葛蘭素史克 (GSK) 2011 Q3 法說會逐字稿

Thank you very much and thank you all for joining the call.

I'm actually in Tokyo, and Simon Dingemans is in London, so we're relying on the technology.

And if there is a time lag between the Q&A and my answers, trust me, it's not because we've moved Brentford to the other side of the world.

I think it's particularly apt that I'm hosting today's call from Japan, given our Japanese business has significantly contributed to this quarter's growth, notably through the great uptake of Cervarix as part of the national HPV vaccination program, which started here earlier this year.

Cervarix is one of more than 60 new products and indications that GSK has launched in Japan since 2000.

And we have the potential for up to a further 40 such launches over the next five years.

The success in Japan underscores the importance of developing different drivers of growth for the group, with different risk profiles across the various geographies.

In the quarter, all three of our key businesses -- pharmaceuticals, vaccines and consumer health -- grew sales.

And if we look at it from a geographic perspective, 38% of the group reported turnover is now outside of the US and Europe.

And that 38% is now growing at 17%.

All of this has meant that despite a difficult trading environment in the West, we have been able to deliver group underlying sales growth of 6% and 3% on a reported basis.

We have now delivered average quarterly underlying growth of around 4.5% for the group over the past seven quarters.

The headwinds of Avandia, Valtrex and pandemic products, which have held us back for several quarters, have now diminished significantly.

Although there is likely to be some quarterly variability, we remain confident that underlying sales growth will translate into reported sales growth in 2012.

Given economic pressures faced by governments, the environment for our business in the US and Europe remains challenging.

That said, the impact of healthcare reform and price cuts in these regions during the quarter was in line with our expectations.

We continue to expect a full-year impact of around GBP325 million from these measures.

Beyond sales, operating profit before major restructuring was up 3% to GBP2.2 billion for the quarter.

Our guidance for the full-year operating margin, excluding legal and other income, remains unchanged at around 29.5%.

With our improving sales performance and continued sustained pressure on GSK's cost base, we have the opportunity to build operational leverage.

In 2012, resulting improvement to the margin will be gradual, as I've said before, and will become more meaningful in 2013 and 2014.

As we set out at the second quarter, alongside this objective of building operational leverage, we're also focused on how we can deliver stronger earnings per share growth through financial efficiencies, such as improvements to our funding mix and measures to reduce the Group's overall tax rate.

We continue to increase the returns we give to our shareholders.

Today, we have announced another 6% increase to the dividend, to 17p per share, and we have increased our expectation for our 2011 share buyback program by GBP300 million to GBP2.3 billion.

Year-to-date, we have spent GBP1.8 billion on share repurchases, and in total, have returned GBP4.4 billion to our shareholders.

Turning to R&D, we have received another three Phase III readouts since last quarter, reflecting further progress of what is a diverse and innovative late-stage pipeline of new medicines and vaccines.

Of the 15 assets with data expected by the end of 2012, six have now reported data.

Of these six, data have been filed -- so, Votrient in sarcoma; data is in-house and being reviewed for Promacta and IPX066; and programs are ongoing for Relovair and our malaria vaccine, RTS,S.

More than 30 additional Phase III readouts are expected by the end of next year, including news flow on assets in key therapy areas such as respiratory diabetes, oncology, HIV and rare diseases.

We have the potential, depending on the data flow, to be able to file for 10 new products during 2012.

So, overall, this has been another very positive quarter for GSK.

I'm very happy that we continue to deliver on the track that we set out 3.5 years ago, as the various changes in our investment strategy have continued to yield the results we anticipated, and deliver a more diversified source of growth for the Group going forward.

The strategy is on track.

I'm now going to hand over to Simon, who will talk you through the financial aspects of our performance.

Thank you, Andrew.

Overall, the quarter has delivered against our expectations and leaves us very much on track with where we expected to be at this stage of the year.

In particular, the quarter saw the headwinds from pandemic of Avandia and Valtrex sales continuing to diminish, and a return to reported growth with reported turnover up 3%.

The quarter also highlighted strong underlying growth of 6%.

And while this reflects some phasing benefits, it also reflects the breadth and balance of our business, which, as Andrew highlighted, has now delivered average quarterly growth of around 4.5% since the beginning of 2010.

Other key takeaways for the quarter include operating margins in line with our expectations; strong cash generation with cash inflows in the quarter of approximately GBP2.3 billion before legal charges; and continued significant cash distributions to shareholders totaling GBP1.8 billion in the quarter.

As you can see, this is very consistent with the financial architecture for the Group that I laid out for you in July, which targeted delivery of sustainable sales growth, improving operating margins, and greater financial efficiency; driving earnings per share growth and free cash flow generation available for dividends, share buybacks, or reinvestment, depending on where we saw the most attractive returns.

Since we announced these objectives, we've been driving them more deeply into the Company, and in particular, embedding them in a reorganization of our planning processes, which, in particular, is designed to develop a more medium-term framework through which we can both compare across businesses, but also drive these objectives over the longer-term to the benefit of shareholders.

Now let me turn to the quarter in more detail.

As you can see, total reported sales after the impact to the roll-off of pandemic, Avandia and Valtrex sales grew 3% to GBP7.1 billion.

