葛蘭素史克 (GSK) 2011 Q4 法說會逐字稿

Okay, good afternoon, everybody, and welcome to the GSK results.

Thanks so much for all coming in.

And hopefully there are just about enough seats in the back there.

Before I start let me just introduce to you some of my colleagues from GSK who are here in the room, who may well get asked to answer questions and if not they will be here for you to pray on at your leisure after we finish in the coffee break afterwards.

So, we've got Moncef Slaoui, down here at the front, who is Chairman of R&D and also now looks after our whole Vaccine business; Simon Dingemans, who you will be hearing from shortly; David Redfern, who is the Head of our Corporate Strategy group; Darrell Baker, who is running all of our respiratory development programs in R&D; and Patrick Vallance, who we just appointed as Head of our Pharma R&D organization.

Oh, I'm sorry, and Deirdre, Deirdre; stand up so everybody can see you.

Deirdre Connelly, who is the Head of our US business.

So what we want to do today is I'll give you a little bit of an overview of one or two key themes I think is important about the company, and then of course Simon will take you through some of the details of last year in particular and how we see the business shaping up from a financial structural perspective.

Basically, in terms of what I hope you've seen in the press release -- and I apologize an awful lot in that press release, but that's a good thing.

There's a lot going on in this group and there's a lot of good momentum building up in the different parts of the organization.

What I hope you take away from the press release today are a couple of things.

One is that you're really starting to see the company emerge from the period of the patent cliff and the loss of Avandia.

Since the end of 2006 we've burned off $10 billion of sales, mostly in America.

And we've replaced that through the investments we've made across the board in our various growth businesses, whether that be EM's, the Vaccines, consumer business -- all of those different businesses have obviously been built up over this period.

And I'll talk to you in a little bit more detail about that.

That's allowed us to deliver that 4% underlying growth last year.

And more importantly it has allowed us to generate continued strong healthy growth in cash.

Combine that with a focus on working capital that we've been deploying over the last couple of years, you can see where we are able to generate the opportunity to pay out last year alone GBP5.6 billion in returns to shareholders in a mixture of share buyback and also dividend.

We announced today continued strong dividend growth.

As you know, our priorities remain absolutely unchanged.

We want to deliver a growing dividend.

We want to buy back shares unless the acquisition of bolt-on businesses beats the return rate of the share buyback.

You saw us do that absolutely resolutely last year.

I think what you've seen here in these results is certainly a continued commitment to that strategy going forward but also through the supplemental dividend of the extra 5p through the disposal of the US OTC business -- what we're trying to do there is remain balanced around the different interests of our shareholders.

Not all shareholders are in favor of share buybacks and some favor share buybacks way over dividends.

And what's important is we try and -- we think -- make sure that we repatriate the maximum amount of cash possible in a way which works for as many shareholders as possible.

And therefore the special dividend that we've announced today I think signals to those people who are very pro-dividend, we hear that and we want to make sure that they are able to partake in the benefit just as much as those who prioritize or see the share buyback as more important.

So the third final thing I would say is R&D.

In this press release you will see reference to three new products approved and launched last year in the US in particular.

That brings to a total of 16 the products that we've had approved in the US over the last four years -- more than any company in the business.

What you will also see in this press release is, we already at this point in the year have four products ready to file.

And of the 15 new products that we told you we would get data on this time last year, one has already been filed; four are ready to file; and we've got six more which we'll finish before the end of this year.

Meaning that we have obviously the potential if all goes well and it may not, but if all goes well, it gives us the potential to file for 10 new products during 2011.

Sorry, 2012.

So what you see there is a business which is focused on -- has gone through its restructuring to fit itself for a growth opportunity going forward.

We've burned off much of our patent cliff.

We're focused on generating returns, and we are focused on delivering an R&D pipeline for long-term value creation.

That was really the strategy I laid out four years ago -- grow a diversified global business, make sure we deliver more products of value and make sure we try and simplify our organization, and essentially take cost out of the business and streamline the way the business operates so that we can drive more to the bottom line.

If we look then at what's really been going on over that period, it's just a snapshot of the change in shape of the business.

And you can see here very quickly just how different we look today than where we were four years ago -- a dramatic shift in our geographic exposure; much more exposed to where we believe the macro growth drivers are of the world, particularly in the emerging markets; a dramatic shift in our exposure to payors, much more exposed to cash pay, not just domination of third-party pay in the traditional Pharma sector; a big shift in the shape of our molecule exposure, so less exposure to individual patents, particularly on small molecules; driven by our consumer business, the dermatology acquisition and of course our Vaccines business.

All of those businesses really represent for us at GSK tremendous opportunity to build reliable sales growth going forward.

And as you know, we expect during 2012 to be able to move from a period of talking to you about underlying sales growth over the last year or so into a period where we're able to talk to you about reported sales growth, which we are excited about and hopefully so will our shareholders be.

Delivery of more products of value.

The R&D organization at GSK under, particularly Moncef's leadership over the last four years and now with Patrick's leadership as well, has really transformed the capability of the business.

If you just look at a couple of the metrics on this slide, we have more than twice the number of patients in active clinical trials at GSK today than we had four years ago.

Over 200,000 people -- in fact in 2007 we have 95,000 people in trials.

That's underpinning the 30 programs or so that we have in full development.

And that's what's driving our confidence that we believe we have a pipeline unrivaled in the industry made up of a broad portfolio of medicines and Vaccines -- some small, some likely to be small to medium-size opportunities but some clearly evolving to be potentially very significant opportunities.

The strategy of the group has never been to develop one single product to carry the organization forward.

The strategy of the group has been to change the economics of R&D so that we could deliver a number of products year in, year out over time, building a much broader portfolio which the new commercial models that we've been developing would be able to cost-effectively commercialize.

That's the model we've been prosecuting and I think you can see from the R&D progress that that's very much on track.

If we look at the discovery performance units, which I know is very much something people are very interested in at GSK, it's one of the major changes we made to try and, if you will, bring back to life the real creativity of discovery.

This gives you a little snapshot of what's happened over the period since we began, and particularly the output from the review that took place last year that Moncef and Patrick led.

And actually these are just kind of surface answers if you will.

Of course we closed some DPUs, we created some new DPUs and we reshaped some DPUs.

I know everybody is focused and fixated on that.

It's not the story.

The story is, we completely transformed the culture of discovery inside GSK.

What this tells you is that we are absolutely focused on a disciplined assessment of progress and that we're not prepared to just allow organizations to drift on for five, 10 years against a failing target or a failing hypothesis.

We are going to consistently prune and fertilize the DPUs to ensure that they get stronger and stronger as we go forward.

But, core within the whole DPU change has been the creation of greater accountability and a greater personal capacity for our scientists to really fulfill their potential.

Just a few examples.

These are photographs taken in our various DPU labs, really just to give you a little bit of a sense of what kind of things might come from this and what do I really mean when I talk about culture?

The first lab is just a busy lab.

And why do I show you a picture of a busy lab?

Well probably because if most of you went to an R&D lab three, four, five years ago anywhere in the world, you wouldn't find very many busy labs because scientists didn't spend much time in them.

They spent lots of time outside of their labs.

And you certainly wouldn't have found a lab with all the different disciplines in the same lab.

Four years ago if our people who worked in neuroscience for example needed to dialogue together they needed to book video conference time between the center in Verona and the center in Stevenage and the team in Upper Merion in North America.

All that is gone.

All the people who work in our teams are all co-located in the same lab.

We no longer have departments of chemistry.

We no longer have departments of biology.

We have everybody integrated into the same organization.

That creates a greater potential for serendipity.

What is the chance of a coincidental or serendipitous discovery if you've never met your coworker?

What is the chance of that spontaneous insight if you've never looked at a piece of biology when you are chemist?

There's no chance.

And the whole point of this change is to re-create that atmosphere.

Anybody who worked in a drug lab in the 1970s and 1980s will absolutely recognize this is a case of back to the future.

But the reality is, that was the era which was the most productive in this industry.

And we need to get back to the fundamentals, allowing individuals to make those insights which are a function of unexpected connections.

That's what the busy lab allows us to do.

I invite any of you to come and visit any of these labs that you would like to to see for yourself.

But take it from me, it's transformed.

And the culture of how this organization works in discovery is what's underpinning our confidence for progress.

In the middle here is a lady called Sharon.

She's a research scientist at Harlow, just north of London, and she's working here on a very interesting piece of research, looking to see how we can develop compression characteristics of tablets.

Why is that important?

That's important because if we can compress tablets without excipients, we no longer need to go through all the development process of a tablet before we can go first time in human.

Why is that important?

