 50% from COGS and the rest split between SG&A and R&D, that would not be a bad measure.

And is there any color on the division area that is coming from; is that predominantly Pharma?

No, I think it is coming out of all of the areas.

I mean take the Consumer business.

For example, I talked about the restructuring that we are going to have to do in that business following on from the tail-end disposal.

Part of that process is about aligning the manufacturing chain much more to the ongoing business.

So, in Consumer, there will be a number of savings in manufacturing, in distribution, in logistics and in the front end.

So it is across the board, but it is indicative of actually where we think we can unearth more savings across each of the categories we have already been working on.

Luisa Hector, Credit Suisse.

Is there any more color you can give on the tax rate and how you can achieve that 2 percentage point benefit?

Any particular driver or just the mix?

I don't think there is any one particular driver.

It is a mix issue, and it is a geography issue, and it is about aligning our cost base and our profit flows with the changing shape of the group that Andrew described.

And that gives us a number of different opportunities that add up to the 2%.

I think what is also very encouraging on the tax front is we talk about the next three years and the way you have seen.

If you think then beyond that, you then move into an area where things like the UK patent box start to become enacted.

And so there is clearly opportunity for us to continue to put pressure on the tax rate going out into the future and beyond.

Now that is not what drives the first 2 percentage points, but it is a further opportunity which starts to come in.

And I think after very many years of seeing that tax rate as pretty stubbornly stuck, you are starting to see a number of ways in which we can get traction on it, which is over potentially quite a prolonged period.

Mark Beards, Goldman Sachs.

A couple of questions.

One, on the business mix and the pressure you might see on margins because the businesses that are growing regionally are at low margin, a significantly lower margin than, say, the US and Europe.

So how should we think about that?

And then secondly, in your legal disclosures, you talked about settling the standoffs on European Advair litigation.

Can you just talk about how that has maybe changed your view or not on the threats in Europe?

Well, let me take the second, and then maybe, Simon, you talk about the margin.

So we have come to an agreement with Sandoz.

This is on the so-called attachment on the SBC element of the patent.

Because the patent had expired or was dated 2010, but in some countries, mostly in Southern Europe, there were supplemental extensions.

This patent had already gone in a whole bunch of countries, and we just took the view that actually there was no point spending money and litigation at this point.

It was just a marginal call.

We took it.

We don't think it changes anything.

And remember, this patent has been absent the UK since 2004, so and then in other countries subsequently.

So we have had a very long period of time without this patent.

I will say something I have said on this stage and similar stages so many times, it has never been about the patents never.

It has always been about whether or not people can manufacture the product to a standard, number one, and then is that standard substitutable or not.

And the patents were there originally, but actually it has never been about a patent issue, which is why I think when you look at the US, nobody has ever filed a Paragraph IV against the patents in the US, which, again, just gives you that same sense that it is about whether they can make it and whether what they make is equivalent or not.

We believe that is not going to happen in the US, certainly not a fully substitutable generic.

It is hard to see even a branded generic in anything other than the medium to long run.

In Europe we are going to see, as I have said many times, probably sporadic generics.

We will see what comes along, but it is very -- we think it is very, very unlikely to have a single European scenario.

We think it is going to be very different market by market and who knows how that plays out.

But we have dealt with that in the past with many different products.

So, as far as this particular settlement is concerned, we see it has no impact on what may or may not happen.

And on margin and mix, you are right that obviously a lot of the growth that we have seen has been in some of the lower margin businesses in the group.

But, at the same time, look at the overall operating profit performance.

That is where you get straight into the kind of cost reduction efforts as well, that we are playing off the mix versus those cost reductions where we invest to drive overall operating margin and overall operating profit.

We are not driving them individually by business.

Because ultimately the operating profit is what is going to turn into earnings-per-share and, therefore, into cash flow.

So I think it is better to see us do more of that as we think about where to invest and where to change the mix of the business.

But you have already seen us doing it over the last couple of years.

And the decline I showed you in that chart was really most heavily weighted to the beginning of the chart, and I think we are going to be focused in that way going forward.