The drag from these products is significantly reduced from the first half at GBP129 million for the quarter, but we still have one more quarter of significant roll-off, with sales of these products in Q4 2010 of a little over GBP300 million.

And so as a result, you should still expect some drag in the balance of the year.

But as we move into 2012, this factor should largely have disappeared.

Beyond this distortion, underlying sales grew 6% for the quarter, with all three parts of the business contributing growth -- pharmaceuticals up 2%; vaccines up 21%; and consumer up 5%.

Vaccines delivered a particularly strong performance on the back of the success of Cervarix with Japan's national HPV program, although the quarter also saw some phasing benefits of two of the three vaccinations covering the latest cohorts were delivered during the quarter.

And the final tranche expected to be delivered in January 2012.

Consumer was also strong in its markets.

Excluding the OTC assets we've targeted for disposal, the continuing business delivered approximately 7% growth.

And this reflected continued momentum in the oral care and nutritional as categories, with Sensodyne continuing to deliver strong growth, up 23% and Horlicks up nearly 20% in the nutritionals category.

If you extract from the OTC flat sales performance, the OTC assets that we've targeted for disposal, this category was also up over 3%, slightly ahead of its markets.

In the pharma and vaccines business as a whole, our growth for the quarter was achieved despite continued pricing pressure in a number of markets.

This was particularly acute in Europe, where the impact of negative pricing measures cost about 7 points of growth in the region, of which 5% was austerity cuts and 2% more regular price reductions.

However, Q3 was particularly hard-hit by vaccine price cuts, and we still expect the full-year total negative price impact in Europe to be around 5%.

Beyond vaccines, we saw encouraging volume growth to deliver a net result for the European region down 4%, with good contributions from Seretide and a number of our other new products, such as Duodart and Votrient.

In emerging markets, continued strong volume growth meant the business was able to offset some significant mandatory price cuts in Turkey and Russia, and a tougher environment in the Middle East to still deliver net 11% growth.

And Japan was not also all about vaccines.

We're now starting to get meaningful contributions from new products such as Avodart, Lamictal, and Zyrtec, which together, contributed over GPB40 million in the quarter.

Turning to the US, underlying sales up 1%.

This is the second consecutive quarter of growth for the US, with good contributions across the business, although helped in the quarter by the timing of some vaccine sales, and particularly the shipments of our flu deliveries, which this year, fell almost exclusively into this third quarter; whereas in previous years, they've fallen across both Q3 and Q4.

Turning to margins, operating margin was down 0.9% on last year, reflecting a 0.3% increase in COGS and a 0.8% increase in SG&A.

This is very much in line with our expectations, and reflects primarily the impact of the loss of high-margin pandemic of Avandia and Valtrex sales, offset significantly by our continued cost reduction initiatives, and in particular, the existing OE program.

Without these benefits, the impact would have been substantially greater.

The increase in SG&A also reflects our continuing investment program behind our growth businesses, where we still see attractive returns in each of consumer, emerging markets, and vaccines.

Now this is a good example of where our revised planning processes are allowing us to benchmark those investments and really subject them to extract the best returns in the overall context of the Group.

The OE program and the additional savings we're targeting remain key to establishing a cost base that is both more flexible, and that can deliver the improvements in operating margin that we are expecting next year and beyond.

We're still expecting to exceed our original target of GBP2.2 billion by the end of this year, and we remain on track to achieve GBP2.5 billion by the end of next year.

However, we continue to look for additional opportunities.

We've already identified a number across the business, including in procurement, logistics, marketing, and infrastructure costs.

The benefits of many of these will take time to flow through, however, and this is why operating leverage is going to take some time to build from this year's margins, and why we expect only a small increase in 2012, and more significant contributions to come in the years thereafter.

But remember, this is not the only leverage we have contributing to our objective of earnings per share growth, as we're also focused on driving greater financial efficiency, which is likely to make a greater contribution to EPS growth and shareholder returns in the short-term.

I continue to expect that by 2013, we will be able to improve our mix of funding and reduce effective financing costs by approximately 200 basis points.

And we also expect to be able to reduce our effective income tax rate by 2 percentage points by 2014.

This reduction will be from 2011's underlying rate, which we're continuing to target for the full year to be 27% before the impact of the disposal of the Quest stake.

The rate for the third quarter was 25.7%, 1.3% higher than last year, with both years benefiting from the settlement of certain historic matters.

But it also means that if we're on track to deliver 27% for the full year, that you should expect that the fourth quarter rate will be higher, probably in the order of 29%, to deliver that average for the year of 27%.

Looking at the cash flows in the quarter up GBP2.3 billion.

This is a significant increase from last year, reflecting, to some extent, the benefit of the timing of tax payments, but also reduced restructuring costs and a lower working capital drag.

Working capital in the quarter has stabilized with a slight reduction in overall days, reflecting an improving inventory position, as some of the inventory build in the [first-half unwound on the back of sales in the quarter].

There is clearly still considerable progress that we can make in this area, but already a number of examples where we're tightening control.

And particular, to highlight, we've reduced our receivables, for instance, in the Euro area and the Middle East, where we see greater risk.

We've made significant progress on that in the last several months.