Well we know that nine out of 10, the first time in humans are probably going to fail, so what's the point of spending lots of time and energy to develop robust tablet techniques and stabilities on programs and drugs which are likely to fail?

How do you solve that?

You need to invent a way to develop tablets, develop molecules which don't need to be made to be stable.

What does that mean?

It means we can get into the clinic six or nine months quicker than we used to be able to do at a fraction of the cost.

That means we get to a decision point.

Is the drug going to work or fail?

We get there much more quickly than we used to.

It's how we've been able to move assets from busy labs like the one on the left into clinical trials much more quickly.

And I think you will start to see as we go through the next few years more and more evidence of speed as well as creativity beginning to become more and more evident as outputs.

Now here on the right is a scientist called Andrew Berkowitz.

Now Andrew four months ago was a bench chemist in GSK.

He is a very smart guy as you will hear in a second, but he is a bench chemist who decided that he would just have a crack at the dragon's den at GSK.

He had an idea for what he thought GSK ought to be doing some research on.

So he sent in a proposal to the DPU review because as we went through the DPU cycle we knew we were going to close some teams, but we also wanted to look for next best ideas.

So we invited the organization to give us some of those ideas and Andrew was one of the people who wrote in.

He's a bench chemist, he wrote in, he gave us some ideas.

Patrick called him to the review; he came to the review; he pitched his idea; and at the end of his presentation he said well here is my idea.

I really hope we'll do it, but you're going to have to find somebody else to lead it because I'm just a bench chemist.

And what was great about this whole review is not only did the company fund the idea, create the DPU, but now Andrew is a DPU head running his own organization.

And it just reflects in a very personal way that this organization is all about individual scientific brilliance being brought to life by people like Andrew in labs like the one you see on the left there, supported by technologies which allow us to make things go so much quicker than we've ever been able to do before.

That's what's really changed inside the DPUs.

And again, I'd reiterate, it's fascinating to look at the numbers.

It's much more interesting to be -- to see the cultural shift in the organization.

And it's those sorts of shifts which are giving us confidence that we can really sustain our R&D deliveries over the next several years.

So as I've told you already, here we are today.

We've already filed one drug from the 15 we talked about last year.

We have four more ready to go.

We have six which we think should complete during this year; if all goes well, we'll get them filed during this year.

There are somewhere between five and seven Phase III's that we think we will file during 2013.

So that gives you this year a nice batch, next year, a nice batch.

And then you can see that as we move through the rest of this year and into 2014 up to another 30 projects going into full development.

So if I just step back for a second and think, okay, over the last three or four years, we've launched 19 new products across the group, 16 in America, a further three outside of America -- products like Simplirix which weren't launched in America.

So 19 over the last several years.

We are in a position where we could file up to 10 this year, maybe another six or seven next year, and then we're back to another 30 going into the pipeline.

You can see that the goal we have the ambition we have -- to bring back to life the core value creator of the company alongside all of these other businesses that we've been investing in over the last four years.

I want to focus on one area within discovery which probably most people obsess about most of the time for good reason, the respiratory business.

And here on this slide, you can see the areas that we are currently active in.

So we obviously have the Ventolin business, we have the steroid businesses, the long acting bronchodilator businesses with salmeterol and then of course Advair.

And just underneath what I've tried to pull out here for you is which markets are we actually operating in?

Obviously we are known as a very big respiratory company.

It's a terribly important business for us and we're very good at it.

And on this slide you can see we have about a third -- 33% market share of the overall respiratory marketplace.

Our new respiratory pipeline which Darrell Baker is in charge of, back there in the audience, is active in all of these areas.

So what you can see on this slide is everything that's going on inside GSK, whether that be Relovair in the combinations; whether it be 698 monotherapy steroid; whether it be the new LAMA/LABA Zephyr combination, whether it be [flair], the oral program, the p38 or the anti-IL-5.

And you can see that what that would do if those drugs all came to market, not only would they give us a chance to double up and renew ourselves in our current categories, but it would take us into huge new markets where we currently have zero market share.

And yet remember we have that great position with all the people who prescribe in these areas.

All of these markets are dominated by the same customers.

We just happen to play in half of the market.

The goal is to take us into the other half of the market with this pipeline.

Progress is very, very good.

We've seen the data coming through.

We know we have a highly effective steroid.

We know we have a highly effective long acting bronchodilator.

We know we have a filable combination product in Relovair.

We know we have the right dose for LAMA.

And we know we've got some very exciting data in-house already on programs like the anti-IL-5.

So these are programs which are really starting to move for the organization.

And we also know that during the last two or three years most of our competitors have slipped rather than gained ground on us in this space, meaning that in many of these categories we have the chance to be the first to market.

And obviously that's a lead that we want to continue to prosecute.

So this respiratory market as a total remains one which we are deeply committed to.

We are very reassured by the potential longevity of Seretide and Advair, as we've talked many times before.

But it's now so exciting to see the opportunity to layer on top of that foundation of Seretide and Advair so many new growth opportunities.

But I will just take the moment to reiterate again it's never been our strategy to replace Seretide Advair with one product.

It has always been our strategy to layer on top of Seretide Advair a portfolio of new products.

And that's exactly what we are intent on delivering.

Remember, this portfolio is just one of the batches of products coming through, all of which are being delivered for the same total amount of money being spent on R&D as we were spending four years ago.

That's why our internal rate of return is starting to go up inside R&D at GSK.

We are making progress on the deliverability of our pipeline.

Our products are surviving to market.

We are beginning to see improvements on attrition.

And we've been able to keep the costs under strict control.

So our cost per asset is falling.

Now, in the way these calculations are done, because you allocate costs to different molecules in different cycles -- or different eras of their life, the full benefit of the cost implications of what I've just said won't play through until we redo this calculation in a couple of years.

This initial increase is really a function of several things.

One, a slightly reduced rate of return on the Vaccines R&D operation; a significantly better improvement in Pharma than you would expect here because of the long-term development of the pipeline, the increased probability of success because the programs are now close to finalization and the beginnings of a contribution of reduced costs.

As we move forward, you should expect, if we can sustain that maturity of pipeline, the cost element will really start to kick in which is why we are very confident that we're on track to our goal for a 14% rate of return.

So the R&D organization from discovery through to pipeline are focused specifically on respiratory, on great track to give us a sustainable value creator for the company.

What we needed then was a vehicle to commercialize these products around the world.

And there are two places in the world now which in our view really comprise the core innovation markets for Pharmaceuticals and Vaccines, the US and Japan.

Europe has unfortunately I would say slipped in terms of its willingness to pay for innovation in the absolutely sustained delaying of access to patients for new medicines.

But we're now at a point where we have to take the view and I think face the reality that really it's about the US and excitingly anew, it's about Japan in terms of where innovation should be driven.

And that's why over the last several years the restructuring of our businesses in these two countries has been so critical for us.

We've talked very often about the US which had to be restructured because it was in freefall from its patent cliff.

But we took the opportunity, under Deirdre's leadership, to not just shrink but to change shape so that we were better fitted for the new marketplace.

Four years ago, I would be honest with you I would say we were in the lower quartile of preparedness for what was coming in the US.

Today I would say we're in the top two companies readiness and fit for the new type of customers who are active and making decisions in America.

In Japan, when I very first stood up to talk to you I included a note about Japan would be a focus area.

And quite a few people said to me why are you talking about Japan?

Here we are, GBP2.1 billion of turnover.

In 2007 it was less than GBP1 billion of turnover.

A new pricing regime, a new intellectual property regime, a very pro-innovation marketplace.

At the end of 2011, 48% of our turnover in Japan was in product which had been launched in the last five years, a remarkable rate of innovation and renewal.

That's really why the US and Japan will be the primary customers for our R&D organization.

Europe of course will be the customers but given the current propensity to not pay for innovation they're no longer going to have quite the same capacity to drive the agenda that the Japanese and US markets will.

In terms of simplifying our business model, again, many examples across the organization, some of these familiar to you from other discussions.

I did want to just pull out a couple of points to you.

I know it's important that we come back and tell you what we did, not just what we are going to do.

I told you three years ago that I would take 20% out of our global functional costs.

This is the cost of HR, the cost of finance; just to let you know, we actually took 23% out of that part of the organization to try and bring down the G&A cost.

I also told you we needed to do something about RIT infrastructure, and I'm very happy to tell you that we have now begun to deploy our SAP platform around the world.

And over the next several years, we will get the company onto a common platform, which as you know will then allow us to make decisions much more quickly, have a much clearer view of things like inventory and working capital, and just allow us to drive and ratchet up our efficiency as an organization going forward.

So all of that has really delivered the company that GSK is today.

