葛蘭素史克 (GSK) 2012 Q2 法說會逐字稿

Good afternoon and thank you very much for joining me by link today.

I'm sorry we are not doing this face to face, I'm sure you understand we're trying to avoid everybody being caught up in an Olympic Lane and hopefully this works for you in terms of avoiding being trapped in traffic.

We're going to review the Q2 results for GSK and with me today are Simon Dingemans our CFO, who will make some comments in a few minutes, and also Moncef Slaoui, who will join Simon and I for question-and-answer at the end, so you'll have an opportunity to ask about pipeline assets if you'd like.

Let me start by making a few general comments about the quarter.

It's been an interesting quarter.

A very busy one.

Really two big dynamics.

The first is some very, very good progression of the advanced pipeline.

We will talk a little bit more about that but clearly during the quarter we have seen a lot of very encouraging data, particularly around some of the bigger potential assets in the pipeline.

While there is much still to do to bring those assets to the marketplace, it is clearly coming into shape as a potential driver of enhanced organic growth going forward.

Secondly, again the quarter has been characterized by a continued deterioration in the external environment, especially in Europe where we took a 7% negative price hit during this quarter.

We think to some degree that may be the worst it gets but that all depends on government policy.

So if nothing new comes up from now on we think it starts to ameliorate going forward but it all depends on the events coming out of the Italian, Spanish, and other governments over the next few months.

We will have to wait and see.

This is been a quarter really with some short-term tough external pressures, really offsetting some of the growth opportunity that we have in our investment markets and a quarter where we're seeing good progression on pipeline.

Overall, strategically, we feel that we have made good progress and in terms of heading towards where we want to be, delivering sustainable sales growth and driving leverage in our margin, over the medium to long term, over the next few years, we feel we've made good progress.

I want to just review some of the headlines of that.

First of all just to reiterate, the strategy remains exactly the same.

This is something which is guided us well and I think we have exactly the alignment we need within our organization to deliver the focus on our investment businesses, the growth of our Emerging Market business, the strengthening of our Japanese business.

All of that has really helped to deliver for us this year.

It's interesting even in this quarter, this time last year, our reported sales were falling about 4%.

We're now moving into a period where we see this year coming out inline with last year.

That minus 4% back to level this year, we would have liked it to have been a little better than that, but within the scope of the pressures we see, we still think that shift and turn in momentum of the organization is really a key signal of what we are building toward over the future.

We've got to this point because of the performance of our investment businesses, a little bit offset by the pressures in some of our more mature businesses.

R&D continues to be a major focus for us in delivery now, major changes in how we operate, major changes in how we make decisions is what's put us in the position we are today with really an unprecedented potential opportunity in our pipeline.

Really key for us in terms of the medium-term opportunity for the Company.

The portfolio as a whole really helped along by continued growth of our Consumer business.

The cleaning up of that portfolio, the divestment of the products are really helping to release the energy and the focus, delivering a 7% growth during the quarter against a market growth of about 4%.

Very nice recovery in the US for us on the Consumer business and really across all of our key categories of oral care, particularly the Sensodyne business and nutrition, particularly the Horlicks business, and of course wellness, particularly in pain, very good performance during the quarter from Consumer.

We also continue to be very positive about our vaccine business.

And while it's very lumpy and causes all of us including yourselves real challenges in forecasting because the tenders come in in such unpredictable ways and therefore creates and amplifies quarter-to-quarter volatility.

You can see during the year the continued development of this business, tremendous continued rollout of Simplirix across the world particularly in Emerging Markets, continued good growth of Rotarix, Boostrix as well as the base businesses.

Very strong performance during the quarter from Emerging Markets, and we continue to expect during the rest of this year, although it will be variable between Q3 and Q4 because of prior-year comparisons.

And we continue to expect our vaccine business to be extremely robust driven by those new products.

I want to dive very quickly into the two mature markets and to give you a sense of some of the puts and takes there.

But before doing that, just give a little bit of a sense of the overall movements in the business this year at the sales level.

So what you can see from this slide is a simple bridge from where we were last year Q2 you can see the impact of the divestments of the business -- the various businesses, so this is the Vesicare [divestiture] as well as the Consumer brands.

You can then see the headwinds of the US and European pharma business which I'm going to touch on in a second.

Really completely overwhelmed by the growth being delivered by the Emerging Market Japan and Consumer businesses and I think the slide more than any I can show you demonstrates why the investments we've made in these businesses has been worth it.

Because even in this much more difficult than expected environment for the developed markets, our new businesses have been able to neutralize that impact.

You then see a little bit of the impact with ViiV genericization particularly of the old HIV products, takes us to where we are on CER and just for completeness I've shown you the currency headwind as well.

Really what you see here is a story of really three parts.

A piece of divestment, headwinds in Europe and US, countered by continued strong performance in those growth businesses.

Emerging Markets up 9%, Consumer up 7%, Japan up 6%.

All three performing extremely well.

Let's look quickly at Europe.

We talk a lot about price but I wanted to share with you volume because I think volume just gives us a sense of how well we are doing competitively in this marketplace.

This is an IMS derived slide.

You see three lines on this slide, the top line is the overall market.

The middle line if you will, from the left hand side, the middle line is the peer group of major multinational companies and they're highlighted in the bottom for you in the footnote, and then the more variable line is GSK.

Two or three messages in this slide.

This is volume, this excludes Avandia as a discontinued business but includes everything else.

Includes vaccines which are picked up in retail resell but not vaccines which are picked up through large government tender.

So just for completeness to give you a sense of what this data shows.

Two takeaways I think you can see from this.

Number one, the overall market is pretty slow anyway in volume and if anything, just gradually slowing.

You can see that top line just trending slightly down from an average of about 1% to somewhere in the middle of 0% to 1% range.

So whole European market volume not terrible but certainly not dynamic.

What you see within the GSK versus peers is two phenomenon.

In the early part great volatility around the winter quarters, why is that?

61% of GSK's European business is either respiratory or antibiotic, and so what you see there is the phenomenon of the light flu seasons that we've been going through in the last few years.

More importantly as you look at the more recent quarters, over the last several quarter's you see the GSK's performing either head or inline with the peer group for volume growth in the marketplace.

It's important to keep an eye on this.

It's very easy when we look at price to draw conclusions about competitiveness, actually what the business does is generate prescriptions, it generates use, and that of course is a good measure of our competitiveness.

You can see that through the volume slide here.

If we go now to the US, very quickly, this list reconciles for you what's going on in the US.

US is a less of a fundamental issue than I think Europe.

Europe is very much about this price adverse against the volume picture I have just shown you.

US is a little but more a series of one offs.

You can see here 86% of the US businesses in promoted brands, so the business we promote, as you all know most of the old business disappears quite quickly anyway.

You see that that business grew 4% in the quarter.

There are already two one offs which are then really then influencing our quarterly performance in America.

First of all at the extreme right hand side you can see that we have an impact of discontinued businesses.

This is the Avandia, the Vesicare business disappearing.

Took about 3 percentage points of growth away.

And you can see that there was a stocking patent shift compared to last year, particularly in the three respiratory products of Advair, Flovent, and Ventolin, which took about 2 percentage points of growth off.

Those really tell you that overall this business in the US is about flat, maybe down 1%.

And that's where we think more or less our underlying performance is in the US on a annual basis rather than on a quarter-to-quarter basis.

You can see there that the puts and takes between the promoted growth, the genericization drag which of course gets smaller year-on-year, important for next year to remember.

And then you've got these two one offs which essentially then drives the minus 6% performance for the quarter.

I think this is less concerning to me than the European picture.

European picture I can't do much about the price pressure.

What we know is that these one offs in the US will work their way out of the system pretty quickly and the focus for us obviously is putting more products into the promoted box as we see the size of the genericization box shrink.

And so again, the US continues on quite a good journey in terms of transitioning from a business dominated by businesses which would decline into a Company which is dominated by businesses with the potential to grow.

