葛蘭素史克 (GSK) 2012 Q4 法說會逐字稿

Good afternoon, everybody.

Welcome.

Thanks very much for coming to the GSK annual results.

We'll obviously as usual, I'll take you through a few slides, just to frame where we think things are at, maybe cover a couple of the highlights from the results announcement today and then Simon will take you through more of the detail, give you a sense of maybe shape a little bit of the year the to come, and then most importantly, give you the chance to ask any questions you might want to have.

Just to highlight to you we have David Redfern in the room here who is Head of Strategy for the Company, very busy last year, by HGS, shares in Theravance, the Indian business, Shionogi, and a few other things.

Very active for us and has come out here for a rest.

So it'd be quite good if you ask him lots of really difficult questions, so he doesn't relax that much.

Let me take you through the results.

Before I do that, unfortunately I think as many others I need to just share with you this statement, hopefully to draw your attention to it and you can probably recite it better than I can.

Let me move on to where we are as a group.

Nothing's changed in terms of the strategy of the Company.

But clearly as we moved through the last few years, I think it's becoming clearer and clearer what GSK really is.

I think we've got a very clear case of a balanced business, balanced exposure geographically, balanced exposure across our different sectors, our consumer business, our vaccine business, and pharmaceutical business, and also some very good opportunity around the development of our pipeline of new products.

So good balance.

We've been very, very focused on building synergies within the organization.

That exists at lots of different levels.

Of course, all of the organization increasingly works through a common core backbone of services that I talked about three or four years ago.

That has lead to very significant reductions in cost, about 20% reduction in administrative cost in the Company since 2008, partially facilitated by that.

That core backbone increasingly now being supported by the deployment of our global ERP platform, which we've begun to aggressively roll out.

It's now well on the way to rolling through Europe and then we'll go beyond as we move through the next year or two.

That whole binding together of the service organization of the business, very important.

Of course, we have global manufacturing.

We've always had that.

But we've increasingly now moved towards local supply chains.

We've started to strip back out of our commercial businesses, the ends, the commercial distribution ends of our supply chains and bind them back together with our core manufacturing supply chains.

That's taken out all of the interfaces, it's taken out all of the opportunities for inventory builds at interface which often happens.

Again, a nice source of synergy.

Of course a key one is the interaction between our consumer business and our pharmaceutical business, which increasingly is focused around two key points of synergy.

One is where the business is around OTC in consumer, obviously very closely linked to pharma, many of those drugs were in fact pharma products originally, and of course they're distributed through pharmacy very often.

So tremendous obvious synergy there, has always been there.

And then Emerging Markets really the second pole of synergy where we see tremendous shared distribution capability.

One of the things we've announced today is a review of our Lucozade and Ribena brands, at least partially because they don't naturally sit in either of those two poles.

We don't have a big Emerging Market Lucozade and Ribena business; they're not distributed through pharmacy OTC pharma channels.

So we're really looking to see how we best now develop a long-term brand value, all options on the table, but quite good example I think of us really testing if it doesn't naturally fit to where we believe the core points of synergy are, then we're going to ask the question about exactly how we should deal with that.

I'm sure we'll cover that a bit later on as well.

We've been focused on driving forward the development of this business.

We obviously have now a much more balanced business geographically.

We're looking for more and more efficiency in the organization.

We're committed to cash conversion as you've seen over the last two, three years, and then very substantial repatriation of cash back to shareholders either through dividend growth or through share buybacks.

If we look across really the kind of four different types of businesses we have, clearly we are all about the pro innovation markets.

I've talked about these in the past, being particularly the United States and Japan.

Over one-third of the group, obviously this is the part of the business which is going to benefit the most from new products as they come through the final stages of regulatory approval.

We've worked hard to make sure that in both of those geographies we've got the right operating model to go forward.

That's been much more the focus in America as we've responded both to the shift in our portfolio, frankly some lack of competitiveness in our business, four, five years ago.

Also to the effects of the Affordable Care Act.

As you've seen, I think sporadically we've shared with you bits and pieces of what we've done differently there.

I think we now have a very, very strong commercial organization, all the evidence from our early launches of niche products, more specialty products, very, very encouraging in terms of share.