We've reshaped R&D to give us a sustainable and confident view of our pipeline.

Our businesses and innovation markets have changed and restructured to fit the environment they now sit in.

And we believe we have the right kind of shape and competency and incentive systems in those markets to allow us to compete with the new products as they arrive.

And some of the early signals, even in the US, from some of the smaller specialized, new products are very reassuring on that front in terms of our ability to get them going.

Our continued and sustained efforts in the emerging markets has created for us a very significant position across the world.

Inevitably there is going to be quarters where we have phasing issues on things like vaccines which tend to be predominantly important in the emerging markets, or from parts of the world going through various political or economic challenges as we just saw from the Middle East.

But it doesn't take away from the fundamental facts -- most of the people live in the emerging markets.

Most of the new healthcare consumers live in the emerging markets.

And most of the net income growth in the world is coming from the emerging markets.

So, the long-term bet is the emerging markets.

We just have to be mature enough to deal with the ups and downs that come of being in relatively more volatile markets.

It's an absolutely reasonable proposition and a great equation for us to engage in.

The fact that we have such a broad consumer business in those EMs gives us a unique position.

Nobody else in the world has the kind of coverage of physicians and the coverage of consumers that we have.

And you only have to look at the operations of our businesses where our consumer business is relying on the Pharma business to help develop doctor recommendations; and where our Pharma business is relying on our consumer business to develop distribution into pharmacy and retail.

Tremendous business synergies which over the next few years I think will simply become clearer and clearer.

Our consumer business generally remains a very exciting business.

And when we finished the disposal of the tail, which we should do in the first half of this year, that business based on last year's numbers would've grown not at 5% but at 7%.

So the surviving business during 2011 would have been a 7% growth rate.

And then finally we continue obviously to be committed to driving our Vaccines business.

We are the largest vaccines business in the world.

What you will see going forward are two different dynamics, I suspect.

One is new innovation; so for example the zoster vaccine and of course the MACE III program, all coming to fruition over the next year or so.

And then on the second half you've got the emerging markets and the developing world piece.

And you know that GSK is a very, very active participant in the delivery of vaccines to the poorest in the world at very large scales.

Those two things are going to be contra pressures on things like Vaccines margin, so clearly as more innovation comes in that gives us a great margin opportunity.

But as we have ever greater demands on us from GAVI, The Gates Foundation, UNICEF, etc., that's margin suppressive.

And over the next year or two we probably will describe in a little bit more detail to you the exact dynamics of that so you can understand it properly.

That group of businesses and business opportunities is what we have aimed to build.

And today, having come through the patent cliff we now feel that we have the platforms and increasingly the fuel for us to feel confident going forward.

It's those businesses that will drive sales growth for us over the short and medium run of the company.

And then as you've seen us repeatedly describe to you we are going to underpin that top-line focus with an absolute discipline around the desire to drive both operational leverage; you see that begin slowly this year.

Operational leverage, greater cash conversion, driving out more returns with a commitment to maximize the return flow back to our shareholders.

With that, I'm going to hand over to Simon to give you a little bit more detail on the numbers for last year and then we'll go over to Q&A.

Thanks, Andrew.

Well certainly looking back to a year ago when I had the pleasure of sitting in the front row and not having to present, it seems a long time ago now.

But it's given me a great chance over the last 12 months to get out into the company and really meet with a lot of our people and visit with a lot of our businesses around the world.

And as I look back on those experiences and those conversations it's very clear that the opportunities that Andrew and I talked about before I came on board to drive the returns faster and harder out of our strategy are not only real but there are many more of them.

And this is really the reason that we introduced in the middle of last year a new financial architecture to really try and align those opportunities, bring them together and collect the returns that flow from them in a much more coherent way that you are beginning to see in the results of last year.

But it's still very early days.

And while the contribution last year was meaningful, particularly at the financial level I think you're going to see much more of that going forward.

So if we turn to the results for the year, very much in line with what we expected at this point in the delivery of the strategy.

Underlying top-line growth of around 4% and really encouragingly driven by all three of our principal business drivers, so, Pharma up 2%, consumer up 5% and Vaccines up 11% over the course of the year, building on that global balance that Andrew just described for you.

And that's despite a considerable number of challenges during the year, not least from the economic environment, political uncertainty in areas like the Middle East, and a number of other pricing pressures that we felt particularly in Europe, but also in the emerging markets, particularly in the second half of the year.

And so I think overall very encouraged by the position that we come out of 2011 and looking forward to the momentum that we take into 2012.

The biggest factor, however, in the results for last year was the rolloff of GBP1.8 billion of sales from pandemic Avandia and Valtrex products.

This is very much as we expected.

And we've talked about the headwinds that we are seeing during the course of 2011.

And those are now very much coming to an end.

But as you can see from the results, it's very much the top line down, but it also, given their high margin and strong cash conversion, also materially affected the margin performance for the company during the year and the cash conversion.

But if you look through that and you look at the underlying performance, and I'll come back to the margin and the cash conversion structure underneath that noise, you can see that we are very much on track with the expectations that we gave you at the beginning of the year.

And that's really driven by the breath of drivers that we now have inside the group.

And I've talked already about the three businesses, but if you look geographically as well you can see with 38% of our sales now outside the US and Europe we have a much broader range of growth engines across the world as well as across our businesses.

Pick consumer, up 7% if you strip away the OTC assets that we are in the process of disposing of, very much driven outside of the US and Europe.

So, 14% growth across our emerging market businesses in consumer, driven with good contributions from the oral care business with Sensodyne up 25%, Horlicks up nearly 20%, showing the balance in that business.

And that's against a US business down 1% and a European business down 2% really reflecting the tougher economic conditions.

Very much the same pattern in the Pharma and Vaccines business with much of the growth being driven through our emerging markets business, our Asia-Pacific business and Japan, as Andrew has just described.

Really all three of those contributing very strongly but in very different ways despite some of the challenges in particularly some of the emerging markets, where pricing pressures began to come in during the second half of the year with price cuts in markets like Turkey and Russia really playing through.

Despite that, looking through the Pharma portfolio in emerging markets we delivered consistent growth through the year at around 14%.

Vaccines also being a very strong contributor, up 17% over that year, but Vaccines as Andrew described is a much more lumpy business.

And so when you look at the fourth quarter for instance growth rates coming down a little bit, particularly in emerging markets, very much driven by the phasing of those Vaccines sales but also by the strong comparator of some earlier tenders in Q4 2010 which flowed into Q1 2011.

So again as you play into the comparisons at the beginning of next year you'll probably see the same effect coming through, but that's very much sort of looking individually at quarters as opposed to the overall growth contribution of the Vaccines business is making, which is very, very strong.

Japan also, an outstanding year, with good introductions on the Pharma side, Avodart making a particular contribution.

But the real outstanding marker for Japan was Cervarix, which was up to nearly GBP350 million of sales, which is a very strong performance on the back of its position.

It was first into the market which really gave it a leading share of the government inoculation program.

And we've got a good pipeline as Andrew described of new products and introductions coming into Japan which we intend to take the same advantage of.

So overall if you stand back from that position you can see why we feel comfortable that as we go into 2012, the momentum behind the business leaves us in the position that we've anticipated throughout 2011 of being able to convert underlying sales growth into reported sales growth despite some of those challenges.

And we are mindful of the risks that there are out in the marketplace.

We are anticipating in our plans a number of pricing measures that have already been announced in Europe for instance.

And the European business performed very strongly in the face of some very tough challenges last year, but going forward, we are anticipating the environment remains tough and we are continuing to work that.

The US, for instance, flat overall as the healthcare reform measures rolled through the course of 2011, but of course we go into 2012 with those annualizing.

And we are always looking ahead to whether there will be new measures here, but so far none have been identified.

But we manage the business against those pressures.

And despite those continuing challenges we feel good about the opportunity to convert that underlying momentum into reported progress in 2012.

I think you can see a similar sort of pattern at the margin level.

And as I've ighlighted, the rolloff of pandemic Avandia and Valtrex sales was by far the biggest driver in terms of the overall margin performance.

But we also saw some additional pressure during the course of the year from some of the pricing measures that I've described, the unrest in the Middle East, and some of the phasing of some of our Vaccines sales that left the margin a little bit lower than where we had originally expected in terms of the final outturn for 2011.

But it's also driven by the investments that we are making behind our growth platforms.

And it would've been wrong at this stage in the strategy when the visibility of the delivery of that strategy is becoming much clearer to pull back on those investments.

And take R&D for an example, here we are at 14.3% for the year, a little bit ahead of the guidance that we gave you during the course of 2011.

But you've already heard from Andrew the extent of the pipeline readouts that we've got in front of us, and that we are on track with our expected progress in that area.