And that is exactly how we would like to see things go forward.

To summarize, where we at the half-year for GSK in terms of performance?

Sales you see and we've guided today that we expect the year to be in line with last year in terms of our sales performance.

We'd love it to be a little bit quicker than that but the reality is the pressures from pricing in particular have knocked off that small amount of growth which we'd originally hoped to deliver.

Nonetheless as I've said, getting back to that level compared to where we were last year remains a good milestone on the path to getting to sustainable sales and you can see that beginning to come into sight for the Company.

Continued to react to that sales pressure by taking cost out of the business.

This is a really important thing for us to get right.

We are not going to cut costs for the sake of cutting costs because we know there is so much value to be created in two key areas.

Number one, making sure that we support our investment businesses like Japan, Emerging Markets and Consumer.

And number two, we need to get our pipeline right so that when we bring those assets to market they fully deliver a return for shareholders.

It would be crazy to make short-term cost reductions now which would damage either of those two potential long-term value generators.

And we are not going to do it.

What we are going to do is continue to look for efficiencies in our administration organization, and where possible, continue to tighten up our selling and advertising expenditure.

We have done some of that during this quarter and you can see that we've been able to offset some of the negative impact of the sales picture and the mix picture but not all of it.

And that's because we are determined to stay committed to developing the long-term value proposition that we have described.

Cash production as Simon will describe to you has continued to be very robust, very strong and during the half we delivered GBP3.2 billion to our shareholders.

Pipeline very exciting.

At least eight new products capable of being launched in the next 24 months.

And within that portfolio, an extremely interesting mix ranging from some very novel exciting rare disease assets all the way through to major new programs.

I just want to touch on some of the progress we have made here.

We promised you that we would work on essentially 15 programs during 2011 and 2012.

We are keeping a very close eye on this scorecard.

Of those 15 programs, 12 of those programs have reported data already.

10 of them have reported positive data.

This is a slide which just reflects where we were a year ago.

We have data back on just a handful, a green bar means that we have had good news.

A red bar, creatively enough means we had bad news, and that really reflects to you where we were a year ago.

If we just fast-forward then through to the end of last year you can see the progress we're making through the portfolio.

Where we are today, you can see that we have had the majority of the data back on the majority of these programs.

So of the 15, 12 essentially given us substantial data, 10 of which are positive.

And you can see there that the only two which really disappointed were otelixizumab in Type I diabetes which was ironically the first data we got back two years ago, and failed.

We are relooking at that molecule in potential other indications.

And then we've been disappointed as you've seen in the various announcements we have made during this year along the potential expansion of Tykerb, particularly into adjuvant breast cancer.

Outside of that indication and otelixizumab you can see that across the board, we've continued to deliver very positive results.

And what's exciting within that portfolio, as you read down the list, the umec vilanterol combination so called program zephyr, a very exciting, very significant opportunity.

And you've seen how we have been able to essentially overhaul the competition and particularly with regard to the US market and you know that we are heading towards filing there.

We have already filed Relvar, new name for Relovair, and as you go down the list you can see the progress that we're making.

What's very important is that we are delivering these assets, many of which clearly have substantial potential because they are going to major areas, you're seeing some real points of differentiation being elucidated in the trials and crucially, they're going to fields where we are all ready establish.

So as an organization, you can start to see a focus developing around what the next generation of GSK is going to look like.

This isn't about GSK drifting into hundreds of different therapeutic areas.

It's about a GSK which delivers substantial portfolio opportunities into franchises in which we all ready have established expertise, established sales and marketing operations, and networks and therefore will not need in many cases to build massive incremental cost bases to take these assets to market.

The drugs I've just described to you on the prior page really fall into theses boxes neatly and you can see -- read for yourself the various opportunities which are coming along.

I just want to mention to you we actually filed the BRAF inhibitor yesterday in Europe; the slide says it's imminent, it's more than imminent, it was yesterday.

And you'll see over the next few weeks the completion of the MEK/BRAF filings both between Europe and the US.

Again a remarkable fast development program.

Very exciting opportunity.

Just yesterday we get news that the Promacta hep C thrombocytopenia indication would receive FDA policy review, again a very good signal.

What does that mean?

It means that within this portfolio of assets, some of these assets have the potential if the reviews go well if we are able to complete the process successfully to start to bring these assets into our business line much more quickly than I think many people had expected.

And I think over the next two years, there is a real picture emerging of a pretty constant stream of new product opportunity being delivered to GSK into areas where we all ready have the capability and the competence in place.

To summarize, where are we?

Look back since we really embarked in this journey in the middle of 2008.

A lot has been achieved at GSK.

As you see on the left inside the 2008 to where we are today, very aggressive effort to rebalance the Company geographically, opening up the new growth businesses of EMAP and Japan and I've shown you the way in which they have contributed even in a tough environment for the West.

You've seen the way in which we've built the world's leading vaccine business and we brought to life probably one of the world's leading Consumer healthcare businesses at a time when many of our competitors in that field are having a dreadful time of competing in the marketplace.

We've delivered a significant increase in efficiency in the cost space.

The R&D organization has relentlessly focused on improving its quality of decision-making, which is driving the improvement in return on investment.

We remain I think the only Company to publicly talk about return on investment and we are proud of the fact that we're making the progress that we are and we will be updating you again on that next year.

We'll also, from an R&D perspective be holding an R&D day before the end of this year which will come on top on all of the data releases we're making at the various conferences during the year and of course we have increased the focus on cash generation.

What that's done over the last four years or so is allowed us to pay to our shareholders GBP22 billion of dividend and share repurchases.

That really demonstrates the absolute commitment that the Board has at GSK to make sure that the performance of the Company is translated into cash and then the cash is repatriated to shareholders as rapidly as possible through a growing dividend and a sustained share buyback program, which we remain fully committed to.

And I'm delighted that today we were able to increase the dividend again by another 6%.

Going forward, on top of all of those things, so on top of the growth that we believe that our investments markets can give us, on top of the delivery of the pipeline, we expect to now start to see that pipeline converted into a growth driver for our business over the next couple of years.

That clearly is going to be an enhancer of our growth.

It clearly is going to be a mechanism through which we will be able to drive leverage in the business as we start once again to bring higher-margin products into the portfolio.

We will also be making sure as we have done with Human Genome Sciences that we seek to maximize the economic share to our shareholders of GSK.

Obviously one of the direct consequences of the acquisition of HGS is 100% now the economic benefit of BENLYSTA and albiglutide, and if successful eventually of darapladib will now accrue to the shareholders of GSK.

That's an important part of shaping our business, we will continue to sensibly look for how we can do those sorts of transactions in the last quarter in addition to HGS by increasing our sharehold in Theravance in a different way we achieved a very similar goal.

We will also though be very focused in continuing to streamline and clip off from the business low-margin businesses and non-core businesses which we don't believe ought to be part of the long-term future of the group.

As we move forward, the picture of the group becomes more clearer, it becomes a group which is absolutely global in terms of its US competitiveness, its European position, Japanese position now strengthened, Emerging Market position now strengthened, that is the group through which the pipeline will be deployed.

But we will continue to look for ways in which we can drive focus into that opportunity by looking for businesses which are either low-margin and/or non-core.

Good examples of that have been the disposal of the tail of our Consumer business and the regular disposable of tail assets in our US business whether that be Wellbutrin or Vesicare most recently.

We will continue to look for those opportunities as we seek to really drive a focused organization going forward.

With that, I'm going to bring my comments to a close and ask Simon to come up to describe in more detail the quarter.

Thank you Andrew and just like to add my thanks as well to everyone on the webcast on the phones for helping us avoid some of the Olympic congestion that's just beginning to build up in London.

A year ago, we implemented a new financial architecture for the Company, really designed to drive a different level of focus around implementation of the strategy and make sure that we were driving the right returns from that strategy, and sustainably so over time.