We continue to work on that area as well as continuing to improve our overall inventory turns.

Together, these measures have allowed us to deliver GBP1.8 billion of dividends and buybacks during the quarter, while only increasing net debt by [GBP240 million].

Net debt ended the quarter at GBP9.5 billion.

And so, overall, continued progress in the quarter, with headwinds diminishing; underlying sales performance sustained at 4.5% over the last seven quarters; breadth and balance driving that growth; and operating margins in line with expectations; and finally, strong cash generation of over GBP2 billion before legal payouts.

Each of these contributing to the delivery of our financial objectives, which together, leave us very much where we expected to be at this stage of the year.

And with that, I'll hand back to Andrew.

Simon, thanks so much.

And now I'd open the call for questions, please.

(Operator instructions).

Tim Anderson, Sanford Bernstein.

I have a few questions, please.

I'm hoping you can comment more on what you expect for emerging market pricing going forward, both in the nearer-term and maybe a bit farther out, like over the next five years.

Should we expect continual price declines over something like a multi-year period?

Or is this just something related to the current economic environment where we might see some downward pressure?

Second question is on your LABA/LAMA.

Novartis said yesterday that they'll have a delay of US with their LAMA.

They suggested that other companies were facing similar challenges from FDA.

I'm wondering if you can just talk about your program specifically.

And then last question, I know you'll be switching over to core earnings and on December 1, I guess, you'll be having a call; but I'm hoping you can just give us a very rough idea how much this will likely kick up your continuing operation earnings.

Are we looking at something like a 5% to 10% increase?

Or what exactly?

Okay, Tim.

Thanks so much for the question.

I'm going to, obviously, ask Simon to address the last of the three.

Let me take the first two.

Emerging market pricing, that's -- let me take a minute just to kind of untick what's going on in the emerging markets for GSK, because I think it's worth just doing that.

So, first of all, we've got very strong volume growth run-in.

And clearly, you're seeing here about 3 points of price pressure in the pharma emerging market business.

That is coming from essentially two places.

The first is from a small number of countries where governments take a significant role in healthcare provision.

So, countries which have systems, let's say, a little bit more akin to a European system, or at least parts of the system is like a European system.

So, Turkey, Russia, in particular in this quarter.

Those sorts of countries represent about -- typically about 35% to 40% of the total emerging market space.

So, about 60% plus or minus of the total emerging market space is a true cash out-of-pocket marketplace without government domination of pricing.

So the potential impact of government price intervention is always going to be much lower because of that big dilution effect of the cash pay element of the marketplace, is the first thing to say.

We've seen during this quarter, as I've said, a couple of countries, Turkey and Russia, make some changes.

And of course, you can't rule out that we see other countries doing similar things in the future.

Korea, for example, is looking, at the moment, at potential price reductions.

I think the likelihood of it becoming a chronic year-in/year-out phenomena is relatively unlikely.

And if we look back at the last 10 years, in most of these government-influenced markets, you tend to see stability, if you will, of pricing for two, three, four years, and then an adjustment, and then stability for two or three years.

I think what we're seeing this year is a little synchronization because of the general anxieties around economic activity; not surprisingly, flowing from the issues in the US and Europe.

But my guess is that unless we see something very significantly unpleasant happen on the macro story, I don't think you should expect this to be a regular occurrence.

There is another element to the price pressure in this quarter, and in fact, it has been going on during the year.

And that's GSK have been voluntarily reducing prices of some products, as you know, Tim, to reposition ourselves for much higher volume growth.

Now what that means is we're taking a short-term hit on the business, but it's unlocking tremendous volume growth, which obviously, we believe will be sustained into 2012 and beyond.

So it's not all government and, if you will, involuntary; some elements of this is part of our strategic positioning of unlocking the opportunity.

On your second question, as far as the LABA/LAMA is concerned, I'll put this as delicately as I can.

I didn't recognize anything to do with GSK in any of the comments I read about from yesterday.

We feel very confident with the process we've gone through.

We've obviously used a process of dose selection and definition of dose frequency based on all the experience we've had, having done this many times before.

And you will see some of that data being presented, I think, even as early as today at the [CHESS] Congress.

So we're well on track with our LABA/LAMA.

I've got, at this point, absolutely no cause for concern.

I think, just as we've seen on the Advair generic story, once again, we're seeing that it turns out it's more difficult than people originally anticipated to get into this space.

And I think, so far, so good, as far as our own programs are concerned.

I'm going to hand you over to Simon to address the core earnings question.

Okay.

Thanks, Tim.

As you pointed out, we will give you the detail of this on the 1st of December, and we'll give some restated numbers so you can build the trend from that.

One issue that this year in particular we'll see is, obviously, as we said back in July, we're not going to strip out pandemic, Avandia, or Valtrex sales going forward, as that will be a much smaller factor; but will throw off some of the comparison numbers in '11.

But overall, I think the benefit to core earnings is probably more at the bottom end of your range than the top end of the range.

But clearly, it will vary year-to-year, depending on the factors concerned.

But that's probably to give you some guidance.

But more detail in December.

All right.

Thank you very much.

Thanks, Simon.

Next question.

Mark Beards, Goldman Sachs.

Yes.

Thanks for taking my call.