So to pull back on R&D spending when in fact the absolute amount we spent on R&D last year at GBP3.9 billion was exactly in line with our plans, would've been a mistake from our point of view.

And that's really why we came a little bit lower on the margin, but we think to pull that would've been shortchanging those future prospects.

And if you look at the COGS and the SG&A you see a similar pattern.

And here I'll just tried to pull apart the different drivers of the margin during the year.

And you can again see pandemic Avandia and Valtrex a big driver, but also healthcare reform and austerity pricing putting quite a lot of pressure on the COGS line.

And yet, already you can see some of the operational excellence and restructuring savings beginning to make a real contribution to offset that.

Unfortunately, in 2011, those pressures were unbalanced, but you can see some of the momentum building behind here and being able to allow us to offset the continuing regional and mix drag that we have at the COGS line to be able to build momentum into the operating line going forward.

And that's one of the reasons why we've said that we expect to be able to build operating leverage going forward, but it's quite to take some time to come through, and it's going to start gradually in 2012 because we are still dealing with a number of pressures on that mix.

And we are going to continue to invest behind the growth going forward.

But what we've done over the last six months is really work with the manufacturing businesses particularly to take the progress that we've made in the operational excellence program, which is really about simplifying the manufacturing footprint that we have and see how we can now align that footprint much more tightly to the three main businesses that we have of Vaccines, Pharma, and consumer.

And we've got a major project ongoing, which has been working up through the course of 2011 to align the manufacturing businesses and the consumer business into a single end-to-end chain, much like you would find in any of the major FMCG companies around the world, to drive the speed of response, to drive the costs lower, and particularly to also drive the cash and the working capital out of that.

And that will be playing out during the course of next year in particular and then into 2013, but that's just one example.

And we're already taking some of the lessons of that supply chain engineering across into the Pharma business, which is allowing us to say, okay, where do we want our plant?

Where is the capacity?

How can we utilize that much more effectively?

So we are now (technical difficulty) as Andrew highlighted we are bringing in-house a lot of the things that for the last few years we've had outside with third parties.

So not only does that save us their margin; it allows us to procure more efficiently and buy differently rather than just buy from someone else and also load our plant much more effectively.

And what we've been able to identify also in the last few months is areas where we can do that between the businesses, so, around our big respiratory plant in Spain, have some space in one of their plants that was otherwise sitting there in a mothballed way.

We are now going to put the production of Panadol into that plant.

So it saves us going to an outsourced third party, we are loading our own plant more effectively, and we're driving down the cost of goods in the consumer business by tens of percent.

And that makes us much more competitive in what you know is a competitive market.

So you can see some of the things already coming through that are hidden within this green box here, but allowing us to offset the regional and product mix on an ongoing basis.

Same thing on the SG&A.

Avandia pandemic, healthcare reform, big drivers that are pushing the margin in the wrong direction this year as anticipated.

But you can see already, the OE savings similarly allowing us to continue to invest.

And SG&A is probably the biggest beneficiary of the operational excellence program over the last two or three years.

Probably about half of the overall cost savings of now GBP2.2 billion have gone into the SG&A line to allow us to reposition the group from the developed markets into the new growth areas that we described earlier.

And that process is now continuing with a whole series of new initiatives.

And what we're really trying to do again as we did with the manufacturing bases is to align the cost platform that we created through the OE programs and say, right, how do I then also use it to allow me to look at not just the sort of fixed costs of the global functions like real estate or like finance, but also, how do I use the finance function and the centralization of some of our global services to say am I really spending my A&P properly?

Am I getting the right returns?

And already you've got a program running which we built up during the course of last year to bring some of the consumer expertise into Europe Pharma, where we are running P&L's for individual products and thinking about how we launch and how we drive real return out of that to make sure that the investment we are putting in is a fully paid for and covered by the savings but that we are generating the right returns.

And it's those kind of initiatives that we're now going to play forward and that will build to contribute to the increasing operating leverage and the growing margin that we anticipate, but they will take time because each one of them is not a huge project.

There's not a big step change going on here.

It's a whole series of individual initiatives.

And you can see some of them summarized on the slide.

So at the COGS level, that simpler manufacturing platform is allowing us to simplify our supply chain, drive cost out, simplify logistics for instance, which are hundreds of millions of pounds in terms of how we think about distributing our product around the world.

If you align the plant more closely with where you are actually selling it you can reduce those significantly, to pick one example.

But it also allows us to knock out working capital throughout the chain because we're now looking at it in a much more joined up way.

The IT platforms that we are now rolling out will give us much more visibility around that and will allow us to compare and contrast between different lessons and getting the businesses to share experiences on the back of that enhanced information.

And remember, the rollout we've done in Germany this year is the first of the European platform, but we already have SAP in our manufacturing businesses.

And so we are able to sort of join up the commercial operations much more tightly now and we'll be looking at how we can accelerate that.

And we've already taken the decision to re-prioritize the emerging market footprint and bring them further forward in the chain so that we can really exploit that opportunity.

I think the other area is just in the consolidation of the global functions where having created a central capability, we are now looking as we look to how we can expand that to consolidate the provision of those services into a much smaller number of global centers, allowing us much greater efficiency in driving the cost down to another new level.

So a whole series of initiatives here, the first phase of which really adds up to the additional GBP300 million that we've identified during the last part of last year, which are really extension of the OE program, but they will create a platform which will allow further additional programs along the lines of those that I've just described.

So overall that will take the OE benefits up to GBP2.8 billion, so we've found GBP300 million extra in the middle of last year, so GBP600 million in total during the course of 2011 to contribute to that operating leverage objective.

Finance has made a more short-term contribution.

We've still got some areas that we are focused on here.

But if you look overall at the financial performance net debt is steady during the course of the year.

That really reflects the cash flow generation that we will come back to.

The effective funding costs still very much the same as last year, and that's not something that I'm particularly pleased with, but remember, we've got quite a lot of refinancing to do during the course of this year.

We're looking at opportunities.

And, again, if we are too visible to the market, is exactly what we're about, then we'll undermine those objectives.

But I'm still confident that we can deliver on the 2% reduction in our funding costs that we are targeting over the next couple of years.

Where we've really made some progress this year is in the tax rate.

A number of the measures that we were planning around the objective that I described for you back in the summer have come a little earlier than we anticipated, so that's good news.

And that has allowed us to lock in a tax rate of 26.2% for 2011 and hold it for around probably 26%, would be the guidance I'd give you for 2012.

So those measures are on a sustainable basis and we are still very much on track with our original targets to take it to 25% the year after that.

So I think you can already see as we anticipated during last year that the financial measures will probably make more of a short-term contribution.

The operating leverage will take longer to come through.

And that's really why when you look at the balance of operating leverage versus financial efficiencies that we are expecting the operating margin to improve gradually in 2012, more in 2013 and more in 2014.

But only a few 10's of basis points in 2012.

The financial contribution will probably be greater next year and we'll look at the overall balance.

Because remember, the objective of the architecture is to drive earnings per share and free cash flow and so we are really looking down the P&L for all the contributions to that.

And the share buyback would also make a continuing contribution to the EPS progress during the year.

So, overall free cash flow, GBP5.6 billion excluding legal.

And remember we are expecting that during the course of 2012 that we will reach final agreement on some of the settlements that we announced in November of last year.

We don't know exactly when those are going to come, but clearly the outflows from those legal settlements will need to be factored into your expectations for free cash flow.

But if you look at the pattern during 2011, another good year of conversion.

If you strip away some of the legal noise around 2010 as a comparator, we are running at around 105%, 110% conversion against earnings.

And I think that's a rate that we feel pretty comfortable is sustainable going forward.

And, working capital, obviously, a big contribution to that, another nearly GBP500 million coming in during the course of the year; not as much as in 2010 but remember that benefited significantly from a number of receivables coming in from pandemic, but still a very good contribution.

And we'll come back to the details of that in a second.

The other area is just on CapEx, came in at around the GBP1.2 billion, and this includes investments and intangibles as well as fixed assets.

I think going forward into 2012 we have a number of projects on the way, which probably mean it steps up a few hundred millions for next year, but probably that brings it back more in line with where it's been historically.

So expect a little pickup in that, but we're obviously continuing to work hard at driving the returns out of that and scrutinizing the program as we work through it.

But that's probably the sort of level you should have in mind.

And we've already talked about the tax rate that goes into next year.

So, working capital.

I've talked earlier about some of the supply chain initiatives on the manufacturing side.

We have talked about some of the IT platforms.

This is all about information.

And what we have generated during the second half of last year is a very specific project to take those pieces and pull them together into a close monitoring of our 10 key product pipelines and that sort of supply chains.