I think as well to build on that, what we have tried to do, and I think you see some of that in things like core business services, other corporate costs, those shared services, we spend 20% less today than we did three years ago on our cost of administration.

So things like HR, IT, those sorts of things.

What we have really done is we have tried to un-hook those costs rows from the sales line, and the same is true of R&D.

You're not going to hear us forecast in the future R&D as a percent of sales.

We will talk about -- if we talk about anything, we will talk about absolute number of pound notes.

Because actually we don't think R&D should grow just because the sales line grows.

Now you have been seeing -- that has all been a bit meaningless, while the sales line has not been growing.

Once the sales line starts to grow, the separation of those curves is going to become very apparent.

All right?

So, as long as we can stick to that de-coupling, if you will, of some of those big areas, that is going to create margin opportunity.

Some of that, plus the other things that Simon has described in terms of cost reduction and all the rest of it, some of that will end up being reinvested.

Some of it will go to drive the operational leverage that we anticipate coming through, and it is going to be turbocharged in the first couple of years by further leverage below OP but before EPS in the shape of tax and interest.

And that is really the way we are trying it.

So what you are going to get from us is a bit less detail forecasting of cost rows and probably a bit sharper targeting around the OP level and then where we are going to head in terms of overall margin.

Florent Cespedes, Exane BNP Paribas.

A few quick ones.

You deliver on the cost control.

We believe that your next challenge will be on the research portfolio.

Do you believe -- when could it be possible to have an update on the late-stage portfolio?

Could it be possible to have toward the end of the year when you have the DPUs update or maybe later next year?

And further on DPUs, I would love to understand that some units will disappear, and there will be some new ones that will be related.

Could it be possible to see new ones being on the seven core areas?

And maybe a last one on products, on the Respiratory.

Could we have a quick update on the (inaudible) program in the US and where you stand regarding the discussions with the FDA as there is any new potential big safety clinical trial there?

Okay.

So, as far as an update on the pipeline, as far as the -- so, remember, the DPU is really the early phase discovery activity.

So what we do or don't say about the late phase is kind of independent of what might or might not happen with the DPUs.

We will certainly give you an update of what the conclusions are of the DPUs.

We are not going to tell you exactly which targets we will research and what we have stopped.

But we will certainly give you a feel for how many closures, how many doubling up, how many status quo decisions we took, how many starts we took.

And we have got -- one of the great things about this whole process in discovery is we have got literally dozens of scientists in the Company putting forward their ideas for new DPU opportunities.

It is kind of creating that innovative vibe inside the organization again because they see these chances to get -- they get their chance to do what they have always dreamed of.

Now, if they don't do it well in the first three years, then they are at risk to get stopped.

But there is a tremendous atmosphere.

So we will update you on the shape of those conclusions.

Now, as far as the late stage is concerned, we will come to you with an update on that pipeline, and it will be somewhere -- it will be either the end of this year or the first quarter of next year.

We have not quite nailed down exactly when it is going to be, but somewhere in that window.

And the reason why we are not rushing that is we want to have a reasonable amount of data on the key assets before -- there is no point coming and talking to you and saying, well, we've got 2 bits of data today, but we are going to have 5 bits of data next week.

We need to come to you with a substantial quantity of the data.

So it will be somewhere around that kind of period.

I'm excited that we are going to have that opportunity to show you all of that.

As far as US is concerned, as far as the Relovair front, we are very comfortable that we have everything that we need already underway in terms of what is required for the COPD program.

As you know, we have not got any specific asthma trials underway for a US filing, but we have a very big program ex-US.

The whole thing is justified.

The asthma indication is justified on the ex-US opportunity.

And, as you have seen, FDA's view continues to evolve.

Then we will make a decision on filing for the US a bit nearer the time, but the option is open for us there.

And if you ask me today, I would say there is a reasonable chance we might end up filing in the US for asthma, but we are not committing to that right now, and we need to just see how that opinion continues to evolve.

But we are not planning to do a big safety trial in advance of those filings, and I think we are in good shape as we stand.

Now we are commissioning the safety trial in Advair, along with other marketed companies.