Firstly on the buybacks, the increase in 2011.

Does that flag anything in terms of how it looked for buyback going forward?

Can we expect an increase in that?

And then, secondly, on UK consumer sales, you've flagged that over the last few weeks it's started to weaken.

Are you expecting that to be localized or maybe a more broader European trend?

And then finally, is there any update from the ongoing DPU review that you can give us?

Okay, Mark.

Thanks very much.

As far as share buyback is concerned, I mean, we said previously we're committed to a long-term share buyback program.

We've never given any signal about what that means for 2012.

What we'll do is we'll update you in the full-year, the quarter-four results of our intentions for 2012.

I think what you see here, though, is a very clear signal.

We've said, look, as we've gone through the year and been able to generate greater cash from the business through our programs, as we've gone through the year and decided not to do acquisitions because we don't see acquisitions which drive superior returns, then we're going to prioritize the cash in real-time out to the shareholders through the share buyback program, while we believe it generates superior returns.

So I think what's important about this increase -- and it's obviously the second time we've done it this year -- it just signals to you our intent to not allow cash to build up.

Its commitment to essentially drive this discipline of making sure that we deploy the cash into the plays where we think we can generate the best return and not be distracted from doing that.

And we'll update you in February for what happens next year.

As far as UK consumers, I said on the press call, we have seen a slowdown in the last six weeks or so.

A bit of that's stimulated by a very UK-centric phenomena, which is a lot of very aggressive retail-to-retailer price competition in the system.

We're putting in place a number of actions to address that.

I think we will be able to improve the situation actually over the next few months.

I think actually the patent, in reality, Mark, is that there's a bit of patchiness across Europe.

There's a few countries which are a bit weaker and a few countries which have carried on going fine.

And in particular, in the UK marketplace.

We're just seeing a softness in this so-called impulse sector.

So the kind of place where people fill up their car with petrol, they go shopping in the garage -- people have stopped or reduced spending money in that circumstance.

So it's that kind of pressure.

It's kind of at the margin; it's not fundamental, but it's taken a bit of the edge off, and particularly a bit of the edge off in our nutritionals business in the UK.

As far as the DPU review is concerned, we finished the reviews.

It was an extremely, I think, effective process.

It's done exactly what we would have expected, so we've identified DPUs that are going great and we want to double up on, if you will.

We've got DPUs which are going fine but still work in process.

And we've got DPUs which aren't quite where they need to be and we're going to address that.

In terms of our decisions in how we allocate resources, that gets finalized just before Christmas.

And we'll then update you at the full-year results on exactly what we're doing there, so you can see everything.

And what you'll see is exactly that mix.

So you'll see some things stopped; you'll see some new things started; you'll see some things increased; and you'll see some updates on progress.

And then the bottom line -- and the thing that I'm very focused on, and I've spent quite a bit of time personally in the DPU labs during the year -- is this has been completely transformational in the way in which we do research.

And the degree of creativity and the degree of energy that we've recaptured in our labs has completely vindicated, in my view, the changes that we've made to our discovery operations.

I think when you start to see some of the progress that's being made and how we're making those investment reallocation decisions, I think you'll start to see that we've absolutely executed what we said we'd do.

Next question.

Steve Scala, Cowen.

I have three questions.

First, regarding Relovair's Summit Study, I appreciate that the study is event-driven; but based on the current status, what is the most likely year of completion?

Secondly, Andrew, apologies for scrutinizing every word in the release, but in your CEO's review, you state operating margin to begin to improve gradually from 2012.

The same sentence was in the July release.

Other than the word "gradually" has been added and the word "onwards" has been deleted.

So can you tell us why these changes were made?

What has changed since July?

And then the third question is -- you have previously stated that the risk/benefit ratio of a partnership would have to be substantially altered in order for you to consider an acquisition of a partner.

Has there been any changes in the development of Benlysta, Darapladib, or Syncria that have changed the risk/benefit ratio of the HGSI partnership?

Thank you.

Okay, great.

Steve, thanks so much for the question.

Let me -- so, as far as the first one is concerned, the Summit Study is a mortality endpoint.

We haven't commented on when it's going to likely report out.

Obviously, event-driven and it's going to take a bit of time.

Nothing really I'm going to add to that, to be honest, Steve.

So I 'm going to trump you on your ability to read my letters, because I went back and read my transcript from the 2Q results.

And what you'll see in the transcript is both Simon and I said "gradually." So what we thought was appropriate was, given that we said at the Q2 analyst meeting verbally, "gradually" as a descriptor of the pace of operating leverage expansion, we thought it would be appropriate to put it in writing here.

So I actually will argue pretty strongly that we haven't changed our position here.

Now, it is quite important, though, because I think some -- when people have listened to what we said about operating leverage, some people have said, okay, we get that; it's going to start slowly to start with, and then it ramps up over '13 and '14.

And then other people have said, well, okay, great; they're going to have some pop in 2012, and then somehow we jump up in the margin in 2012.

And then it's going to somehow plateau at this higher level.

I think the simple thing I can say is the first is the right shape to think about.

This is going to be a gradual start as we begin to come out of this period, as Simon has said many times, we continue to build the benefit of our restructuring program.