And that's allowed us already, particularly in the fourth quarter of last year, to drive quite significant inventory savings out of the Pharma side of the business; more work to do still on the consumer side and particularly on the Vaccines side, which is pulling in the opposite direction given some of the buildup against the big government contracts that we have in the Vaccines business.

And I think as you play into 2012, expect us to see more progress on the Pharma side and the Vaccines following a little bit behind, so the progress will be steady, but don't again expect big step changes.

But we're taking 10 days out during the course of 2010.

And remember in the first half of the year, we were going -- we contributed about GBP350 million so we have reversed that and taken it down GBP10 million, and we'll be looking to make further progress.

We are also continuing to manage our receivables.

We are conscious of our European risks in particular, which we are managing very tightly, but across the world in emerging markets we have issues which we have to monitor.

And the whole finance organization is now focused on that.

And equally on the procurement side where I've talked to you a bit about some of the new hires we've made on that side, not only are they making progress in terms of what we buy and the costs we're paying, but they are also managing the way in which we relate to our suppliers much more actively, looking at our payment terms.

And those tend to only come around once a year, so we saw good progress on that in the fourth quarter as well, but more that we can do next year.

So overall that's left net debt study.

And I think probably the key message out of that is if you look at the free cash flow of GBP4.1 billion and the disposals of GBP1.3 billion we've paid out that and a little bit more in terms of dividends and buybacks during the course of the year as we reviewed the other opportunities that there were around.

And from a benchmark returns basis, that seemed to offer the most attractive returns for our shareholders.

And so during the course of the year, we increased the buyback from a range of GBP1.1 billion to GBP2 billion, to the upper end of that, and then to GBP2.2 billion over the course of the whole year.

And I think that's very much as Andrew highlighted the approach we're taking this year that we're looking at how the returns play out, what other opportunities there might be around, but we start in the same place with a commitment to effectively looking at prioritizing the dividend, and with the free cash flow that we're generating.

Otherwise we'll return it to shareholders or reinvest it through bolt-ons if they offer a better return.

And so, in summary, returns last year, dividends GBP3.4 billion, buyback GBP2.4 billion.

And remember the supplemental of 5p.

We've decided that we want to maintain a balance between dividends and buybacks, and so we've -- returning the supplemental dividend to return the proceeds from the OTC disposal to keep that balance.

And we'll continue to look at that balance as we go through the course of the year while maintaining the overall objective of looking at our total free cash flow available on where we generate the best returns.

And so overall in terms of the position that GSK finds itself in today on the back of 2011, I think we feel very comfortable about the momentum in the business.

We've talked about the pipeline and the breadth that that brings to the mix as well as the different overall balance within the portfolio and the overall returns that they focus on -- operating leverage, financial efficiencies and free cash flows -- is allowing us to deliver in terms of dividends and buybacks.

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

Great.

Thank you very much, Simon.

Maybe I could ask Moncef to come up as well, and then we'll open up the floor to Q&A, please, so any questions?

Andrew?

Thank you.

It's Andrew Baum from Citi.

Three questions, please -- firstly to Andrew and Deirdre, you mentioned the US as being a driver for future growth given what's going on in Europe.

Perhaps you could talk to your level of contentment with existing Rx script trends or the volume trends in the US because looking at some of your growth drivers in larger drugs they're either flat or negative, so Lovaza, Tykerb, Veramyst, Advair and Flovent.

So what can be done in the context of the reengineering of the organization that's happened to date?

Second in terms of tax rate, Simon, perhaps you could give a comment about the further acceleration of improvements for the tax rate for 2014; and in particular if you'd have a stab at where you think your tax rate is going to be in 2017 given the UK patent box.

And then finally, on Vaccines, a question for Moncef -- seven vaccines I think have been added to the Japanese schedule of late from your competitors.

To what extent that gives further opportunities to GSK to get its vaccines incorporated into the pediatric schedule?

Okay, Deirdre, do you want to go first on the US Rx position?

Thank you, Andrew.

We have seen in the US overall in the pharmaceutical market a contraction in terms of value in the general market of about 2%.

And we think that is partly due to some of the macroeconomic issues.

We've seen the economy impact the visits of patients to physicians' offices at around 5%.

In respiratory we're seeing about a 7% loss of patients that are visiting physicians with respiratory problems.

So overall the market has seen a negative impact, but I would point, Andrew, to some of the products that are growing double digits in our portfolio, for example, Votrient, Arzerra, Promacta, Jalyn.

That gives us confidence in the current growth of those products, so some of the products that we've launched.

And also it gives us confidence that the products that we're about to launch in the next couple of years will be launched effectively and we will see success with those products as well.

So while we are challenged with some of the respiratory issues that we've seen in the marketplace from a macroeconomic, we're very encouraged with the results that we've seen with our other currently launched products.

Thanks, Andrew.

Thanks, Deirdre.

I think I'd also add to that that if you look at our bigger products, shares look pretty good, so what's going on really there is majority market dynamic as Deirdre has just said.

And actually in most cases, so if you look at Advair, for example, you start the period with an 80% or 80%-plus market share and you get two or three new entries, you would expect to see a decline in performance.

We really haven't seen the kind of share fall that you would've necessarily predicted and certainly not -- and certainly we've seen a better performance in the US than we saw in Europe even.

And even in Europe we were able to hold onto 70% of that market for five to seven years.

So I think overall, the US story, Andrew, is one of there is a -- I think a much greater tenacity than there used to be.

I think that's demonstrated in the robustness of the shares of the bigger products.

And as Deirdre says, the new products I think have all performed very well actually so far.

Now, the key of course is we have to fuel that market with new products.

There is actually no point in dreaming that the US is a great place to be with branded generics; it isn't.

You need to be there with innovation, and that's been the whole point of trying to bring the R&D portfolio back to the fore.

I think the early signals from some of the newer specialized products that I'm encouraged that we can make progress.

I would also point out the shift in the customer perception of GSK in the last 12 months has been dramatic in the US.

So if you look at the way that GSK is now rated by managed markets, customers by pharmacy, by integrated medical centers you will see tremendous improvements, very often now ranked as the number one company in terms of the companies they interact with.

That's key because that marketplace is very dynamic.

Customers are changing.

Customers who made decisions for products we launch next year are not the same kind of customers who made decisions five years ago.

It's critical that we've got the right rapport and the right credibility.

And I think that's more than anything, reassures me we're in good shape.

Tax rate in 2017 -- and while you're at it could you tell us what else we would like to know about 2017.

Exchange rate with the yen maybe?

Just directionally.

I mean how much potential is there here?

That was the text of the question.

I don't think we want to change our specific targets at this point.

And you've already seen we've made some early progress towards those and we'll benefit from those during the course of next year ahead of time.

I think the patent box was always something that was for the future beyond the targets we gave you.

How much of a benefit we'll reap from that depends on how quickly we can, A, bring product back into the UK; what we're doing with the pipeline; how R&D in particular plays out; a whole host of factors that make it very difficult to predict.

But clearly we are targeting that 25% is the first target and we'll work better thereafter.

And so on Japan I think we've had a strategy that we started implementing already a few years ago based on two approaches.

One is to implement some -- or introduce some of our most innovative vaccines into the Japanese market.

And I think the experience with Cervarix this year has been quite compelling.

And Rotarix is the next one to follow on.

The second approach is one that relies on local partnership.

And for instance we have a partnership around the development of a cell-based flu vaccine, locally, and there is potentially more to come.

But we are definitely going significantly after that opportunity.

And I think if you look at the performance of Cervarix in particular and you look at which company really has worked hard, particularly on not just getting listing of vaccines but listing of vaccines which are reimbursed at substantial level -- as you know there's really only been three or four modern vaccines fully reimbursed in Japan -- you can see that GSK has been a very successful participant in all of that.

Mark?

It's Mark Beards from Goldman Sachs.

Thanks for taking my questions.

One, on margins, which I think came as a little bit of a surprise to the markets this morning on how -- what small amount of margin expansion we are expecting to see this year.

What are the headwinds that are stopping you from expanding to the level that we were expecting in 2012?

And then secondly, you mentioned Europe and what's happening in Europe in terms of innovation not being paid for.

What knock-on effects might that have to the commercial organization in that part of the world?

Okay, let me answer the second question first and then Simon can talk to the margin, although that really is about the definition of the word gradual.

We will come to that in a minute.

In terms of Europe, what we're seeing in Europe is really two general phenomena, although of course within Europe there are many differences.

So the two -- you've got price cutting going on.