We're starting to see some nice improvements even in the bigger, older products like Advair, and its share performance and also its market performance in the last few months.

All of which is reassuring, very good metrics coming back from the key decision makers in the US marketplace, ready for the pipeline.

Japan, we've just launched a Votrient sarcoma indication in Japan.

That was the 70th new product we've launched in Japan since the year 2000 and we have 30 more new products to launch in the next three or four years.

Very exciting portfolio of opportunities to come.

I hope in these businesses, but both of them ready really to start to move forward with what I will hope will be bigger commercial opportunities than we've had in the past.

In Japan specifically during the year we built the joint venture with Daiichi Sankyo to ensure that in the vaccine space we can complement our newer high end vaccines with the base vaccine portfolio that Daiichi Sankyo has.

That's put us in a very strong position for the long term in Japan I think as well.

Emerging Markets, obviously been the focus since I took over.

We've significantly increased our resource base there.

Now you can see very material part of the group continues to grow very strongly.

Delighted last year that although we suffered in the first quarter, particularly with the Arab Spring, very strong recovery during the rest of the year, 16% up in the pharma vaccines space in the fourth quarter, very strong consumer business, and overall still a 10% growth rate there as we started to see some of our multinational peers' growth rates drop off.

I think that's largely because we've got the right business model in these markets.

We're very focused on innovation and great continued growth of our newer products, but we're also very focused on ensuring access of the body of the portfolio.

So we see good volume numbers, we see good adoption of new products, just a look at Synflorix as one example, GBP400 million of turnover just for Synflorix, just in the Emerging Markets is really a good signal of the way in which we can generate adoption of newer products as well as sustain the old ones.

Europe of course has been the challenge, very much the focus of last year, disappointing for us to see the environment turn out more negatively than we anticipated.

Very much expressed through price.

So we continue to see our European business perform around zero, minus 1 type of volume movements.

Our biggest product Seretide last year actually grew 2% in volume but had a significant price reduction.

So the volume's nothing dramatic, very much in line with where we see the market operating.

Volume shares don't look anything to be worried about, but like everybody else, significant price pressure.

Although at the beginning of last year it felt like we were the only people to get such significant pressure as we have that Seretide price cut roll through, I think as the year's gone on, you've seen most of our peers have had very similar kind of price dynamics to our own.

And actually when you look at our performance in Europe, it's very much along side the rest of the industry.

We are determined to do something about this.

We don't believe that the European picture is going to suddenly improve and we don't think the European macroeconomic situation is going to facilitate a dramatic relaxation of pressure in Europe, and therefore, as a group we want to make sure that we do everything we can to maximize our efficiency in this region while we then focus on the growth opportunities in the other 80% of the group.

It's a very dangerous track to become obsessed with Europe when in fact everything else in the world shows great opportunity.

So we've already announced today the beginnings of a significant restructuring program of our European business within our overall change program I've announced today.

This will focus on obviously reducing the size of these organizations.

It will reduce headcount in these organizations, eliminate overlap, duplication, and the like.

Most of that will fall in the SG&A arena, so that will be administration sales organizations.

There will be an element of redeployment, so some of the reductions and eliminations will be redeployed on some of the brands we think we might be a little under-powered on at the moment.

All of that makes sense.

It's all completely obvious.

It's under way as we speak.

We are continuing, however, to look at bigger, broader, strategic solutions to Europe.

Europe is not a one or two year issue.

We think it's a strategic issue for the business, actually bluntly for the industry, and so we continue to look at other options.

We're not in a position today to share those details with you.

But it is very much something which is on the front burner of the Company and we intend during 2013 to get to resolution.

Obviously when we do we will share with you what the shape of that looks like.

We've already signaled as an example of perhaps the least ambitious perimeter of what the next step might look like that we are looking for a partner for albiglutide commercialization, so that might be one pathway where we look to do more specific partnering to avoid buildup of European infrastructure when we know it's a relatively tough environment.

At the other end of the perimeter you know historically we've transacted deals like these, where we've created very different structural approaches to try and resolve very complex pressures in a particular segment of our business.