And of course, as we have investments around pipeline and the like.

So it will be a gradual start in 2012 and it will accelerate as we go forward, as we expect to be able to drive more leverage through the business.

So the shape of it is going to be more of that kind of gradual incline rather than, as some people have kind of assumed, some spontaneous jump-up, which then drives the plateau.

It's probably good to have the chance just to at least describe that qualitatively to you.

As far as our relationship with our major partners, and HGSI in particular, you're not going to be surprised I'm not going to make any specific comment on any particular rumor or M&A opportunity.

We're very comfortable with where we sit with HGSI, Steve.

I know there are lots of people on the outside of the Company who have different forecasts for BENLYSTA.

You know we never gave any indication of what we believe the forecast would be.

And I can tell you, it's tracking kind of where we wanted it to track.

And we're happy with where we stand.

It's playing out the way we thought it would.

I've many times said that I thought this would be a drug which would require physicians to try it; patients to try it; patients to come back and tell their physician how they feel.

And I think we're on course with the drug.

And I have nothing to say on HGSI other than we're quite happy with the relationship that we have.

Next question.

Gbola Amusa, UBS.

Thanks for taking my call.

A couple of my questions have been answered but have a couple more remaining.

On European austerity and the third quarter, can you elaborate a bit more on which countries in particular are proving more austere?

And which reforms in particular are triggering new prices throughout Europe?

And Andrew, since you're in Japan, can you also comment on which remaining key legacy assets, other than Advair and Cervarix, if any, have not yet achieved critical mass in Japan?

And whether in launching the number of drugs you mentioned earlier, whether this requires an enhancement of your Japanese distribution, or whether Glaxo is now positioned to do it on its own?

It's a great couple of questions, Gbola.

I think as far as the EU austerity is concerned, you might be a bit surprised to hear that the country which has been kind of most challenging in the last few months has been Germany.

And I think we've seen both in their respiratory and the vaccines sector -- it's hit far wider than just those two sectors, but for GSK, it's been in those two areas -- which is why in Q3, the Q3 price impact in Europe was so much higher, because it hit the vaccines and because we had a very -- this is our quarter for shipping European vaccine.

So we have this pop-up in European pain, if you will, to 7% in the quarter.

It's going to come back down in Q4, and we're happy with our guidance we've given you, that for the full year, is about 5%.

And it's really Germany which has been a big chunk.

And it's Germany which really has been the driver to push the European rate up from about 3, 3.5, to more like 5%.

So hopefully, that gives you a little bit of clarity there.

As far as Japan is concerned, listen, there's still a lot of opportunity for us here in Japan.

We've only just got going with Avodart.

We've only just got going with Lamictal.

They're both in the market, but they've just started.

Both doing really well -- really nice progression of the business.

By the way, with Avodart, we're the first product -- Finasteride never launched here; so we have a 10-year run at this marketplace, very interesting opportunity for us.

Lamictal, as you know, is a product which is in every market, built tremendous performance.

And I think we're going to see the same here.

Our vaccine business -- we only have one vaccine on the market in Japan and it's called Cervarix.

So clearly, we have great opportunity there.

We are about to launch Rotarix.

We've had approval; we're going to be, just as we were first with Cervarix, we're going to be first with Rotarix.

And so we're going to be moving forward there.

And actually, this still -- I'm going to call out respiratory as well, Gbola, because the great opportunity in Japan is COPD.

And the market development opportunity both for Seretide/Advair or Adoair, as it's called here; and then for Relovair and then [for Zethra] is absolutely tremendous.

So, significant opportunity.

We do continue to look for ways to expand our distribution capability.

For example, we have a distribution agreement with Daiichi Sankyo for the launch of Rotarix.

As you might know, they have a significant presence in the vaccine space in Japan.

It's given us an opportunity to work with them to more quickly strengthen our introductory capability for Rotarix.

So I do think you should expect to see us continue to find ways to efficiently and effectively strengthen our capabilities here.

But there's no question, that this business is on an absolute run.

And if you look at where it's come from in the last five or six years, it's absolutely phenomenal.

And I think the potential to continue to grow is very, very significant.

And that's because we've delivered so much innovation to the Japanese marketplace.

Next question.

Alexandra Hauber, JPMorgan.

I just have two quick questions on the cash flow statement.

Firstly, it looks like the legal provision is paying out relatively slowly.

You've only paid out GBP1.1 billion of the GBP4 billion you had on the balance sheet in December.

Obviously, it's hard to forecast, but is that sort of run rate reasonable to forecast, because it may have, of course, affect your ability to do buybacks?

And the other question is on the CapEx.

That's also running considerably below the 2010 run rate and 2010 itself was lower than the historic run rate.

Could you just tell us where you expect full-year cutbacks to come out?

And also maybe give an outlook for the years going forward.

Thanks, Alexandra.

I'll ask Simon to comment on that.

Okay.

On the legal provisions, Alexandra, we've obviously been dealing with a whole series of them within the totals that you see on the balance sheet.

I'm not going to get into the breakdown between different cases and issues that we have in there.

But I think you also need to keep an eye on the current provisions this quarter and the last couple of quarters, which probably give you a better guide as to the levels we would look for going forward -- significantly down on the large provisions of last year.