As Andrew has highlighted for you I think we really feel that the quarter despite its challenges shows real progress on that strategy and I'm confident also that the financial architecture is contributing to that delivery.

The ways in which it's really making a difference in the short term is in helping us allocate our resources more effectively and helping us look at those choices and the decisions we're making so that we're improving the returns.

And making sure that we are driving investment behind the best returning and highest growth opportunities that we have across the Company, and reallocating resources away from those where we see less opportunity.

And I think thirdly what it's really done is drive a focus on those returns across the Company so that decision making is really now much more consistent, much more comparable between the businesses than perhaps it has past.

And you can see that in some of the cost measures that are contributing to the Company in this more challenging quarter.

But over the last several quarters consistently, where we are reallocating those resources to help drive the investment businesses.

I think the last area where it's become most visible in the last several quarters is in the focus on cash.

We have improved our working capital performance, we have improved our return and profile of our investments.

And by getting the organization to think of our cash flow generation in a very different way, we have been able to support the dividends and buybacks commitments that we have made and the programs we have going forward with much greater room for maneuver, as well as continuing to invest in the business, do bolt-on M&As, and secure the long-term future of the Company.

But if we're really to make this sustainable, we also have to deliver on the fourth pillar, sales growth.

And clearly in the second quarter in particular, we've seen a number of challenges which have become more acute during that quarter as Europe has raised additional challenges, additional austerity measures, and slowed their approval of new launch products, which has led us to the 8% performance that you've seen in the quarter.

This is compounded in our other mature business in the US where the portfolio we have has certainly seen as Andrew has described some additional pressures.

That has more than offset us as we have been through the growth that we are seeing back from our strategic investment markets of Japan, vaccines, Consumer, and the Emerging Markets where we saw a good recovery from the first quarter.

Overall however, despite those growth engines really beginning to come through, the pressure that we saw in the quarter more than offset that as well as the currency drag that we have reported.

To really make those more mature business to move forward we need new products and Andrew has described how the quarter has seen some good progress on that.

But in the meantime, given that the product approval processes and the run-up to launch will take some time, we have to work with the portfolios we have with the investment markets we have targeted.

And we are continuing to look at how we can continue to generate additional growth opportunities going forward.

But against a more challenging environment that we now face, we do expect for 2012 as a whole that sales will be in line with last year.

When we look at that environment, we are clearly also reacting in terms of the cost profile.

There is a balance that has to be struck however in terms of how we think about investing behind the opportunities that the strategy presents going forward as well as reacting to those more challenging environments.

So in delivering against that balance we do expect for the operating margin for 2012 as a whole will also likely be in line with last year consistent with the top line performance.

And unless we see a significant improvement in the top line performance, then I think we believe that that is the right balance to strike in securing the long-term optionality around the pipeline and some of the other growth investments that we have made.

So overall as we look at the year going forward, we are still confident in the strategy in its delivery and the execution that has been recorded in the first two quarters of the year.

But clearly the environment is presenting a number of challenges.

If over the balance of the year we are expecting sales to be flat, the one other marker that I would just put down as you should remember the comparability with Q3 last year where we had a very strong performance from our Japanese business given the Cervarix inoculation program.

We also saw a very strong performance out of the US on the back of some accelerated flu deliveries.

That's going to make the Q3 comparator quite tough and so if sales overall for the half are flat then you should probably expect that Q3 will be negative, Q4 will be positive to leave us flat overall in terms of comparability for the year as a whole.

And with that, let's turn to the headlines of the results.

We have been through most of these so I will keep this brief.

Turnover down 2% at the top line, the core operating profit down 7%, this really driven by the shift in the sales line but also by 2% swing in cost of goods and I will come back to that in a minute.

And then we're recovering at the EPS line a couple of percentage points really reflecting the earlier delivery of the financial efficiencies that we have targeted, the share buyback program and the continuing cash generation to leave us down 5% at the bottom line.

Cash generation of GBP1.3 billion in terms of free cash flow excluding legal in the quarter.

GBP2.1 billion over the half, securing and underpinning the dividend and buyback that we've announced.

As Andrew has highlighted, the principal drivers behind that top line performance are really the offset of our mature markets to the growth drivers of EMAP, Japan, and Consumer.

I think Andrew has taken you through the detail of what's really behind the US and European performance.

But I think it is worth just highlighting the robustness of the growth market's performance in the quarter and over the half as a whole.

Where EMAP after a tough first quarter with particular issues in the Middle East, has seen a strong recovery to be up 9% in the quarter.

Middle East up 5% in the quarter, reflecting both good contributions from the pharma business and the vaccines business in the region which is now nearly GBP300 million for the quarter, so a significant contribution.

But across the EMAP region, we've seen good growth from the pharma business in both innovative and classic brands, but also from the vaccines business which does produce some relatively lumpy performances quarter to quarter, up 15% this quarter.

But we have also seen consistent delivery on a number of the tenders that we'd identified at the beginning of the year that we are going to drive the growth in the vaccines business overall.

And so from an execution and delivery point of view I think we are feeling very comfortable about how the vaccines business is delivering consistently across EMAP.

Japan also up 6% and that is despite even in Q2 a significant drag on their vaccines business from Cervarix which had all ready started to ramp up in Q2 2011.

Their pharma business in Japan up 10% really reflecting the breath of new product introductions that we're bringing to that market, which really gives us a very robust space going forward.

And Consumer while we've called it out on the green line remember this year is really contributing very little growth to the overall group position given the washout of the disposed businesses that we have sold off over the last 12 months.

But the underlying performance of that business about up 7%.

And I think most encouragingly, very broadly based with not just Emerging Markets but also US and Europe contributing, but also the categories that we have now identified as our key focus areas for Consumer, both on the wellness side, on nutrition with India again a very strong grower and Horlicks contributing nearly 15% growth in the quarter, so a very good base there.

And also building out new categories of investment.

And lastly, the oral care business which is continuing to be a major growth driver, not just in some of our newer markets but continuing to maintain momentum in whether products such as Sensodyne are more established.

And I think if you think about that base contribution and you move past the disposal process, you can see that we expect Consumer to come back to be a major contributor.

One small point on Consumer.

We have in the process of running the disposals looked a number of times whether we can dispose of Alli as we have commented before.

We were affected by supply problems with one of our supplies letting us down such that the product was effectively withdrawn from the market over the last quarter at almost zero sales.

Given that position, we have decided that we would not be generating the right value for shareholders if we proceed with the sale.

We are going to take the business back in hand and rebuild that brand in a much more focused way, and see how that plays forward from here.

So if you adjust back in for the quarter the Alli sales, the 7% would become about 5%.

I think that over the second half of the year, that difference diminishes very, very rapidly given the trend in Alli's business over the last 12 months.

That just gives you a sense of how the shape of the Consumer business look going forward, but I think does nothing to undermine the long-term potential of that business.

Currency has been a more material factor in the quarter than it usually is, and that shouldn't be a surprise given the volatility we have seen.

We have about a 2% drag at the top line, much less and close to flat at the bottom line.

That's unusual in that we have a number of currency credits on intercompany transactions.

I think if you roll present rates through into your forecasts for the full year, what we are expecting is that currency would be about a drag of about 1.5% at the top line and maybe 2% at the bottom line.

And that's much more consistent with our normal pattern and reflects more accurately our mix of costs and revenues.

Turning to cost, the margin's down 1.2% over the quarter.

And that really reflects the sales drag but it also reflects the mix within that drag.

Mix is an issue we have been dealing with for sometime, and really is a function of shifting the footprint of the Company to grow in the Emerging Markets, Consumer businesses, which are lower margin than perhaps our more mature markets.

But given the down swing in the US and European businesses this quarter, that has added a particular pressure in terms of that mix factor.

It's probably about 2% drag on the margin in the quarter.

So against that, I think we are encouraged by the ability to put back 0.8%.

Because that is really a mix of our ongoing operational excellence benefits from the restructuring program over the last several years, contributions from a number of new initiatives that I've talked about a number of times to really add operational performance to that restructured cost base, as well as a number of one-offs that those exercises have surfaced.