I'm not guiding you that we're going to do either one of those things.

I'm simply signaling to you the spread of the perimeter and I think that gives you a feel that we are very serious about looking for the right strategic response.

But we need to make the right decision at the right moment and obviously not simply to synchronize with the results announcement.

A lot going on in Europe, a lot of change, a lot of work.

We have seen as you saw in Q4 a slight improvement in performance there which is good, a slight improvement in volume, and a little bit of reduction in the price pressure as predicted because of Seretide price pressure went down a bit but nonetheless we'd expect 2013 to remain a negative pricing environment in Europe as we saw last year, probably mid-single digits sorts of territory.

US and Europe consumer businesses remain very strong, very dynamic, particularly in America, outstanding consumption growth; every single month of last year we grew faster than our categories in terms of consumption.

We're seeing very strong performance of all of our brands in these geographies, particularly the oral care business, Sensodyne now a $1 billion brand, it accounts for about 8% of the world's toothpaste market, so as a brand which most people think about it's a bit of a niche.

It's actually ended up or has become a very significant part of the global toothpaste business, and has grown in double digits for 14 of the last 15 quarters, including the last quarter.

Very strong business, very good performance in America, very much benefited from stripping out the tail, so by divesting ourselves of the tail last year has really cleared the way for us to focus on essentially 15 brands.

Those 15 brands drive about 80% of that organization, it's an extremely concentrated business and has got a very, very sharp focus.

As I mentioned, two brands, Lucozade and Ribena really sit a little bit outside of the very strong synergy points of this business.

That's why they're up for review.

Again, this is a review which has no predetermined decision and it has no options ruled in or out.

So it could at the most conservative end of the perimeter conclude that we should invest more and we should carry on doing what we're doing but with more investment in different geographies, and it could at the far end of the perimeter include divestment of these assets.

That perimeter is as wide as that, no decision taken, and I think we had the first phone call from a bank at 12.18 and we've had six since.

So all credit to the investment bank community, although I was surprised it took them 18 minutes to get on the phone.

R&D I think has been a really tremendous story for us during 2012.

Really, the continuation of the momentum which has been building up in the R&D organization, very strong delivery of clinical trial results.

Fabulous delivery of efficiency in the trial environment, something like three times as many patients in GSK clinical trials today as compared to 2008, so a massive step-up in activity.

Trials getting done, many trials finishing early, many trials coming in under budget, all of which are why we've been able to hold our R&D budget flat to down, even with this massive step-up in the pipeline.

Really the proof if you will of the efficiencies that we've begun to put in place in that organization.

14 assets still to report out over the next couple of years and we think with the 6, which are already under review, we have the potential to have 15 new drugs or vaccines.

That's not line extensions.

That's 15 complete new drugs or vaccines in the next couple of years.

Lots of news this year.

Lots of catalysts for those of you who love catalysts.

So there will be lots of moments where I'm going to be very nervous, you're going to be very interested, and we'll see how we both feel in the morning.

It's going to be one of those sorts of years, it's a very different sort of atmosphere for us.

Obviously, there's going to be lots of twists and turns in this year.

Not everything is going to go smoothly.

There's bound to be twists and turns as we go along.

We'll see how the year progresses.

We're in great shape.

We've got six files in already.

And of course during the year we'll also get the first data back on the MAGE-A3 therapeutic vaccine and darapladib.

And while we've always signaled that those are high risk, but very high return opportunities, it's impossible not to get excited about as those dates start to progress toward us.

A lot coming in terms of pipeline.

I really couldn't be happier in terms of the progression of what we've done there and been able to do all of that and at the same time show that we can be more efficient, and that R&D is not simply a function of how much money you throw at it.

We believe and we have the first two respiratory files obviously at the regulators, we believe we have the opportunity for up to 10 new respiratory drugs in the next five or six years, and we are very confident of our view that we can grow our respiratory franchise over the medium term as these new products start to roll in, notwithstanding the fact that there will inevitably be continued price and in some areas generic pressure to some of our existing products.

One of the reasons why we've been buying up our stakes in our partners is because of our increasing confidence in the assets and our desire to get more economic control, and also to simplify some of the relationships.