So I think that probably gives you more of a steer as to where you should be headed for the future.

Clearly, how those provisions get utilized when they get utilized depends on when we reach agreement or settlement on the particular issues concerned.

I don't think that we can predict which quarter they may fall in; but they're there for a reason and they'll get used when appropriate.

I think on the CapEx, we're obviously working hard to scrutinize the levels of CapEx in the business.

It was one of the issues I talked about back in July.

And we've done a review of a number of programs since then to see where the best investments ought to be made or whether we should redirect resources as a result of that review.

And some of the reduction that you see here reflects that.

I think that if you look at the plans going forward, there is certainly more to come in the fourth quarter than this quarter.

But I think overall for the year, we will probably be a little up on this quarter but not dramatically so.

But let's see where we get to in the fourth quarter.

And I think guidance for next year and a steer for the future is something we should consider with the full-year results when we get to February.

But it means you're going to below -- this year, below last year?

I don't think we can commit to that at this point but we're obviously working hard.

Thank you.

Thanks Simon and Alexandra.

Next question.

Seamus Fernandez, Leerink, Swann.

So just a couple of quick questions.

With the very impressive growth that we're seeing in Japan, Andrew, can you just update us on how we should be thinking about pricing dynamics as that market continues to evolve and shape?

There's an enormous number of companies that I think are seeing similar -- maybe not the same threshold of results that you are, but lots of approvals, growth in that market, targeting that as a growth market.

And I'm just wondering how you envision the government evolving there?

And what are the pushes and pulls in the Japanese market?

And then, second, as we think about the opportunity in respiratory, particularly with regard to the Relovair franchise, could you just update us on your thoughts for that product opportunity within both COPD and asthma?

And whether or not you see that as more a growth driver for the franchise or a switch opportunity relative to Advair?

Thanks.

Thanks, Seamus.

So as far as Japan is concerned, this is a -- it's a dynamic environment, so there is -- a new pricing system is currently deployed.

It was rolled out about 18, 24 months ago.

It's officially still in an experimental phase, so the government is trying this new pricing system.

What this new pricing system does is it moves the market on from the historic biannual price cut situation -- and I'll come back to that in a second.

So many of you will be familiar with the past situation in Japan, where every two years, there would be quite a material price cut across the board for different drug manufacturers.

The new system does a couple of things.

First of all, it defines those products which are innovative.

And those products which are innovative are awarded a higher price or a price, but then importantly, while they continue to be deemed to be innovative -- typically still in their data exclusivity period or certainly prior to their being a me-too, if you will, on the market -- those products would not be affected by the biannual price cut.

So for a period of time during which you are deemed innovative, you are able to accrue a higher reward for innovation.

The quid pro quo for that is, at the end of your period of exclusivity, there will be a pre-programmed, very substantial price reduction, essentially to guarantee to the government that they achieve a kind of generic or genericization windfall, regardless of whether or not there is a generic substitution.

Because, as you know, in Japan, the generic sector is very immature.

So that is the key change.

Now that means that if you are an innovative company, the pricing environment has got very much more favorable in the last few years.

It doesn't mean that you have a forever benefit; but it means that you absolutely have an opportunity to recoup your innovation costs to start with.

Of course, GSK benefits from that.

Those products which are not deemed to be innovative are on the so-called long list.

And the long list are essentially products which the government continues to apply the biannual price cut to.

In GSK's case, we have more drugs than anybody else on the innovation list.

So our relative balance is much more exposed to the innovation list than the long list.

But it doesn't mean that we're completely immune to the biannual price cut, because we have some old products on the long list.

The way the price cut is calculated for the long list is essentially the government assesses what the level of discount is being offered in the wholesaler networks on each individual product, and then essentially drives the price cut according to that discount level.

So in product areas where there is more discount being paid, there will be a bigger price cut; in product areas where there's lower discount, then there's a lower price cut.

The next of those price cuts is due in 2012.

So there will be some price cut in Japan next year, but it will be for the long list products.

And those companies which have the oldest portfolio will suffer the most.

And those companies where they have the most discounts being paid into the system will also suffer the most.

And so you can kind of unpick a little bit how different companies will be exposed.

As far as the respiratory portfolio is concerned, the way I view this, Seamus, is not -- and I think I've been very consistent on this for the last several years -- I don't, and I never have viewed, Relovair as the key single product that we should all focus on.

Relovair is the first product in a long list of new respiratory products coming from GSK.

We have [Zessa], the LAMA/LABA combination; we have a series of other combinations, some of which have been publicized, some have not; and a series of monotherapy inhaled drugs, as well as other drugs.

For example, Mepo for severe asthma to compete in the Xolair kind of sector.

So my view is that the whole game shifts for GSK when the next products come along, because we are going to have a very substantial Advair platform because of the absence of generics in America and Europe.

And, because we're going to, if all goes well, be in a position to introduce numerous new products into the sector.

And so my view is that our strategy becomes much more one of building a bigger franchise, and really driving market share growth above and beyond the base Advair business, with all the various new compounds which are coming out.

And Relovair happens to be first.

(multiple speakers)

And Andrew, if I could just follow-up quickly, you said and Europe versus the US.