And they may be one-off but they still add value and they've most importantly allowed us to invest nearly 1% of margin in the quarter in supporting the pipeline, supporting the launch preparations for those and supporting the delivery of the future strategic options that we have described.

That is exactly the sort of balance that we are going to continue to work with going forward so that we can maintain that tracking of our targets in terms of the future growth.

We're not going to pull the cost to undermine those.

However, we clearly will look in this environment of where we can accelerate those changes.

I think that's more likely to come at the SG&A level in the short term as an area where the drag and the mix effects are being felt most acutely is at the cost of goods.

And that's really a function of our ability to move our manufacturing costs quickly, which is constrained when the lead times and cycle times are perhaps not as short as we would like.

We're working to improve that but in the meantime, certainly in the quarter, relatively little benefit beyond the operational excellence improvements that we have all ready built in, but we're planning and have put in place a number of measures to improve this over the balance of the year given the environment that we are now facing.

And those will come from managing the supply chains and managing our procurements.

And most importantly, going back to the financial architecture, really looking at where the volumes are, where the right forecasts are, how we tie those to the best returns and make sure the manufacturing businesses are focusing on those rather than areas where our returns are being pulled back and we are facing negative sales pressures.

Really back to that reallocation theme.

I think in the short term, SG&A has recovered some of that drag and we had SG&A down 4% in the quarter.

As I say, that's really a mix of operational excellence benefits, continued pressure in terms of management of our functional costs.

But I think what the area where perhaps we have seen the greatest acceleration in is really picking apart the A&P and selling and distribution costs to say where are we allocating that expenditure.

Where are we really driving the right returns?

We're seeing a lot of transfer out of our Consumer business of some of the gross to net analysis that they look at, some of the A&P metrics that they are using in taking those models and transporting them into the pharma business, particularly in our growth markets like EMAP to say which markets, which products should we really be investing behind?

Can we release some resource elsewhere or to help protect the overall margin or protect our future ability to invest?

We've seen quite a lot of that starting to get going in the quarter, we'll see hopefully more benefit of that as we play through in the balance of the year.

And that's really where that is playing forward.

I think if you look at those two cost lines, it's also a signal of why we need to do more.

Because the mix pressure isn't going to go away and we need to continue to invest and really drive the returns out of the pipeline and some of the future growth opportunities that we've described.

And that's really why we have identified another GBP500 million of cost savings out of the manufacturing businesses, you can see where the greatest pressure is in terms of cost of goods.

And this is not really about big restructuring anymore, it's about process improvement.

It's about making our manufacturing supply lines more robust, more efficient, investing in our people capabilities, and taking the restructured footprint that we've developed over the last two or three years and really aligning it much more tightly to the end markets.

So we've already put in place a vertical end-to-end Consumer supply chain.

We're now looking at how to do that much more tightly in the pharmaceutical business.

Really by exposing those supply chains to their end markets, whether it's EMAP, or the US, or Europe they get a much clearer view of what cost level they have to operate to rather than operating on a broad-aggregated base.

What SKUs are really valuable in those markets and that allows us to simplify the number of presentations that we are putting into the market.

And I was sitting with the pharmaceutical manufacturing chains the other day looking at a particular product where we went through a review of the SKUs and by adjusting around 90% of the volume and maintaining 90% of the volume in its existing presentation, so you're only really touching 10%, we were able to adjust the SKUs by 50%.

You can imagine what that does to your cost of goods, your speed of reaction, your speed to market.

Alongside that we can also then push back up to the upper end of the procurement lines and say how many presentations do we need?

Can we save on packaging, can we reduce our response time?

So you can see how it becomes a circle and a cycle that can contribute on a sustainable basis going forward which is the most important thing.

R&D and royalty is relatively flat in the quarter, not much to report there other than as Andrew highlighted we are continuing to work with the R&D organization to make sure that their platforms and the infrastructure are as efficient as possible so that we can make sure we dedicate the right resource to bringing forward and completing this wave of the late-stage pipeline and also investing in the next one.

We move beyond the operating margin, financial efficiencies as I said last quarter we expected to make more progress in the short-term in delivering contribution to the bottom line.

And we've certainly made some progress here in improving our financing costs.

We launched a $5 billion bond earlier in the year which we completed for a range of maturities with an average financing cost of under 2%.

And that compares to our average funding costs on our existing debt of over 5%.

And so you can see already starting to make a significant difference there and we are still on target to deliver over on net funding costs of around 6% by 2013.

And that's going to be partly more efficient debt funding but also reducing the cash balances as we've discussed before, and I'll come back to that.

Net debt at the end of the half was GBP9.6 billion, we're continuing to target A1/P1 credit ratings, that's our anchor in terms of how we think about the balance sheet.

But debt will clearly go up in the next quarter as we pay out from the balance sheet the legal charges and also pay for HGS which we expect to complete during Q3.

We've made further progress on the tax rate, where we are now at 25.5% for the quarter and we're targeting to be at 25.5% for the year.

And for 2013, we are expecting now to be at 25% which will be a year ahead of our targeted delivery.

And then on the cash flow side, share buybacks and dividends of GBP1.1 billion in the first half, and GBP2 billion to GBP2.5 billion still expected for share buybacks over the year as a whole.

And that's really supported by the cash flow with GBP3.5 billion coming in at the operating level.

But I think the strongest indicator of the flexibility we have to support those returns is the free cash flow which is up 4% in the half despite the challenges that we faced.

It really gives us the security to make the commitments to the long-term program that we have made.

And that's really being driven by number factors, but the one I am particularly encouraged by is working capital where we've reversed the outflows of Q1 during Q2.

And we've also reduced the volatility of the cycles that we have seen in previous years.

And that's partly because we have introduced a new set of incentives across the Company to target people on quarterly progress for working capital rather than annual progress.

But this is also back to the changes in the manufacturing cycles, the changes in the procurement process, which is allowing us visibility, better planning, and the capacity to remove some of the buffers that we otherwise had in the system.

And so inventory, even though the days are flat Q1, Q2, GBP300 million better than it was a year ago, reflecting the progress we've made.

We continue also to look at our receivables and we've made very good progress across the group, not just in Europe which has obviously been a particular focus.

And in Europe we have also managed to recover a material part of our exposures to some of the southern European countries that are facing obviously particular challenges.

And we continue to manage those very actively to make sure that we keep our exposures to the minimum, consistent with continuing to trade in those business and support the patients we have in those markets.

Liquidity being a big focus in the first half of the year given the outflows that we were expecting we finished the quarter at GBP7.6 billion of net cash.

That reflects a gross up from the inflows from the bond refinancing which is partly due to funds maturity that came up in the middle of June.

But we also have cash on hand now to deal with the payments for HGS and since these figures were put together we have also paid out the cash in terms of our government settlement which is about GBP2 billion.

So we've got GBP4 billion coming out of the gross cash amounts and adding to the net debt in the next quarter.

But because we're reducing the overall funding costs in terms of overall interest charges for the year we're not expecting a significant increase.

All of that has allowed GBP3.2 billion of cash to be returned to shareholders in the first half, split between dividends and buybacks.

As we've said before, we do maintain a balance between these dividends important to some shareholders, buybacks important to others.

A growing dividend is our cornerstone commitment up 6% in the quarter, consistent with the first quarter.

And buybacks again we maintain a long-term program, we've got GBP2 billion to GBP2.5 billion for this year and we've delivered around 50% of that by the middle of the year and we're on track with the overall targets.

So overall, in terms of the quarter, given a more challenging environment I think we're encouraged by the strategic progress we have made.

The financial architecture is definitely contributing to optimizing the returns despite those challenges and I think we are on track with the delivery in terms of the late-stage pipeline.

And so overall despite those greater headwinds, I think that the overall position of the Company is one that we feel very confident in.

With that I will hand it back to Andrew.