So to avoid having to negotiate everything, speed up decision making, and buy up the economics was really behind our deployment of capital last year, and essentially almost all of our bolt-on acquisitions, all of our deployments last year were targeted around that arena.

In terms of looking at how we simplify the business, I've covered a couple of these things.

The first two you see.

These are updates on numbers you've seen before, very substantial reductions in the size of our R&D footprint.

As an example, it's a much leaner organization almost in every dimension, it's a much more creative organization, it's much more accountable organization, but it's certainly leaner.

We're in the midst of changing our manufacturing organization and the change program that I've announced today, GBP1.5 billion charge for GBP1 billion of savings covers the European restructuring, and it covers elements of the changes that we're stimulating in R&D and manufacturing.

This is going to lead I think to a really significant technology leap for the Company.

Areas for example that we're going to be accelerating is a jump toward more continuous process manufacture, a shift from synthetic chemical reactions to enzymatic reactions, and a whole reframing of how we do analytical testing in all of our facilities.

The net-net of all of that, very significant reduction in process time, very significant reduction in cost, carbon footprint, inventory, and speed.

All of those things are on offer, and we've been spending in parts of the organization -- we almost never talk to you about in our platform sciences units, we've been working over the last five or six years on a series of technologies, which we believe now are ready to industrialize.

We commissioned the first, we began building the first facility in September of last year in Singapore where we're going to start deploying the enzymatic technologies into Amoxicillin actually first of all.

But it's already been deployed in two of our pipeline assets and will now be accelerated across the rest of the organization.

Just to give you a little sense of what that all means.

Because I could see when I said enzymatic reactions one or two people kind of glazed over just for a second.

Just to bring that into what that might mean from an economics point of view.

Couple of metrics.

When we normally make a chemical which goes into medicine we need a facility which is about 900 square meters in size.

That gives you a sense on average.

To do it this way takes about 100 square meters.

So you're talking about a massive reduction in capital deployment and space occupancy obviously.

You'll see something like a 50% reduction in carbon footprint and solvent use.

Up to a 50% reduction in cost.

These are enormous levers on the biggest part of the cost base in terms of the cost of goods.

How big could this be?

Just again, if you look at our current portfolio, between one-third and 50% of all the chemical reactions we do in our factories is amenable to this technology.

This is not something which will be a rarity.

It should be something we can apply on a very broad basis.

So that really is a new avenue for us and I'm excited about this because I think what this reflects is this is a Company that has spent five years working to deal with a patent cliff, working to deal with lots of other issues from the past, reinvent its R&D organization to deliver a pipeline, rethink its commercialization modeling key businesses, grapple with core strategic issues of fit like HIV, like Lucozade and Ribena.

And at the same time, invest in developing technologies which can allow us to take another leap forward in terms of changing our cost base for the medium term.

I think it reflects the capability and the focus of the organization to relentlessly keep looking for ways to build momentum into long-term value creation.

All of that of course is designed to generate sustainable sales growth.

We think this year should be a year of growth, small growth, low growth, with leverage, but nonetheless a year of growth.

Obviously we hope that that would have happened last year but with the pressures we saw in Europe combined with the decision to dispose of some of the tail, that really took that growth away.

This year we think we can get to growth.

We'll have to see what the environment throws at us.

But based on what we see today we expect that.

We're confident we can deliver EPS growth.

A lot of that leverage comes from our financial engineering and Simon will touch on this a little bit more.

The work that's gone on to refinance the group, reduce our cost of borrowing, really has made a significant difference as of course does the tax rate.

So all of that should start to deliver for us a very, very consistent delivery over the next few years as the pipeline starts to feed in at the top.

We've continued to work to reduce working capital and of course we continue to then focus on returning the cash back to shareholders.

We're guiding today that we will increase the dividend again.

That's our goal, consistently increase the dividend.

We've done it today by 6%.

We continue to aim to do that during '13, and we will continue to buy back shares initially set in a range of GBP1 billion to GBP2 billion.

Very simple architecture for the Company, very much focused on sales, driving into the top of an efficient organization, using leverage at any place we can within the P&L to try and maximize EPS growth with a view that the focus should be on organic growth and it should be on returning cash to shareholders rather than significant acquisitions.