Right?

So we are doing those safety trials as required by FDA.

But, as it stands today, that is not being required so far for these programs for Relovair, and I think we are in very good shape on those programs.

Our expectation is that we should be in a position to file in the first half of 2012.

(inaudible).

Just a question on your Respiratory portfolio and especially the real fixed dose combination of (inaudible) that you want to bring to the market.

I mean (inaudible) with Novartis to bring this new fixed dose combination.

So what is your strategy?

Do you plan to file either (inaudible) units, the LABA and the LAMA in your new device?

And also regarding the device, how this generally differs from Discus?

And finally, just on the share buyback program, what should we expect going forward for 2011 but going forward?

So share buyback for 2011 we are going to be at the upper end of the GBP1 billion to GBP2 billion range.

We have not given any numbers out for next year other than to say two things.

One the initiation of the share buyback program was the beginning of a long-term program.

So I think you should anticipate more share buybacks.

And secondly, we said that when we dispose -- assuming we can get a price for our Consumer tail which meets what we expect and is a fair reward for our shareholders, then the net proceeds of that will also go back to shareholders potentially through further share buybacks or, I suppose, conceivably a special dividend, but one or the other.

So that is on that first part.

As far as the LAMA, LABA, this is the Zephyr program.

I'm not going to go into a huge amount of detail what we are doing in terms of our registration strategy.

What has become very clear in the last three months is that there is a really good chance we can be first to market in the US with this product.

And that is obviously -- we are going to chase that as hard as possible, and we are not going to give our competitors any clues.

Now in terms of Gemini, Gemini is a very interesting device in a couple of dimensions.

First of all, it builds on everything we have learned from Discus.

So all the key bits of Gemini are evolutions, if you will, of what we know works, and we can manufacture at very high capacity on Discus line.

So in a way it's a bit like developing the iPhone from the iPod.

You learn a lot about the technology in one product, and you make it reliable by taking -- and that's how you make the new thing super reliable.

That is really important because we know we can get this thing up and running.

We have already got lines up and producing huge volumes.

The other bit that's very, very different is that if you look in the Discus, what you will see in the Discus is the drugs are premixed in one blister, whereas in Gemini there's two different blisters.

So that massively simplifies the whole development challenge, which is why we have been able to accelerate so many drugs in parallel and why I showed you today just the scale of what is coming.

It is partly because we sold one of the really difficult problems, which is compatibility of molecules by not having them together in the device.

And that created a tremendous amount of technical opportunity to move a lot of things in parallel much more quickly than anybody thought we could move.

Michael Leacock, RBS.

Two questions.

Firstly, in terms of the US sales force incentive scheme, maybe perhaps you or Deirdre would be able to comment a little more on what outcomes you are expecting for the sales reps.

What sort of metrics they are being targeted to deliver, and how will we know that that is a success?

And secondly, since David Redfern is here and I think he is also in charge of ViiV, what is the competitive landscape like for deals?

You have not done many at the moment.

I think we are expecting some bit of follow-on from ViiV or perhaps the other way around at some point.

Can we just get an update on that landscape?

It would be very welcome.

Deirdre, do you want to make a comment on the salesforce incentive program?

Yes, thank you for the question.

In terms of the sales incentive, what we have changed is previously most of the incentive was dependent on additional scripts at the doctor level.

We have device at program that now requires that our sales professionals have three things that they need to meet through metrics.

One is product knowledge, business knowledge, which is then to have a more sophisticated discussion with their customer.

Second is business acumen, so their investment of their resources both real-time and dollars.

And third is the sales -- total sales and profitability of the region.

So there is still a commercial sales incentive that has been pulled off to the region.

Those are the three parts of the incentive plan.

And the way you are going to know if it is working is sales are going to go up.

Exactly.

I figured out I had a fascinating not long about maybe a month ago in Chicago met with a bunch of our sales force and was really -- I was just -- sometimes you go there over the last few years and people will tell you all the bad stuff that is happening.

And then it was very interesting just to hear the kind of shift in perception of our US people on the front line.

And one of the things that really came out from that conversation was actually how positive this was.