What you also have is, and particularly in Germany, in the UK, one or two other markets, relatively big markets, sustained patterns of very extensive delays to new product availability, or a pricing regime which makes new product introduction not that obvious -- I'll put it that way.

So for example in Germany, proposals where you can launch but a year after you launch you can have your price reassessed and potentially cut which will be right when you're in the middle of negotiating prices in the other 27 member states.

Is that really where you want to be?

UK I think -- you can read every day of the week of a drug not being approved in the UK.

Sooner or later, it -- when you get to a point where we've gone through so much to try and get drugs approved, we've taken -- we've proposed risk-sharing deals, we've proposed very significant discounts and we still can't get through, eventually you just say well actually you know what we'll focus somewhere else.

So it's not that we won't develop drugs for Europe.

It's simply a case of the priority of where we are really going to drive, what should the comparator be?

Where might we do the trials?

It's going to be driven from the markets that we think are most likely to welcome the product.

It's not that different to any other industry.

And I think we just have to move on and recognize that at least for the next few years, Europe through all sorts of obvious macroeconomic pressures is kind of stuck in a bad place.

What it means for our European business -- not too much.

We have halved the size of our of our European operations' physical headcount more or less in the last four years.

So I think we're probably more or less at a state that's kind of fit for what I'm describing to you.

And we'll still register drugs in Europe.

We're just not going to necessarily design them for Europe in a way that we would've historically done.

And obviously that can change if the view of innovation in Europe changes.

But at the moment there is an increasing, not a decreasing gulf between the way European payors are behaving and the way American and Japanese -- who are not pushovers by any stretch but just have a more pro-innovation instinct to start with.

And I think that's obviously a place where we would rather focus.

On the margin?

On the margin, look, I think the important point is that nothing has changed in our expectations of what progress we're going to make in 2012.

And we've always said gradual.

What we're trying to do is put a bit of definition around that, given that people were struggling with that.

And you know -- and the reality is when you look at, as I've described in 2011, what we're dealing with is balancing the investment behind the growth drivers with the cost savings and the efficiency gains that we're making.

And those are providing the resources to be able to allow us to invest to drive the growth at the top line that you're seeing.

And the balance of that is going to change as the pipeline comes through and as the growth comes through from those investments over the next two or three years.

And to pull back at this point when the strategy is just at the point of really rebalancing the group, the R&D position is really beginning to come through, just seems to us the wrong thing to do.

And that balance, therefore, is going to be relatively tight in 2012.

We'll have more room in 2013 and more room in 2014.

So it's a sort of two- to three-year progression that we are talking about here.

But it is going to be a few 10's of basis points next year reflecting that balance.

I think as well -- let me just add a kind of slightly more philosophical view.

I mean ultimately, pounds pay the shareholder, not percentages.

And while we are -- don't get me wrong.

We're very focused on delivering -- if we say to you we want to deliver an expanded margin, we want to deliver an expanded margin and that's what we're going to do.

If opportunities come along which allow us to create very substantial amounts of value for the shareholder but for some reason might dilute the margin a little -- imagine tomorrow morning, Emma Walmsley rang me up and said I've just discovered an organic growth opportunity for consumer which adds GBP300 million of profit to the group, at the consumer margin, obviously that would be dilutive.

Should I say yes or no just to protect the margin?

I should say go for it because it's creating more wealth for the shareholder.

And I think we just -- so I just want to make very clear, we are giving you our best estimate of where we think this will go.

It's absolutely where our plans take us, but ultimately we are in the business of generating maximum economic return for our shareholders, not some theoretical percentage margin structure.

And at some moments that might lead us to say, actually, this opportunity came along or this organic investment came along and it leads us to a slightly different place.

And I think just fair to share with you that I have a slight -- I don't have quite that religious kind of obsession with the percentage.

I'm much more focused on how do we drive profitable growth for the group and maximize cash for the shareholder and maximize return to the shareholder.

Graham?

Thanks.

It's Graham Parry from Bank of America/Merrill Lynch.

Just wondering on the buyback expectation for this year, is there a scenario where you would see your free cash available for dividends and buybacks exceeding essentially what you're pointing to here, and so have you left anything in the pop there for bolt-on acquisitions?

And if they don't happen, could you actually see yourselves exceeding the top end of that GBP1 billion to GBP2 billion, which you'd already set out as a long-term and sustainable target?

And then a question on the 719 dose ranging data which you said is supportive of the current dosing in Phase III.

Can you confirm whether that means that this does show that doses below 62.5 micrograms are not active?

Or are you actually seeing any kind of activity below that level?

And then thirdly, on Promacta, you're still moving towards filing on Promacta despite the disappointing ENABLE-2 data.

I know you are looking to cut that data in other ways.

Have you done that now, and is that giving you any greater confidence in filing?

So can I ask Darrell, do you want to answer the 719 question first?

So the -- we have completed as you know the lower dose study with 719.

The aim of that study was to help us fill out and understand the whole dose response curve so that we would know where we are with the doses that we've chosen for Phase III on that dose response curve.

And I'm not in a position to reveal any details around the data, but the data had given us greater confidence that those doses which we've chosen are -- look like optimal doses for us to be in Phase III.

And Promacta, Moncef?

So regarding Promacta, as you know, there's two ENABLE trials, 1 and 2.

And observations were contrasted between the two studies.

And our overall assessment of the population in the two studies led us to conclude that the benefit/risk intervention in chronic hepatitis C patients was positive.

And, therefore, we will file.

And I'm sure the observations made will be subjects of discussions during the review period, but we are confident to file.

And we're confident this is a beneficial medicine for patients.

And Simon, if we didn't do any bolt-ons, would we have more to buy back shares?

Well I think as we said in the presentation, our approach to the range we've given you is very much the same as last year, that we'll see how we progress during the year with other alternative investments that may come along; and also how we generate cash and what our performance is on that front; and put them together during the course of 2011, we came in better than we expected on the cash side.

And we also didn't see really the opportunity on the M&A side.

And we then upped the buyback as a result.

So I don't think we can give you any specific target today, but that's very much the philosophy that we go into 2012 with.

And, I mean no question.

If we didn't do any bolt-ons at all then there would be more -- if all else was equal, if the plan delivered what we expect it to deliver, then there would be more capacity to do more if that's what we wanted to do.

Yes, go ahead.

Florent Cespedes, Exane BNP Paribas.

Three quick questions -- first on the 2012 guidance on the top line given the soft Q4, how do you see the growth of the top line for 2012?

And what are the mainstream factors?

And given the operating leverage, is it fair to assume mid to high single digit core EPS growth for 2012?

That's my first question.

Second one on pricing environment, could you give us some --

That was two questions already, right?

The first was on the guidance.

Now on the emerging market and pricing environment, could you give us your view on the pricing environment in emerging markets?

And also a quick update on your low pricing policy you announced last year on some of your products?

And maybe a last one if I may regarding the (inaudible) sales, will you announce an analyst meeting with a review of the late-stage pipeline sometime in the year as you anticipate the leap year date shortly?

Thank you.

Okay.

As far as -- we're obviously not giving any specific sales guidance this year.

We are certainly confirming that we expect to be able to report sales growth.

And we've shown you what our averages have been over the last couple of years.

During that period we've had two or three quarters which have bounced above the average, so Q3 of last year was plus 6, Q4 was plus 1, so you've got -- you can see just in those last two quarters the kind of volatility that we will see.

And I would expect to -- I would guide you that we will continue to see volatility.

And I really would guide you not to get too worked up about quarters.

Having said that I think that if you look at the emerging markets over the last six months, we've seen more price pressure, particularly in the government controlled emerging markets, so, the Russias, the Turkeys.

So there's been more of that kind of pressure.

We have seen extraordinary volume growth, which has been suppressed a bit from what you are seeing both by the government price pressure in Turkey and Russia, but also by some of our own voluntary price cuts to drive a lower price opportunity, which will wash through because most of those price cuts were taken in the early part of last year.

And once we get out of the early part of this year we should start to see more of the underlying volume shine through from that piece of the strategy.

Overall, we're seeing the EMs click down a couple of notches, so whereas if we'd been stood here a year ago we'd have been talking about the emerging market market growing 14%, 15%.

You're probably now at 11%, 12% in terms of where IMS is currently estimating.

And that's due to all sorts of things.

If you look at our specific business, partly pricing that I just touched on; a lot to do with vaccine phasing which is not really something to worry about unless you get worked up about quarters; partly anti-infectives.

We have a big anti-infective business, and the overall anti-infective world market has been very flat for the last 12 months; very little disease, good news, in that part of the world.

But that's been a major issue for us.

Those have been -- and then the Middle East has been the sort of specific issues for us.

Now as we go forward this year, what's going to drive our EM business up or down, well, the phasing should wash itself out.