Thanks Simon.

And now maybe I could ask Moncef and Simon to come up to answer questions or help answer questions and open up the call to Q&A.

As usual if you can register for your question we'll call you out in turn.

Tim Anderson, Sanford Bernstein.

Two questions please.

You described three pillars to your long-term strategy, and one of those is to simplify the operating model and I'm hoping you can crystallize what you are referring to exactly and how you can achieve this?

If you plan on maintaining a global diversified business and you are doing acquisitions here and there and you continue to build out your Emerging Market presence, it's not really clear to me how the operating model can be simplified very much.

The second question is on Emerging Markets.

Novartis said recently that excluding their performance of in China it does not really expect that Emerging Markets would be able to grow by double digits sustainably in the future.

And I'm wondering if you can say what your expectations are for Emerging Market growth excluding China.

Do think Glaxo's business can grow by double-digits percent in the future, or would it be less than this, again excluding China?

Tim thanks so much for your question.

So in terms of the simplified operating model, I think there are two or three dimensions that we need to be thoughtful about.

So firstly, you're absolutely right, of course as we have built out into new areas to source growth, that creates complexity.

It creates new levels of how the business needs to operate.

What we have been doing behind that is stripping down complexity which we don't think adds value.

So over the last three years we have created a core business service organization in the business where we've taken the entire organization, service sectors, everything that supports the way the business runs at the frontline, we are streamlining and simplifying all of that, the same in our HR organizations, finance organizations, we're putting in place a common IT platform whereas previously we had dozens of different finance systems across the world.

We streamlined out huge amounts of internal complexity which wasn't visible to the outside, and was really a product of the origin of the Company coming through the composition of all theses merged entities and from businesses which were at the very beginning really federal businesses and dominated by countries rather than the corporate entity.

That's taken quite a long time, it's not all finished, there's still quite a lot of scope for us to go there but that has been a big part of the simplification of the business model.

There's much more standardization inside GSK now than there used to be and you should continue to expect to see that's one area which is very important.

Second area we've touched on all ready today two times, we see continued great opportunity, really very significant opportunity and I think personally the GBP500 million cost reduction we have targeted in the next three years is probably just the beginning of what we will be able to achieve through a properly streamlined process environment in our manufacturing arena.

Taking out the SKU complexity and the implications of what that means for the business, I think is enormous.

It can't be done overnight because you have to go through a regulatory process to unlock some of that, but the opportunity I think is very material, I think the first down payment on that we have announced and committed to today but I'd be surprised if we weren't able to increase that as we go forward.

Thirdly, we are going to continue to I would say -- as we go forward, I would say we are going to have a slightly different tone around our acquisitions divestments than we have had up until now.

Principal everything stays the same, which is it's rising dividend first, share buyback second, unless a bolt-on acquisition beats the metrics of the share buyback like the HGS acquisition.

But I think the type of acquisitions we are going to be looking for, our hurdle if you will has gone up significantly, and you'll have noticed that we've done far fewer acquisitions in the last 12 months.

We don't see the kind of opportunities we were seeing before and the valuations weren't there.

We are also very much raising the hurdle around bringing in more complexity at a time when we want to focus on pipeline.

So while I'm not going to rule out that we do more of the classic bolt-on acquisitions, I think in fact it's going to be less likely than more likely going forward.

And what you will see is has been more challenging around fragments of GSK which don't really fit where we see the future of the Company going forward.

Either because the margin is a very significant outlier or it's simply not a sustainable core part of the GSK model.

So while we will continue to stay very dedicated around the core points of diversification, so having the vaccine business, having the Consumer business, having a properly geographically exposed pharma business, willingness to entertain further drift is reducing significantly.

Because we want to focus on pipeline and our appetite to actually pull in at the margins where we think those businesses aren't truly aligned to our core is going up as again we strive to focus on what we think could over the next few years be a dramatic contributor to organic growth in the shape of the pipeline.

So the strategic nuance becomes much more around allowing the focus on the pipeline than necessarily just adding on to drive growth through inorganic means.

That was a very -- it was the right thing to do over the last five years.

It's got us into a very good place on these growth businesses.

Going forward, the priority will be the organic growth opportunity, the add-ons of the type we've seen in the past are likely to become more unusual, not more common.

In terms of Emerging Market growth rate, Tim, I think where we sit is we have seen the growth rate generally of EM slow, obviously reflected by the macroeconomic trends around the world and the hangover really from the US and Europe.

We see the markets in which we operate roughly around 10%, 11% type of growth rate now.

That's down from about 14% or 15% a year or more ago so clearly a deceleration.

Still very, very good compared to anywhere else.

We strive to grow at or a bit above the market.

And you've seen we bounced back very nicely from where we were in Q1.

We're up in that 9% territory.

I believe we are going to be in that 9%, 10% territory, maybe a bit more, maybe a bit less but really driven by the market.

I think one of the things you've heard me say before and we all need to be very eyes open on is the Emerging Markets are likely to be quite volatile individually and also as a group.

Just by nature of their cash pay dynamics, their linked GDP, there's bound to be volatility in those numbers, but over the medium run, i.e., two to three years, the fundamental demographic trends of those markets and the shifts in economic power up the pyramid of population clearly tells you those curves are going one direction.

Whether they go at 10%, or 12%, or 8%, will be a function of flow-through from other parts of the world.

But we continue to believe they're going to be very robust and we expect to grow at or a bit above that market rate over a period.

Quarter to quarter our exact growth is going to be dictated if anything by things like vaccine tenders which is such a big part of our Emerging Market business and again you're going to continue to see a bit of intra- quarter variability.

Next question.

Graham Parry from Maryland.

The first one is on the margin and sales growth, your latest comments suggest that they are both pipeline delivery, previously I think you suggested that they could still grow expipeline but just be at a lower rate.

Just wondering if you could clarify if that is the case still or does the impact of pricing pressure effectively mean that you are now entirely dependent on the pipeline there?

And second if you could just quantify what the one offs in the COGS line were and is that where you see the most margin pressure this year resulting in you looking for no margin growth now?

And then thirdly, you talked previously about margins over the mid-30%s would be implying under investment in the business.

Is that still a valid number in light of your comments on the willingness to invest in commercializing pipeline?

And then just finally on the divestments in non-core business, just wondering if you can be a bit more specific about any areas that you're looking at in particular there.

Thanks.

Thanks Graham.

In terms of growth, I am still of the view that absent a material -- if you think back over the last several years, Graham, we've delivered more NDA approvals in the US than any other company.

But they've been made up of relatively small niche products.

That's been our base rate of contribution from pipeline.

What we're looking to potentially deliver in the next two or three years is a continued flow, actually potentially a similar number of approvals but of potentially much larger opportunities for the group.

Absent that step up, I still think the group is capable of growing and I think we're very close to that even in this quarter which I think does have quite a composition of different headwinds coming from different places which have just knocked us south of that level.

That is something which I continue to think we will be able to achieve, why?

Because I think Japan, Emerging Market, in particular continue to grow larger and larger, Emerging Market is very close to being our second biggest region, very closer to being bigger than the European business, if you look at the quarter's turnover number this time.

So you're seeing a growth in the overall size of that business and while the growth rates are off a bit as I just mentioned in Tim's question, the actual growth rates remain extremely robust and very punchy compared to anywhere else in the world.

Japan similar story and Consumer a similar story.

I think those businesses continue to be very good.

What we just have to recognize is in the US we're just coming through that turning point and stabilization in our American business, we still have about GBP800 million of old products disappear in this year compared to last year, we decided at the end of last year we would no longer talk about that, we'd no longer strip out but I can't make it go away, it is still there and it's still a drag on that business.

That gradually winds its way out over the next year or so.

Of course new products start to click into the portfolio and that starts to shift, before you think about big new products being contributed.

I personally think the business is capable of growing in advance of major products from the pipeline coming along.

But of course, the exciting future of the group is all about the pipeline delivering enhanced growth.