So one of the quotes that really struck me was the representative said, it is amazing now.

I actually helped my colleague get their appointment.

Because I know it does not matter if they get the script or I get the script.

Whereas before I would do anything to stop them getting the appointment because they might have gotten my script, which actually as a company is just nuts, right?

So I'm delighted that we are the first Company in the US to be doing this.

I think this is really going to change the way that we compete.

I think it is massively changing the way customers see the Company, but also, of course, by the way, diminishes one of -- rightly or wrongly, diminishes one of the things that our critics think is wrong about the industry in terms of what is driving the pressure in the system.

So by -- we are trying to mitigate some risk in the downstream.

We are also creating a better relationship with customers.

I think we are going to create a much more cohesive team orientation in the organization, and ultimately that's going to lead to better customer relationships and better sales.

ViiV, so when is the next ViiV going to be, David?

Great question, Michael.

I mean, firstly, on ViiV I should say it is going incredibly well.

So we are very pleased with the focus that the team under Dominique Limet have brought, and you can see that actually in the sales numbers -- [Absecon] up 7% and sales entry up 37%.

So a real acceleration in the two promoted brands.

And pipeline progressing very well, and we will have the data from the registration studies on the integrase inhibitor next year.

I mean I think the short answer is we are absolutely open to those sort of structured deals.

ViiV, as I said, has been a very good experience, and it is certainly possible that more could follow.

I would say having been involved with ViiV from right at the beginning, these are very complex deals to put together technically.

There is an awful lot of tax issues, there is an awful lot of separation issues, and you do need quite a lot of large number of stars to align.

You need a sort of symbiotic balance between the two companies in terms of what they are thinking and what they will bring.

And it's not always the case that the stars do align.

But we are certainly open to it, and we will see you down the track.

Mark Purcell, Barclays Capital.

Two questions.

Firstly, on Respiratory, could you help us understand what you believe the impact of Seretide generics is going to be from a pricing perspective?

I.e.

how reference pricing might change across Europe, how pricing might change in Emerging Markets, etc., going forward?

I am thinking about this from two aspects, one the pricing of traditional respiratory medicines as we know today, and then secondly, looking at the slew of data coming through in sort of Phase 2B at the moment in your new mechanisms, what you have to show with these new products to gain pricing and value?

So for a COPD drug, do you have to show a 25%, 30% exacerbation benefit?

Do you have to show a mortality benefit?

That is the question.

And the second one was on productivity.

With due respect to what you have said already, I think on gross margin historically the target was to keep gross margins flat ex-royalties going forward.

I just wondered if that is 1000 foot goal that the Company still holds?

And I think on G&A, correct me if I'm wrong, I think it needs to be 8% to 9% of sales.

So I understand what you're saying in terms of sales reaccelerating, and you wanted to get to sort of mid-single digit range where some of your competitors were.

So can you help us understand where you are now?

You were at 8% to 9%.

Where are you now to give us some shape of how that is changing?

Sure.

So, in terms of the margin structure, we are still targeting to bring down that G&A rate, and we are on track to do that sometime over the next three years.

So it is quite a punchy reduction.

And you certainly need some sales growth to create the oxygen to allow you to -- it is very hard to take 50% of something out without any kind of sales growth.

So absolutely we are aiming to do that.

We continue to drive toward it.

We have done, as I've said already, we took 20% of our corporate infrastructure costs out in the last three years.

Where a lot of the leverage comes in the next few years is things like the ERP platform.

Our first deployment of ERP takes place in a couple of weeks.

So then that moves very quickly then to put the whole group onto a standard platform across the organization.

We continue to take out seniority across the Company.

So this year I think we have something like 10% of vice presidents have gone in terms of the upper echelon of the organization.

Why is that important?

Because of the VP is the person who commissions all the costs in the organization.

So if you can keep your upper command relatively tight, then you take away an awful lot of cost and complexity underneath.

So that goal is still there.

In terms of COGS, the challenge on COGS is we have got price pressure, mix pressure, so particularly Avandia and generics dropping out and royalties coming in.