I think the expectation right now is US looks quite challenging to bring Advair generics.

Can you just update us on your thoughts with regard to Advair generics in Europe?

Yes.

No, happy to.

I mean, I think where we stand today is we have one generic Advair product in the market in Greece.

It's not doing -- it's been around for about 18 months.

It's not doing very much and we don't view it -- we don't think it's going to be a material issue or the substitute against Advair -- or against Seretide.

From what we can tell -- and, of course, we're not on the inside of all these other companies, so we don't know everything that goes on.

We can't see any other generic filing.

There have been -- as you know, there are ways in Europe some file -- in Finland, in particular, there is a degree of transparency which allows you to see files as they wait for review.

And over the last two or three years, we've seen a series of putative generics surface on that website and then disappear.

And none of them have come to market.

And our only conclusion can be either the sponsor has withdrawn the file or the file has been rejected.

We don't know, because for whatever reason, these companies choose not to publish the event.

But as of today, our assumption is that we are not going to see any material generic intrusion into Europe for the next few years.

And I would say over the last three months, having seen some of these sorts of files disappear from these websites, I think we're probably more confident now than even we've been in the past, for that situation.

Great.

Thank you.

Thank you.

Next question.

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

Firstly, just want to get back to capital allocation policy.

If you could just reiterate your capital allocation policy.

Again, you have previously said that it would be small bolt-on deals.

And can I just check you -- did you say that you don't see acquisitions that drive superior returns right now?

The second question is about the respiratory portfolio.

And I was just wondering, could you go bit deeper and just clarify whether the FDA was involved directly in dose selection for 719/vilanterol, and fluticasone to Relovair and [Zefir] Phase III dosing?

I know you had end-of-Phase II meetings on all of the Phase IIb's, so if you could just clarify that level of involvement and dose selection.

And then thirdly, just wondering why there's no headline release on ENABLE-2.

You say you've got the data in-house; surely you would know by this point, at least whether it's met the endpoints or not.

Thanks.

So, capital allocation, nothing's changed.

So dividend, share buyback and bolt-on acquisitions, if we see returns, which we believe are attractive.

I think actually, we've done -- I think we've done no acquisitions this year so far.

And it's not because we haven't looked.

We've looked, but we haven't seen anything we like the look of.

So nothing's changed as far as that's concerned.

And I think, again, what we've tried to signal, I suppose, in this quarter is that we're not using the cash; we're not seeing any attractive opportunities.

So we're going to pump up the share buybacks as the cash becomes available.

So that's as far as that's concerned.

As far as respiratory is concerned, I'm not going to go into the detail of what we've done or not done with the FDA.

Obviously, that's a confidential set of discussions.

I would reiterate we've done extensive trials on all of these various components.

We did different trial designs to other sponsors in this space.

And we feel that we've got -- so far, so good.

We feel we're in a good position here.

We don't see the issues which have been reported elsewhere.

And we'll see.

We've got a -- we're progressing these programs very quickly.

It's our hope that we're going to be able to conclude these programs successfully, and be first-to-market, particularly in the US, which is, obviously, the key one to get going in.

So we're pretty happy with that.

As far as Promacta and ENABLE-2 is concerned, the data has just come in.

The team is reviewing it.

We'll update as soon as we've got a considered opinion from the team.

But it's just too premature to say anything.

Next question.

Florent Cespedes, Exane BNP.

Thank you for taking my questions.

First of all, a quick one on BENLYSTA.

Could we have some color on the US ramp-up?

And more importantly, on its reimbursement status.

The second question is on Darapladib.

I noticed on your press release that there is a compilation of the recruitment of a solid trial.

Could you tell us when we should see the first data?

And the last one, you were mentioning that the DPUs update will take place during the full-year results.

But could you share with us when you believe you could be in a position to update your late-stage portfolio?

Thank you.

Florent, thanks very much.

So let me take those in reverse order.

So the update on the late-stage portfolio -- we will update you next year.

We haven't quite decided exactly when; probably won't be a traditional R&D day.

I think I've made it pretty clear that we're not going to go back to the past and have lots of exciting discussion about pipelines until we have high degrees of confidence it's going to be there.

I don't think that serves anybody well.

But we will certainly have an event next year.

We'll confirm exactly when that will be at Q4.

But you will hear a lot more.

I'm sure there's going to be a lot to talk about when you look at the amount of program which is moving through.

As far as Darapladib is concerned, unfortunately, it is an event-driven trial.

We don't know exactly when, of course, that's going to deliver the results.

But it's probably going to be somewhere in the 2014 type of timeframe, plus or minus.

I mean, very hard to call great news that we've got the trials enrolled, and we're up and running.

As far as Benlysta is concerned, we've got extremely good coverage in terms of people who are prepared to reimburse.

But what's a little bit complicated is there isn't this J code yet, so it's just a bit -- we have a temporary what's called a Q code for reimbursement.

It's a little bit atypical.

It's not completely unique but it just makes life a little bit more difficult.

But I'm not -- it's not a reimbursement scenario here.

I don't think we should get ourselves too concerned about Benlysta.

This is -- I honestly think this is going fine.

I think it's completely reasonable in this environment and with the first new drug, an infused drug, that physicians are going to take their time to understand how it best suits their patients.