For me it's around growth and then enhanced growth and I think what our shareholders are looking for and what the value creating opportunity of this group is is to take that growth that all of those base investment businesses can deliver and then enhance it with the organic pipeline.

If we can do that then I think we really get to a place which delivers sustainable sales growth, good margin leverage, and really powerful redistribution of cash to shareholders.

And that's exactly where we want to try and get to.

As far as the margin in the mid-30%s, I just reiterate what I've said before.

I think yes I want to make it clear, but while we strive to expand our operating margin driven by pipeline in particular, driven by taking cost out, where we can sensibly do it, there is a limit I think to what will be reasonable in terms of our external stakeholders partly, and also because I think it's very important, that we are investing properly in the new assets.

We have announced recently that we are redesigning our organization to focus on franchises, to bring together our organization to drive global marketing capabilities in a more sophisticated way than we have done before.

All of that is a signal of our intent to invest and again I would reiterate I wouldn't forecast us to go much above mid-30%s over the next several years.

I'm going to hand it to Simon in a minute for the one-off question on COGS, but as far as divestments, I'm not going to give you a list of things but clearly tail businesses are potentially in scope.

We've all ready demonstrated that that has been something we are willing to look at.

But beyond that, I think it's fair to say that we will continue to look for businesses which are outliers within the core strategic focus of the group.

Now the strategic focus of the group is what drives our Consumer business, what drives our vaccine business, what drives the EMAP, Japan, America, Europe pharma businesses and what drives the synergies between them.

Where businesses sit, absolutely in that matrix, those are the businesses which are absolutely core to the future of the group.

Where there might be businesses or partial businesses which sit somewhere on the periphery of that matrix, maybe their synergy play across the businesses aren't as strong, maybe they are lower margin.

Maybe they are -- they require very different ways of working to the core business.

Those are going to be candidates for us to look at sensibly.

If we can get good returns and accrue significant value through divestment, which we can then repatriate to shareholders directly, and the way we have them with the Consumer disposal, we're going to do that.

Because I think as the business has the opportunity to be grown through pipeline it would be irresponsible of us not to have an aggressive housekeeping approach to taking out those businesses, which by definition we should spend less time worrying about.

Because we should spend more time worrying about the pipeline opportunity, and therefore we should get onto it in advance, clean those businesses out, accrue the value and release it back to shareholders.

Simon, maybe you could touch on the COGS issue.

Graham, in terms of the one-offs, they're split broadly between cost of goods and SG&A, at the cost of goods level, actually the one-offs in this quarter are pretty comparable to the one-offs we had this time last year.

And the manufacturing cost base tends to have a variety of one-offs quarter to quarter.

I think that's not a significant driver.

Where it's making more of a difference in the quarter is at the SG&A level, and as I said in my comments, I think we see this as an investment opportunity to allow us to fund some of the positioning for the pipeline without building permanent expense and so contributing to the overall objectives.

Overall for the margin for the year, cost of goods probably is the bigger drag given the mix issues I discussed.

We're obviously working in terms of the manufacturing base to address that, but I think in terms of trends over the coming quarters, that's where there's upward pressure and we will be pushing as much back on that as we can, but you'll see more downward movement probably at the SG&A line.

Andrew Baum from Citigroup.

Three questions if I may.

First I think you're due to complete your SAP upgrade program at the end of next year.

What does that mean for the future scope additional cost savings on top of what you've all ready announced?

Second, you've highlighted that the EMAP and the European business are going to be consolidated under Abbas, could you outline what you hope to achieve here in terms of revenue opportunities, cost savings?

I'm not looking for numbers but just the motivation here.

And then finally, a question on the US.

The only two products who's performance you highlighted in the quarter did GPB14 million in aggregate.

You're the only Company required by the US government not to incentivize through individual sales targets, and you continue to lose market share in volume across multiple primary care categories; what confidence can you give us that this is a portfolio issue and not a structural issue for GSK following the consequences of the (inaudible) investigation?

Okay great.

Let me first ask Simon to touch on the SAP and then I'll come to the other two questions.

Andrew, on the SAP upgrade, we're making good progress, we now have five or six markets up and running in the last two or three months across Europe, and we're on track with the first phase of that plan which will complete at the end of next year.

What we are looking at with the moment whether we can extend that program within the existing budget to prioritize more of our Emerging Market footprint relative to our developed market footprint consistent with what we have been talking about today.

More to come on that.

We are very much on track and already the early signs of the impact are giving us the confidence to press on.

I think all of the experience we've got either from people in the Company who have worked with SAP or from other companies who have deployed is that the opportunities, it's always harder to forecast where the cost-saving opportunity is from an SAP deployment before versus when you've actually got it, you suddenly discover ways of working which are big drivers of cost efficiency and I suspect that that will absolutely be the case here.

As far as the combination of the Emerging Markets in Europe is concerned, it is really two or three different agendas that I'm really looking to try and achieve here.

First of all, Abbas has really established I think over the last four years a very strong capability to drive operational performance in the Emerging Market region.

And one of the things we're looking to do, and in fact we're announcing today internally the structure below Abbas is we're streamlining and really shortening some of the lines between the Senior Management and operations to try and bring to Europe a new operational emphasis, which we recognize Europe is a tough environment.

But we want to really leverage what we know has worked in Emerging Markets in terms of motivating our organization.

So part of it is about short-term operational delivery and I think that's absolutely the right focus for us to have.

And part of it is around streamlining the business as we move into the pipeline arena.

As we're moving toward global franchises as a way to think about developing our pipeline, essentially translating the assets from R&D into the businesses, we didn't want to have the R&D organization having to engage with multiple different regions, particularly recognizing that actually the era where a single Europe had a single opinion has really gone in the last two or three years.

Today there might be for a new drug a few countries in Europe who are very pro and for who market accesses straightforward, there might be five or six others for which market access is a real problem.

And therefore the notion of creating a European average opinion, which then required R&D to engage with was really a challenge.

By putting together EMAP and Europe what we have also signaled to the business is it's no longer going to be about a regional opinion.

It's going to be which five or six countries have the biggest opportunity for these drugs and they should be connected with R&D direct regardless of which region they are in.

It could just as easily be Brazil and China as France or Germany.

And we really wanted to liberate the connectivity across the organization.

So that as the pipeline emerges, we didn't work through some kind of construct of organization, which was really a throwback to 1999 or 2000.

We wanted something much more in touch with where we see the opportunities evolving over the next decade.

That was a second part.

That third part is our European region has a significant above country organization, and that gives us a lot of flex resource now for us to essentially deploy -- be deployed behind the pipeline.

One of the things I said in my earlier comments was that the pipeline looks good, looks exciting, one of the things that's good about it is a goes into fields where we are all ready established and therefore we don't need to incur a lot of cost to bring that pipeline to market.

Similarly, as we go through the next year or two of preparing, we are looking to divert resources and skills and people from areas which we believe may not be generating the biggest return into supporting the pipeline.

In Europe there is a significant number of very good people in our European organization who because of the changes of the European environment have found it harder and harder to drive performance if you will, because of the changes.

We think that that resource is better deployed now to support the globalization of the pipeline rather than just European market access.

As far as the US is concerned, there's two things I would say, Andrew.

First of all, if we're the most conservative promotional Company in the USA, I couldn't be happier.

I think that would be -- I am completely cool with that, I am completely fine with it.

Secondly, all the evidence we have seen is that our change in the way we incentivized our salesforce, so moving away from the prescription -- the physician prescription dominated model that the industry has used and move to a customer value customer informed, so a customer-judged performance metric alongside things like standard of training, standard of product knowledge, two or three things you should know.

Number one, salesforce I have yet to meet an employee in the US who does not think this is the right thing to do.

Number two, the feedback from customers is overwhelmingly positive including the opening up of customers who do not anymore see any reps from anybody in the industry because they so resent the old model of remuneration.

Number three, I accept that we have some major established products which are no longer growing in the way we would like.