So whether or not we will be able to hold that COGS line into the far future, I think we can get pretty close.

I think we are not going to guarantee it.

One of the reasons while we are saying let's focus on that OP number.

Because actually if we can make up for what we are missing at the COGS line somewhere else in the system, do you really care?

And probably the answer is you probably should not care because ultimately it is still delivering that profitability level at the bottom.

And we don't want to walk away from good business opportunities simply because it is our lower gross margin down the current.

If you did that, we would get rid of the Vaccine business because the Vaccine business is a lower gross margin than Pharma.

Do you see what I mean?

So I think you just got -- there will be a bit of flexibility in that one.

As far as Seretide is concerned, listen, even before you start with generics, you have to recognize there is a tremendous price pressure in Europe.

5% or 6% of price pressure in the core is enormous actually when you think about it.

So across the whole of Europe, you have definitely got a dynamic of governments being very aggressive on price, and they are very aggressive on market access hurdles.

Now we really -- how long ago, Moncef, three, three and a half years ago, we reconfigured how we did files, right, the Medicine Vision program inside GSK really aimed to rethink how we filed, and we have a language inside the business called reimbursable file.

So the goal for Moncef's organization is not just the drug approval; it is the reimbursable approval.

And so the whole point -- and sometimes we have taken six months time liability to get more data generated before we file.

We think that that is going to allow us to get the best prices that we can in the marketplace.

But bottom line when Moncef and I put this strategy together at the beginning, we both agreed that the core assumption should be that the average new drug of the future would have a lower yield than the average new drug of the past.

I.e.

there would not be so many blockbusters because pricing would be so much more aggressive.

That is why we need the portfolio.

So our strategic response to that issue is, of course, we want to generate the data to get the best price possible, but we're going to hedge that by having a portfolio of products that no single product has to carry the burden of every other, and that is the whole underpinning of the strategy of the group over the last three and a half years, to get ready for exactly that situation, which is clearly here.

I would much rather be in the position we are moving into now where we have broad portfolio of products to negotiate, where we have invested the R&D costs to get differentiation, and where actually we don't need to die in a ditch for the last EUR5.

Because we know if we cannot get the EUR5 on drug A, we have got drug B.

And I think that is very different from where the industry has been over the last 10 or 15 years where people were prepared to literally argue themselves to a standstill to get that last few dollars or euros of cost.

They want to be there in this world.

They want to be there with a portfolio, and that is exactly what we have been striving to build.

James Ayre, CCLA.

Just a quick question for Simon on the capital allocation policy within the group that he has talked about today and how that actually works in practice.

I just wondered if you could give us a bit more color on how you will control that process within the group going forward, and to what extent is it a genuinely new methodology for you?

Well, I think there is a couple of elements to that.

As I said at the end of my presentation, we are in the process of rolling out a new planning process across the corporation to really kind of bake in the metrics that we are going to use and make sure that those are going to be applied consistently.

So to how is that going to happen?

That is how it is going to happen.

We have also changed the metrics so that we are using going forward a CFROI benchmark that will allow us to compare between different projects and different investments whether it is in salesforce or in capital allocation or capital projects that we can use across the board, and it also focuses on the cash returns that are being driven out of that.

And that is a shift from where we have been in the past, where we have used similar metrics but perhaps more of a balance of NPV and IRR type calculations relative to ROIC, which has largely been applied to M&A going forward.

So consistent capital allocation benchmarks across the business is how we are going to make that happen.

And already Andrew and I had a session last week on this year's capital spending projects where we have been through the largest of those, and we will be scrubbing down the next batch in the coming weeks.

And then we will be going to the planning process over the summer.

Then all of the businesses are being asked to put forward capital expenditure plans as part of that plan, which they have not been asked to do before.

So those are a few of the concrete changes we are making.

I think also just to summarize how I think things are changing, I have already begun but are changing now is, I think the finance organization under Simon's leadership is going to be much more hands-on into the guts of the Company.

And we know we had a perfectly good finance organization, but it was more of a keeping score kind of finance organization.

I think what you're going to see is a much more challenged, not just from -- Simon is going to role model it obviously at the top.