And they're going to be very significantly impacted by what their patients say to them after they've had a chance to experience the drug.

So we've built, if you will, a temporary reimbursement position with the Q code.

I think everything's going fine.

We've got the Benlysta gateway, which is a very helpful, and I think, actually, unique mechanism in the US market, which makes it easy for people to figure out how to get reimbursement.

I think we're in a very normal phase for a drug like this in this era.

If you look at the performance of Benlysta alongside any of the other most recently launched specialty products, it's performing just fine.

The US marketplace and the rates of adoption of these sorts of medicines has changed in the last few years.

And in that context, we're going fine.

And no reason to be concerned, as far as I'm concerned.

And I'm going to repeat what I've said many times before -- we should look, after we've had a chance for a cycle of patients to come through with experience, see how physicians who have prescribed have been influenced.

That will really tell us how big the drug is going to be.

Next question.

Brian Bordeaux, Barclays Capital.

Thank you for taking my questions.

Two areas of focus, please, both in respiratory.

The first is your LAMA 719 and the second is Relovair.

The first question on 719, do you feel you've characterized adequately the effects of doses below the 62.5 microgram dose, which is the dose that you have taken into Phase III?

So that's the first question.

And then the second area is Relovair.

It looks like Novartis's once-daily LABA Onbrez has been given a reference price in Germany.

Just wondering what you think you need to show with Relovair to avoid the same fate?

And given that you've completed the head-to-head study against Advair and asthma, just wondering when you will be in a position to update us on the results.

Thank you very much.

Well, I think the reality in Germany is you're going to get a reference price, because the rule of -- the German rule is essentially a jumbo group.

So once you've got three combinations -- once you've got three of any product type, they go into a jumbo group and all the new ones come in.

Unless you can show extraordinary separation, which actually is -- I think actually that hurdle in Germany is not one which is very achievable, to be blunt.

So I think it's kind of a null question about what the profile of the drug is.

The system in Germany -- that's why they stuck Lipitor in the same group as Simvastatin.

And it's been like that for several years.

As far as 719 is concerned, we feel like we've done a very effective dose range, as I said earlier.

It's -- I'm just pulling a particular thing for you -- it's a program which has explored a whole series of different doses.

We feel confident we've got the right dose.

We have work going on to completely confirm and reassure ourselves on that.

But as we stand today, we're in very good shape.

And what we selected to go in there, we feel good about.

So I, again -- I don't really recognize too many of the anxieties which have surfaced in the last 24 hours in this general sector as being pertinent to GSK, is probably about as best as I can say on this matter, to be honest with you.

Okay.

Next and last question.

Last question comes from the line of Kerry Holford from Credit Suisse.

Please go ahead.

Just two quick questions, please.

Firstly on Cervarix.

Following the ACIP vote on Gardasil in the US yesterday, should we really just now think about Cervarix as an ex-US vaccine only?

Or is there anything more you can do in the US?

And then, secondly, on seasonal flu, just wanted to check if I heard correctly, Andrew -- that you said the majority of '11/'12 demand was booked in Q3; so should we assume that Q4 sales of seasonal flu are very small?

Thank you.

Thanks, Kerry.

So as far as the Gardasil ACIP meeting and implications for Cervarix, I think that Cervarix clearly is a very -- is doing extremely well in Japan, obviously; extremely well in emerging markets, and well in Europe, right?

So just to titrate it, is not doing well in the US because we were clearly too late.

Now what's been happening meanwhile is that the final data and the long-term data has come in for Cervarix in terms of its ability to prevent cancers.

And it looks extremely good.

And for those of you who haven't seen it, there was a very good review in the BMJ recently, basically looking at the two vaccines from a cervical cancer perspective.

So we haven't given up on this vaccine, Kerry, even in the US.

Now, the reality is, of course, we will need to get that kind of information on our label.

And so, yes, of course, practically in the next couple of years, I think you're absolutely right -- you have to think about this as an ex-US opportunity.

But we haven't given up, because we actually believe cancer prevention is a very important output of the vaccines, and we think that we have the best vaccine in Cervarix.

So -- and as far as the flu business is concerned, just to be clear, what happened last year was about 90% of the American doses were shipped in Q3 and about 10%, 10% to 15% of the American doses were shipped in Q4.

This year, all of the American doses were shipped in Q3.

So it was a very -- so that's the piece that's been skewed for.

That's good news because it means we get better pricing.

The earlier you can go in the US, the better you do.

As far as Europe is concerned, we will continue to see sales in Q4 and you'll see some in the rest-of-the- world, but not too much.

So there will be some.

There will be relatively less than last year, mostly because all of the US product has come into Q3.

And remember, the German price has come down.

So any further sales in Germany will be at a lower price than the price we had last year.

Although, again, the majority of that pain has been taken in Q3.

Thank you.

Thanks, Kerry.

And with that, I'd like to thank you all for your attention on the call.

Obviously, the IR team are available if you have any specific questions or detail follow-up.

We look forward to talking with you individually in the various meetings and conversations over the next few months.

Thanks so much.

Thank you very much, ladies and gentlemen.

That concludes (technical difficulty) [the call] today.

Thank you.