Look at the products we have launched recently.

Unfortunately they are in small niches, but if you look at the performance of our products in the oncology field, in the specialty fields, you'll see they're extremely good performers.

They have exactly the same compensation system as the people who are selling Advair.

There's no corollary in terms of the relative performance.

What's difference is in Advair, we have a product which for five years we had 100% market share, it's not shocking that we're going to lose market share as new competitors come into the market place.

What is impressive is we've held more market share in America than we've held in Europe.

So actually our overall retention has been extremely strong.

But I'm not surprised we're losing share because we started with 100 and new entrants keep coming into the marketplace.

I think for me, this is not an explanation of what is going on.

What's much more the reality is we have established products, they're at the mature phase of their life, they've been remarkably successful, they still have growth in them but clearly the incremental growth opportunity is less than it was.

And just for everybody else in the industry, just the same, what we need to drive the US forward as always, is new products, and that's why the pipeline opportunity we've described today is important not just for the group but also very important for the US market place.

Next question.

Alexandra Hauber, JPMorgan.

Three questions, please.

Firstly, I was wondering what is a strategic commitment to drive operating margins?

Is it a commitment or is it not a commitment?

And also, how important is this as a strategic goal?

Last week Novartis scrapped their 2012 margin target because they're investing $300 million into new products which is probably the right thing to do.

So does it make sense to target margin expansion next year when you should be investing into new products?

Second question, is you mentioned parallel trade is one of the factors that contributed to the 7% price pressure in Europe.

Can you give us a little bit more color on that phenomenon?

Which countries it's coming from, are there any products that particularly affected and also why you think that problem won't become any worse?

And last question is on dermatology.

Why is that declining?

Surely that wasn't what you expected when you were acquiring Stiefel.

Thanks, Alexandra.

So as far as operating margin is concerned, what we've tried to lay out at the beginning of the year is that we believe that the business dynamic that we foresee going forward would give us the opportunity to drive leverage.

We have made very clear that we expected this year the leverage will be small, we're now signaling it's more likely to be in line than the very small and.

I think through all the smoke and mirrors of the way we communicate to you and you listen to us, I think we'd all broadly concluded that very small meant 20 basis points.

So what we're really talking about here is the pinhead of a needle or the head of a needle, so the reality I think is not so much about this year.

The reality is around do you believe that the delivery of the pipeline on top of a business of the shape we have absent the kind of drags that we have lived with for the last five years is capable of spinning off leverage in the margins?

Our view remains yes it will.

It will be driven by the positive sales and mix contribution of pipeline and then therefore as the pipeline comes in, that will be what really drives it.

And that will be either accelerated or nullified by headwinds or drags.

To state the obvious.

This year in a year where it was never about pipeline this year, obviously the increase in headwind, particularly in Europe has been just enough to take away that very small opportunity that we had originally thought might have begun to kick in this year.

Now, I've all ready suggested it.

If we got to a point, if in the middle of next year Moncef Slaoui comes to me and says Andrew, for another GBP200 million of investment we can turn drug X from a GBP1 billion to a GBP2 billion product, I'm going to not even think twice about saying yes, and then we will have to come and tell you we're not exactly where we thought we were.

But given our current plans and expectations, we think we can deliver what we need to and begin and then to begin an accelerating rate deliver margin.

But you are absolutely right Alexandra, I more than anybody else will not be made a slave to a percentage, and we will do what is right for the business and what is right for the business is to invest behind the drivers of organic growth.

At this point in time, we think that what we can see going forward allows us to do both.

And I think that's a good tension to put into the organization, but if the tension comes under pressure the decision will be very clear.

We will invest for the long-term value creation of the business and not economize our way to prosperity.

As far as parallel trade is concerned, really what we have seen is a number -- there are a number of dynamics happening in Europe.

One is parallel trade.

Parallel trade's the physical movement of goods and services across the European boundaries.

There is of course a secondary version, much more difficult to see which is reference pricing, both of those are at work in a very extensive way at the moment.

And if anything it's probably one of the most damaging parts of the European system.

What is driving it, so Greece is a major problem.

Very significant price cuts in Greece last year being reference priced outside of Greece and product being exported.

The same is true in countries like Romania, which has really surfaced in the last six months, I would say for us, the surprise has been the impact, negative impact of Romania, exporting both its price referencing and its physical product.

You've got to remember in these countries where perhaps austerity is really biting, then there is lots of macro incentive for the arbitrage players to just start exporting.

Why sell locally if you can double your price by selling internationally.

So there's a lot of movement of goods, there's a lot of reference pricing going on, we're trying very hard as an industry to get the European authorities to take particularly the reference pricing issue seriously but so far nothing has really changed on that.

As far as dermatology is concerned, it's a mix, so EMAP looking pretty good although held back a bit by supply issues in the quarter.

I don't think anything to be concerned about in terms of EMAP which has really been the big growth opportunity from the Stiefel acquisition, but held back a little bit by some supply glitches during the quarter.

I don't think that's going to be a long-term issue for us.

US some genericizations, Europe actually just hit by the same general pricing pressures as we've seen across the board.

Not one single thing, I think going forward what you should expect good I think EMAP performance.

I think as we brought in the asset we just acquired from [Brasilia], that gives us a nice opportunity to add growth here.

We're going to burn our way through some of the genericizations in the US, as you've seen we have one or two new products approved in the US, so again I think there's a bit of turbulence in the short run, it's nothing strategic as far as the business is concerned.

Gbola Amusa, UBS.

I have three of them.

First on the European pricing pressure, the 7% I will ask it slightly differently, can you give us a bit more on what that number looks like for your vaccines business, for your Consumer business, and how big the gap is between your mature and not mature products.

Secondly on the new tax rate guidance, how much of that if any is driven by geographical mix, and might therefore be a bit more durable into the future beyond 2013?

And then lastly on LABA/LAMA, how much of the phase IIA, IIB dosing studies will be presented or discussed in the coming months?

Okay, let me ask Simon to talk about tax rate, then Moncef can you do LABA/LAMA and I will come back to the pricing question.

On the tax rate, the original objective of 25% was driven by a mix of factors in terms of bringing our files up to date with our whole series of authorities around the world.

And we've make good progress and that's really why we have been able to accelerate our path towards that target.

Yes there is a global element to the objective.

There is also a part of the process of realigning our cash flows and profit flows with the changing shape of the group.

That is certainly underpinning the fact that we believe the 25% target to be very durable.

Once we get to 25% the challenge is then to look for other efficiencies and thinking about opportunities such as the UK patent box, certainly we believe will give us room beyond 25%.

I don't think there's anything in the mix to date that undermines that target or how we're going to make it persist for the future.

On the LAMA/LABA, first we have almost the totality of the data we think is required for fighting.

What we still expect within the next literally handful of weeks is longer-term safety observations from our phase III trials.

We have the fullness of phase II data, and we are of the view and we're very comfortable that we can demonstrate the once a day and the adequacy of the dose selected.

The data will be presented in September and available for comments.

Thanks Moncef and Simon.

In terms of pricing, I'm afraid there's no simple answer to that question as you probably would've expect.

If you look at the pharma business in Europe you've got a mix of phenomenon, so Greece pretty much across the board price cut for all assets, so no different mature, not mature.

You look elsewhere, you will see big assets being targeted.

So products like Seretide, and I'm sure in our competitor similar large market-leading type products get picked out and they get hit specifically.

Parallel trade tends to touch the bigger higher-volume products, higher-value, higher-volume products more than others.

Again, the parallel trade dynamic tends to be more relevant to a product like Seretide than perhaps some of the smaller or older or lower-value unit cost products.

Vaccines oftentimes isn't included in the direct pricing negotiation.

But can sometimes be picked out as a special case as was the case in Germany last year and a very big part of the European price impact we are seeing still is the phenomenon of the German vaccine price cuts, which kicked in in Q3 of last year.