So I don't think you should worry too much about that.

The Middle East, again, we have to just wait and see how quickly it re-stabilizes and what the kind of bounce back might look like there.

Our voluntary pricing washes out, and we should see the volumes kick back in.

And then it's really a question of are there going to be other government interventions or not.

And we have to wait and see what comes from there.

As far as EPS -- that's your job to figure out what the EPS numbers are going to be.

Obviously we are doing everything we can to make it as big as possible.

So I'll let you -- I'm sure we'll speculate -- you'll speculate all year, we'll keep missing each other, there will keep being definitions of the word gradual, and eventually we'll get to the same number.

But we'll just go through the year the normal way on that front.

As far as low pricing policy, as I mentioned already, it's kind of -- it will wash through.

It's been -- what we've seen in the EMs is a very strong volume pickup as we've dropped down the price curve.

When we originally started this we thought this would be something like a three-year payback but it's more like a one year.

So you kind of recover your position about one year after making the price reduction, which gives you some sense of the kind of pace of what's going on there.

What we're also seeing is quite good click in the innovative higher priced products as well.

So, which is -- if you look at some of the -- if you strip back the anti-infective, you strip back the Middle East, and you strip back vaccine phasing, those underlying core volumes look very nice in most of the emerging markets.

As far as R&D is concerned we've confirmed that we're going to have an update on -- or a discussion on the DPUs to give you all a chance to dive a little bit more into that.

And we'll update you in probably Q1 when we're going to do the full development pipeline, but we're not very far away from doing that.

So you've not got too long to wait for that.

But we want to do it where we've got as much data as possible.

Because there's no point having that session if we know big data is due in one way or the other.

Much better to have the picture so that we can actually show it all to you, particularly on the Relovairs, the zephyrs, the albiglutides, the 572 programs, the rare disease programs.

We've got an awful lot of data coming in during the year.

And I think that discussion will be a heck of a lot more useful to you if we do it with the data than theoretically.

And we'll be able to update you on exactly when we will schedule that at the Q1 results.

James Gordon from JPMorgan.

One question, which is the GBP300 million of operational excellence, will we see any benefit from that this year?

And if we will see some benefit from that this year, if that's incremental, is there a reason where -- is there something that offsets that?

That means we don't see more operating margin improvement this year thanks to that GBP300 million saving?

And then just the other question was also where would CapEx go for the next few years?

What should we think about?

Simon?

Okay.

We will see some of that GBP300 million in 2012 and the phasing will ramp up over the next two to three years.

So we'll see probably a 25% to a third of it this year, but it will go into the overall aggregate OE benefitss, which are ramping up to GBP2.8 billion by the end of that period.

So I think it is very much built into the mix of margin improvement and comes back to the same point of it's paying for some of the investment that's driving the top-line progress that we expect to make.

So I don't think you should add anything extra into that.

I think it's more about reassurance that there is some momentum behind gradual this year more in a couple of years thereafter.

So nothing has actually got worse that's offsetting it, meaning you still get to the same level of margin expansion even though you've got the incremental savings?

Well I think, as I say, there is a relatively small amount in 2012.

Most of this will come through in a couple of years behind it, but what we've been able to do is look at the original OE program.

And the process of restructuring sort of unearths the next opportunity, so particularly in the manufacturing businesses where we are simplifying the production lines.

And consumer will be a good case in point where the sort of end-to-end supply chain that I've talked about has really identified a series of initiatives that are a reasonable chunk of these extra GBP300 million that will come in to that business over the next two or three years.

But relatively smaller in 2012, so it's not that something else has happened and we are offsetting it.

It's about building some confidence and specificity around what happens over the next three years rather than just one year.

And CapEx?

On CapEx, I think for 2012 as I say probably something in the order of GBP1.5 billion, and that's in line with our historic norms.

It's been down a little bit over the last couple of years.

We are obviously continuing to see where we can take the savings out of that.

But I think you have to be careful, particularly when we are growing the business and we're bringing in a big new range of products on the consumer side and on the Pharma side that we will have to put some investment behind the manufacturing capacity for that.

So that's why I said it will probably step up a little bit, but that's probably the sort of guidance level you should have in mind.

Yes, Jo, over on the far right.

Jo Walton, Credit Suisse.

Three questions, standard today.

The first one to go back to margins, I'm afraid; second one on R&D; and one product related.

So on the margins, perhaps tackling it a different way -- you've talked about 0.4% of sales adverse mix effect from product and regions last year.

Is that a reasonable ongoing rate?

As you move forwards, you get more partnered products coming in; you're also getting more growth from emerging markets.

So whilst we can all look at the good things of operational excellence, is that a reasonable sort of headwind?

And in the SG&A you talked about 0.8% of sales in the investment.

Where is the incremental investment coming?

You are going to see -- I'm not saying this is bad -- but are we going to see more of this in emerging markets?

Perhaps Japan -- you talked about that as being a real opportunity; is there more footprint to go in there?

My product-related question was on Advair in emerging markets -- it grew strongly in 2010 underlying.

It showed no growth at all across 2011.

Is there something that we should know about there?

Is it disease pressure or whatever?

And the final question on R&D, you talked about an improvement in your R&D productivity.

When you are looking at an average Phase II, Phase III product going forwards, you are trying to value that.

Have you reduced your sort of lifecycle expectation for that because it's just never going to be as big, never going to get where you were going to get to in Europe?

Is that an actual factor?

Or do you now say well it's not going to be as big in Europe but I can now factor in a better emerging-market lifecycle, so, overall the return for an average asset is the same?

Okay.

On Advair emerging markets, almost all to do with pricing, Jo.

So volumes look fine but price and particularly in Russia and Turkey were very focused on Seretide.

And actually the same is true a bit in Europe.

So Europe was very skewed by pricing.

Europe -- Seretide was very skewed by pricing in Germany on Seretide.

So it was just two or three examples where you've got very specific, quite deep price hits in one or two markets just knocks all the growth out of the system.

But nothing -- I wouldn't worry too much about volumes.

As you know in many emerging markets we've already got generics in most of those countries, so, in terms of you know the kind of going forward dynamic is very much the same dynamic we've had in the past.

The issue is government price cuts when they pop up.

And they can -- if you look across the whole of the EMs, about 60% of our EM business is cash; about 40% is government controlled.

So it's when the government controlled element gets hit that's when you have seen that kind of effect play through.

In terms of the margin headwinds, I think there's no doubt that the partnered products obviously reduce the margin going forwards.

It's obviously how we're going to pay for that R&D that was done on our behalf or the risk that was taken on our behalf.

And the way -- I think it's very well worth being thoughtful that the kind of savings that you can particularly drive out of manufacturing are going to be needed to at least standstill against that pressure.

There is no doubt about that at all.

There's a clear -- that's a clear CGS hit that's going to come in as the portfolio mix changes.

And, that's the one I would say you really just have to keep in eye on.

Now whether we can drive more savings in that elsewhere I think is really the question.

So, the way I would look at it is can manufacturing keep driving off enough savings to neutralize some of that impact?

The second part around the SG&A, we are -- I would say for EMs over the next year or two we've had a very big expansion in EMs over the last four years.

And we are quite keen over the next year or two to have a period of pause in terms of expansion to make sure we've got everything running as efficiently as possible and get the maximum leverage out of what we've got rather than just have grow, grow, grow constantly.

I'm quite a believer in if you expand something very significantly, you need to take a breather at some moment to really take the value out of that opportunity.

So I think you should anticipate a slower ramp of investment in the emerging markets, because it won't be zero because there is always going to be a country that you need to increase position in.

But it won't be at the same clip that it's been in the last few years.

And the last thing I would say on margin is, just to state the obvious, a huge amount of what drives these margins is the growth rate in America and in Japan, which we are fixating on the things at one end of the equation.

You've got to look at the other end.

The last four or five years the US has been in freefall, and we've been losing nothing but 98% gross margin products.

What you've seen is the US has stabilized, begun to now move back into growth, look for growth going forward.

Obviously pipeline if it comes as we hope it will gives the opportunity to really drive that growth and bring back margin to the group from the US side.

So I think it's important to look at what we've been able to achieve not just with all the headwinds we keep talking about but the big -- the one we don't talk about anymore, which is the big US headwind, which has been by far and away the biggest margin diluter of everything that's gone on in the group.

So worthwhile just contrasting how tough has it been for the last four years versus what does it look like for the next few.

And while it's not absent headwinds, the really big headwind has at least stopped blowing, and we are hoping to turn it into a tailwind.

And I think it's worth reflecting on that.