But, as he said, through some of the key appointments we have been making and where he has inserted people deep into some of the key bits of the Company, what we are really trying to make sure is that finance is really part of the driver of the future, not just simply checking what happened yesterday.

And that is a very simplistic way to describe it, but a very fundamental and obviously a really positive shift.

And he is going to create an awful lot of value and opportunity in the business.

Because really what you are looking at in this business, it is all about making sure that the next dollar gets spent on the best return and opportunity.

And clearly, as every day goes by, that opportunity looks slightly different, and we need to make sure we are on top of that to get the absolute best return.

I think we have time for one last question.

Mark Clark, Deutsche Bank.

A question for Simon on core EPS.

I am surprised no one has asked it so far.

I just wanted to ask you a couple of things.

Firstly, when you talk about removing legal charges, is that just the large one-time items like Advair rather than the sort of bread and butter legal costs that are part of every drug company's quarterly numbers?

And secondly, do the pretty exceptional and pre-legal EPS figures you have reported, e.g.

the 26p and to 29 whatever it was last year, do they give a reasonably good approximation to the core EPS, or is there any sort of major differences you would like to point our way?

I think going forward we will take out legal charges as all of our peers do, and we will also take out a number of amortization, other write-offs, other one-offs that again are consistent with what our peers do.

So there is more by way of adjustment than the stripouts you just highlighted.

And, as I said in the presentation, what we will do is we will come back before the end of the year, and we will give you all of the adjustments so that you can track 2011 into 2012 and that you have got a clean base on which to start from.

So rather than trying to re-create it out of what we have already got, we will give that to you going forward.

But we do believe that is the cleaner measure going forward, and that is why a number of our peers already use it.

Okay.

Let me thank you very much for the questions.

Just to summarize where we are up to as a company, we are on track for this year.

Not all of our guidance has remained unchanged for the rest of this year.

Share buyback continues at a clip up toward the upper end of the range we have given you.

As we move into next year, we expect to see reported sales growth, we expect to see expansion of our operating margin, and we also expect to be able to start to deliver greater financial efficiency between OP and EPS.

What is critical I think is what we have started to lay out for you is the corner or the inflection point where we believe we are now hitting in this Company.

It is not just about the next six months or the next 18 months.

It is actually about what the shape of the group is going to be over the next five to 10 years.

And what it is showing you is a group, which through its restructuring, has got a portfolio of activities which exposes us to where all the growth is.

93% of all of the births in the world are outside of America and Europe.

So if you're in the healthcare business and the Vaccine business, you had better be big outside of America and Europe.

As a good example, if you look at where our Consumer business is exposed, 60% of our Consumer business post-disposal will be in Emerging Markets.

So you have a very different sort of shape to underpin our future growth.

And, as you have heard today, what we are focused on doing is not just seeing that growth over that period in sales, but also working hard to make sure that year on year on year we look for ways to further drive cost reduction and margin leverage whether it be in the core business or in the financial dimension of the organization.

So it's not just about the next 18 months.

It is about the next 18 months showing what the trajectory can be for the subsequent several years.

It has been a long time in terms of reshaping the organization, but I think you can see -- you should be able to see today what that looks like, and the portfolio of R&D assets, I think, clearly demonstrates the progress that is being made and the way in which that those assets are going to start coming to market over the next few months.

On that note, I would also remind you that we remain the company with the highest number of FDA approvals since 2007.

So we can discover the stuff, we can develop it, and we do get them registered.

And, as you start to see that build up, you are going to start to see a bigger and bigger contribution from new products come in alongside everything else.

When you think back for the last three years, we have battled our way through headwinds without much new product and in the middle of a massive restructuring program.

Think about the future, very substantially reduced headwinds, new product portfolio, big established businesses which have been redesigned for where we think the opportunity is over the next few years.

A very different picture next three or five years compared to the last three or five years.

With that, I would like to thank you for your attention.

As I said earlier, we are going to join you over there if you would like for a cup of coffee, and for people who have not had a chance to ask questions, please feel free to do so.

Thanks very much.