And if nothing else new comes along is one of the reasons why we think this quarter may be the [Nydia] of European price impact as that German number starts to wind its way out.

That all depends on whether new stuff comes along.

Elsewhere obviously vaccine price pressure comes through tenders.

And what we've seen particularly again in Europe is tenders being delayed as negotiations drag on in some cases or in fact they just decide to defer the tender completely as a way of deferring the cost.

It is a real mix.

Consumer of course is not so much direct pressure from government but as you are all aware, there's a lot of retail competition, there's an awful lot of price pressure in the system.

Certainly in the more sophisticated markets, you're going to see a lot of buy one get one free type of pressure.

Actually within that the key way to defend your price point and the reason why our business actually is looking pretty good in that context is through innovation.

So by having the new forms of Sensodyne as an example, Repair and Protect, has significantly strengthened our price position in the Sensodyne arena.

Same is true with new forms of Lucozade in the nutritionals business, and new forms of Panadol like Panadol Advanced in pain.

The key in Consumer is being able to drive innovation to offset the retailer price negotiation pressure, which is always there, but it's definitely amped up in the last year or so as the general retail environment has got very hostile.

Next question?

Jo Walton from Credit Suisse.

I have two questions please.

Firstly, I'm sorry to go back to the European situation.

Just looking at your numbers, we can see that there was a very material price cut of 7% in the second quarter.

You said you think that will be the Nydia.

Would like to give us some sense as to what the underlying rate you think continuing might be just for us to think about?

And the European margin, last year that European margin was trucking along at about 55%.

Now it's trucking along at about 53%.

Is this a permanent devolution in margin until new products come through?

And my second question is really referring to those newer products.

I wonder when you think the leverage might come through because if there's one thing that is happened in the industry, we haven't had many new products.

But I can count on the fingers of one hand, the new products that have come through that have performed well very quickly.

When you look at all of our notes that are out there, are we being too optimistic about the timeframe that you can get these admittedly interesting assets through these additional hurdles that are out there in the various markets?

And may this be a concern that we have that whilst your products are going to be great in five years time, they're still going to be pretty small in three years time?

Great.

Jo, thanks so much.

I'm going to take two of the questions but ask Simon to talk to the margin point in a second.

In terms of the pricing story for Europe, if there were no new price cuts or initiatives and if parallel trade didn't get worse, sorry for the caveats, then I would expect the 7% that we have seen this quarter to start to go down through 6.5%, during the rest of this year and the next two quarters.

My anxiety of course is I don't know whether parallel trade is going to get worse or not, and I certainly don't know whether the government is going to announce another price cut.

But if there were no new negatives then that would be the kind of shape of what we know playing through the system and particularly driven by things like the German price impact dropping out.

Maybe Simon to margin and then I will come back to the product portfolio.

The margin in the quarter for Europe really reflecting the top line pressure and the mix factors with a lot of generic and parallel trades taking the tail down.

I think going forward, if the curve on the top line looks broadly as Andrew has described, I think we would hope the margin might move forward a little bit but I think remember also in Europe we need to invest behind those launches that we have planned.

We're also in the process of looking at how we reallocate some of the resources we have around Europe, how do we best structure those to deal with these tougher environmental conditions.

And so I think I wouldn't put a lot in your model in terms of forward progress at this point.

But I'm certainly confident that we can make that balance if the sales line delivered as Andrew described.

Around the same level, maybe a little bit better, Jo.

And then in terms of your concern around the contribution, I think it's a completely reasonable concern.

And the last thing I'm going to do here today is make very firm commitments on specific timing of delivery of leverage given that we haven't finished the job yet of bringing these products successfully to market.

While I think we've got a very significant opportunity, I don't want to get ourselves too far ahead of it in terms of exactly what this is going to drive.

Having said that, these assets are now at a stage where if we don't plan for success, we for sure will not get success.

We have to marshal the organization behind these assets because it's exactly what we're doing with the realignment of the organization particularly under Moncef and under Abbas in the way I've touched on already.

As we go forward, what's the likely timing, well the beauty of the pipeline if it stays as it is, is the numbers.

I will take you back to 2008 when I first laid out this strategy and we talked about developing an R&D capable of delivering not just one drug but many drugs.

That is exact where we are at.

What is the benefit of that?

The benefit clearly is we are less vulnerable to one thing being stopped in the process or one slow launch delay.

If you play forward over the next two years, there's a scenario, where we have a build in BENLYSTA product, which we all ready have and I continue to be pleased with the quarter-by-quarter progression, not just of the sales but of the physician intent to prescribe and all the leading indicators of that particular drug.

You see products like that all ready in the market building, Votrient all ready in the market and now being expanded building.

All of that business rolling forward.

The drag on the tail diminishing in the way we have been talked about.

And then as you think about the pipeline, you have products like Promacta, hepatitis C, thrombocytopenia indication, just giving priority review.

If all goes well would be at the leading edge of an expansion opportunity.

MEK/BRAF, a portfolio opportunity which again could go relatively quickly.

Dolutegravir in HIV again, a field which tends to move quite quickly.

And then you've got the bigger more classic primary care opportunities, which some of which may take longer to get to market, maybe they're in divisions which are two-cycle divisions, maybe they're going to have complexities who knows, when we finally get to the negotiations to get to market.

I think the beauty of this portfolio is you've got those layers of different opportunity clicking in.

Obviously if they all click in at the same time, you have a much bigger impact and a much bigger opportunity to drive the top and margin, and if they don't, we don't.

And I think that there's not much point in speculating what's going to happen until we get more facts and we get a lot nearer to what the reality is going to be.

But I firmly believe that we are in a very good position in terms of the stabilization of the base, which is very clear now in what this business is and the potential spectrum of opportunity that we have in the next two to three years.

And increasingly, and in what we've shown in the quarter within that spectrum some very interesting assets, which speak to the market we now live in, i.e., unmet medical need, and differentiated from what's already out there.

If we can bring that to finality in the next two years, I think we should be optimistic about what it can be do for the business.

But there's still a lot to be done and that's why we're going to focus on it and get it right.

Brian Bordeaux from Barclays Capital.

Thank you for your presentations.

There's been a lot of discussion about margin operating leverage and I think I get a lot of it, but I was just wondering if you could help us tie it all together and be clear about what you're saying about expectations for margin expansion going forward.

Previously you had said that you expect some small margin expansion at the operating level in 2012 and then more substantial margin expansion in 2013 and 2014.

I would just like you to clarify for us please what you're saying now if anything about 2013, 2014, and whether you are perhaps stepping away from that, either because uncertainty around -- investment requirements has increased and these things are always there, I think we've always known that.

And/or uncertainty around the world economy and in particular Europe has increased.

Could you just please sum up now what your expectations for margin expansion are in those years please?

Thank you very much.

Brian, thanks so much for your question.

Obviously I'm not going to give you guidance for next year, and you know to the extent we're going to give you signals for next year, we will give it to you in February as we normally do.

And so I'm going to be careful not to stray into that, but I think the sensible way to think about it is that 20 basis points of opportunity that we had originally hoped we might deliver this year looks not to be there and we expect to be in line this year versus next.

I think at least for the time being, a sensible way to think about this equation is just shift the curve to the left a year.

Just think about that and we will update you more specifically when we get to February because then we will have a much clearer view, another six or eight months of pipeline progression timing where we are with files, we'll have a much clearer view of what we think the investment needs might be if there are any that we need to address.

And we will have a much clearer view about exactly where the headwinds are going, and I think that is the right moment for us to be very precise.

But I think in the interim, I think you shouldn't take away from this conversation anything other than the shift to the left in terms of what we had hoped for and recognizing that the first year this year was intended to be a very slow takeoff anyway.

It's not that material in terms of the way we view the Company.

And we will update you in February once we have much more information to give you a much clearer view and will give you a sense then.

With that I want to thank everybody for joining the call today.

We obviously appreciate your interest, the IR team are available to take your calls and once again, thanks for your time this afternoon.