And that's why we're confident over the next several years, we can get some pretty good operational leverage, very gradual to start with, but picking up next year and the year after as we start to see that dynamic come to play.

In terms of R&D, we absolutely forecast realistically what we believe the assets are going to do, so we do do a specific European assessment of what we think the value of the asset could be.

So whether we think it's going to be a low price with access or whether we think there's going to be no access at all that does go into the model.

And we do also forecast for the EMs as well.

It just varies by asset, Jo.

There are some assets which are very dominated by the EMs, particularly if we think it's going to be a China opportunity.

You can see very significant leverage if you will from the EM in that whole analysis, but it just varies asset by asset.

But we do do it, area of the world by it.

So we're not just -- we're not still plugging in 1980s numbers for Europe.

We plug in very -- maybe even overly conservative -- I'm not sure.

But we do plug in very Europe-informed numbers into those analyses.

Mark Purcell from Barclays Capital.

Three questions as well.

The first one is on albiglutide.

I just wondered if you could help us understand the clinical proposition the product provides.

We've obviously got two new trials in house that you've got and we haven't got.

The lack of CNS penetration I guess is causing the lack of weight loss.

So just trying to understand that product in the context of its competitors and what this means for investment in diabetes as a franchise going forward.

Secondly, for the emerging markets opportunity, where you're looking to build further critical mass; obviously you talked about some of the reforms in places like Russia and Turkey, whether these are providing any opportunities for you to invest and put your product portfolio through?

And then lastly you're going back to the top line, moving from underlying sales growth of 4% to a top-line figure; obviously as you say in the press release we have to take out any OTC disposables.

What should we be taking out for Cervarix out of the GBP350 million that was booked in 2011?

And should it be about GBP300 million to GBP400 million based on your comments on EU pricing coming out for 2012 as well?

Sorry, I don't -- I just didn't quite follow the logic of the last question.

Could you just repeat that for me?

Yes, sure.

So 4% underlying growth in 2011, so I guess you start with the same, roughly, give or take a few percentage points in 2012.

So obviously we would have to take out up to GBP500 million worth of OTC disposals.

I presume GBP250 million or so of Cervarix in Japan, given that the tenders were biased to 2011.

And then also the European reform measures you just mentioned, about a minus 5% negative pricing environment in Europe in 2012 relative to 2011, so I'm just trying to understand the headwinds that you face relative to that underlying sales growth that you (multiple speakers)

Well, so just to be clear, when we've always talked about underlying, all underlying is ever stripped out has been Avandia, pandemic and Valtrex.

So everything else, so the puts and takes of tenders, wins and losses, the puts and takes of pricing are all in what we call underlying.

So, when we went -- so it's up to you what you back out, and by all means do whatever you need to do.

All we are simply guiding you is don't forget if we dispose of a business we obviously can't grow it anymore, so that has to be adjusted.

We're not looking for any other special kind of treatment or exemption.

And we are going to -- our goal -- my view is that when you look backwards into a year you have a bunch of one-off good things and you have a bunch of one-off bad things.

Your job is to try and turn the one-off good things into repeatable good things and find a few more and your job is to try and minimize some of the bad things and make them stop happening again.

And that's just our job to have to deal with.

So I don't know if that helps, but I don't think you need to get too stuck there.

Russia, Turkey -- yes there are opportunities.

And what I think you see -- and Turkey is probably a better example than Russia.

What you tend to see in these markets is very strong go-go growth for three or four years and then a very sharp price correction.

And it takes you 1.5 years to recover and then you get two or three years of really net growth in the system.

And we've seen that in a whole variety of countries, where you have got that strong demographic push going on underneath the surface.

Turkey is a brilliant example of that.

Russia is a bit atypical because Russia doesn't have the demographic dynamic that a Turkey does.

So Russia is unusual and a bit of a case of its own.

As a general rule, historically, every time we've seen these big adjustments we quite often see some companies withdraw; that quite often leaves space for us to do better over the subsequent three years and obviously we'll try and do that.

Albiglutide -- maybe, Patrick, do you want to talk to that?

Yes, so, as you said, I mean you've seen some of the data and there is more data coming in and there's more data yet to come, so where we are with this is is this a product that didn't meet the once a day efficacy in the first bit, but actually very well tolerated.

We expect that efficacy to continue.

We are very optimistic actually, that this is a nice product with a very good tolerability profile that will have a good place in the market.

So we're confident of that with data still to come, of course.

And we are going to drive you a bit crazy I think because we -- for various reasons very often because we are partnered on the drugs, we have to announce the initial data for obvious reasons because it's very important to the partner.

But in very many cases and in fact in particular in this case there may be very good reasons why we don't want to get into too much more detail in this particular case because trials are still ongoing, and therefore, there are all sorts of regulatory implications.

So we need to be -- -- so there might well be -- and this is one; Relovair will be another; there may very well be times during this year where we give you a sense of the data and it may be that the initial data we give you is not that overwhelming.

It may well be that over time we get more studies because the subsequent studies are looking at let's say more interest in subpopulations or particular niches or particular points of differentiation, or in the case of Relovair, in terms of core differentiation from existing products.

And there may be periods where all you've seen is that initial report and we're starting to see slightly more data, but it's just not ready to announce.

And I'm afraid we're just going to -- you have to be patient with us as we kind of assemble the full portfolio.

What we don't want to do, particularly where we've got 10, 15 studies is if we come out Monday with a study that's ho-hum, Tuesday with a great one, Wednesday ho-hum, Thursday -- we've got to -- somehow we have to get to a sensible holistic picture of the molecules.

Certainly our view on albiglutide and Relovair is that they both look very, very promising.

And we'll see when the full data comes in before we can really articulate the full picture to you.

Since you've all been taking three questions each, I've only got time for one more.

So who's got a question.

Yes, please?

Last question, thank you very much.

This is Sam Fazeli from Bloomberg Industries.

If I may, I have two questions to ask you.

One is with regards to China and Japan.

In terms of the expectations for 2012, what level of impact are you expecting to see from the biannual price cuts in Japan and also the provincial bidding that's going on in China?

I'm assuming that although you haven't given a specific guidance for 2012 Japan and China growth that you are expecting volume to overcome all of that and potentially in Japan from new product launches.

The other question was with regards to strategy versus possible generics, if you want to call them that, for Advair.

We've seen another company recently with a massive genericization be very prepared for that over the year before the patent expiry and have shown some success in controlling the volume of the brand -- I'm referring to Lipitor, obviously.

And given that you don't have that luxury because the patent and the combination is gone and maybe anybody coming with the device would not necessarily be going up against the discus patterns in your [edge] work, what strategies are left to you for potentially protecting Advair if that just comes out of the blue?

So as far as China and Japan are concerned, clearly, the process of the biannual price reduction is underway at the moment.

As you also know there's been a very significant reform in the Japanese pricing system, particularly for the innovative products.

And GSK is one of the leading beneficiaries of that, given the number of products we've introduced into Japan.

So we don't know what our particular pricing impact is going to be.

We have to wait and see, but I think what you can certainly see over the last three years is that, A, we've had extraordinarily strong volume growth every year.

And in the previous year where we had price reductions or two years ago we were still able to grow the business.

So the volume was sufficiently large to be able to grow the business.

And again a little bit dissimilar in China.

We've got -- China for us is -- really we have obviously three businesses, but if you just focus on Rx and vaccine, last year was a very difficult year for us in China for Vaccines because of the Chinese Pharmacopoeia issue, which meant that we had to essentially stop selling a number of our vaccines alongside several of our competitors.

That's one of the one-off bad pieces of news that happens some years and you don't want to happen every year.

But the Rx business has been extremely robust, double-digit -- very strong double-digit sales growth.

And we continue to manage, regularly, price events in China.

The fact that there is a provincial review; there was a different kind of price intervention last year -- every year there's some kind of price intervention.

You have to manage it.

And again the volumes are very strong in those markets.

As far as Advair is concerned, the fundamental issue, there just isn't any in the US.

There is no visibility of any potential generic in the marketplace or on the horizon.

No potential for a branded generic either, at least in the foreseeable planning horizon.

So, I think rather than getting to what we might or might do in a completely theoretical world, what we've seen over the last several years is all of the putative generics or branded generics essentially pull back.

It doesn't mean to say there will never be one, but it's certainly clear there isn't going to be one in the next few years.

That's very important for us because it gives us a platform of confidence around that business on which to build the portfolio of up to eight new products that I've already described today.

So that's probably the best I could say on that.

With that, listen, thanks very much for your time this afternoon.

If you want to stay for a cup of coffee or want to chat to any of the GSK executives who are here, we'll be over just across the hall and be delighted to have a cup of coffee with you.

Thanks very much.