Those are essentially the key messages for you.

I think we're in good shape.

Last year wasn't quite where we hoped it to be, but actually the way it turned out wasn't far off either.

And so the key for us as we go forward this year is to lock in on the growth opportunities, make the right decisions on the strategic challenges of Europe, Lucozade and Ribena.

Make sure that the R&D pipeline continues to move forward.

There are bound to be twists and turns during the year.

I certainly start 2013 with a very high degree of confidence.

With that I'm going to hand over to Simon.

Thanks, Andrew.

Clearly, as Andrew has highlighted, 2012 was a challenging year and one that looking back on it turned out to be a lot more challenging than we'd expected at the beginning of the year, but I'm very pleased with how the business performed and responded during the course of the year to those challenges, and equally pleased that we were able to deliver on the updated guidance that we gave you back in October.

Delivering sales broadly in line with last year, flat excluding the drag from the OTC disposals, and earnings per share flat on the year before.

Europe was obviously a key issue for us to deal with during the course of the year.

And in fact, if you look at the near GBP400 million drag that Europe introduced to the group, that reflects basically all of the downturn that we saw at the group level as well.

So you can see the sort of scale of the challenge that we had to deal with.

And I think what made it particularly difficult to respond to was the way in which the formal austerity measures really spread in a very diverse way across the continent and really played out in different markets in very different ways, which meant the business had to become a lot more agile, a lot more adept in tackling those challenges.

I think the business has responded very well, and even though today we've announced a number of changes and some restructuring charges to put Europe on to a sounder footing going forward, clearly that's not where we've started from, already a number of changes were being made in the business during the latter part of last year.

And already we've taken a number of resources and reallocated them across the business to make sure that we're really focusing where the European business can make the best returns.

I think from my perspective, that's also very encouraging in the way in which the financial strategy that we've laid out for the Company and the financial metrics and architecture that we've given the businesses really being applied at the front line, so that has not only meant reducing costs but it's also meant reallocating resources either back to the group for other purposes where we can see better returns, or even within Europe where picking two or three of our key products, putting extra resources and extra investment behind them, which might seem counterintuitive in the face of that sort of pressure has actually lead to some of the volume growth that Andrew described for you and really allowed us to improve our market positions in a number of key territories across the continent.

We're going to be looking to do much more of that as we go into the continuing review of the European business during 2013.

I think more broadly across the business you can also see other areas where the financial strategy is really starting to bite and have a material impact on our bottom line performance.

I'm particularly pleased with the progress we've made in delivering our funding objectives a year early with our net interest cost now down over 200 basis points from the year before I came.

That's really a function of taking advantage of different opportunities on the interest rate curve, refinancing some of our debt, and really building a much more sustainable and flexible capital structure to fund the business going forward.

Equally on the tax rate, and I'll talk some more about that going forward, I think we've really built a much more sustainable position to allow us to continue to improve and continue to deliver value at the bottom line.

Equally on the cost side, we've got a number of ongoing programs, our OE program, which is now coming to an end, the new initiatives we've announced today, but also we continue to look at areas where we can release value either on an ongoing basis or one-off basis, they all contribute to our flexibility to be able to deliver funding to the businesses where we can deliver the best return and the best growth.

Some of the benefits changes that we've highlighted in the release today, even though they may be lumpy in the way they deliver value, really A, put those plans onto a sustainable, long-term basis for our employees, but they also release a lot more funding flexibility into the Company.

And it's something we've been working on for some time even though they've only arrived in the fourth quarter this year and we will be looking for further opportunities along that line.

I think equally as Andrew highlighted, the financial strategy is one of the key drivers why during the course of last year and this year we've looked at some of the assets that we've got coming through the pipeline, some of our partnership arrangements and have bought in the economics during the course of this year to really make sure that we're driving at the end of the day the most sustainable, long-term earnings per share growth.

I think it's worth remembering that the strategy that we've outlined to support the group's objectives, it's designed to drive two things, earnings per share and free cash flow growth.

And that's why the guidance we've given is focused on earnings per share.

If we deliver the earnings per share, the focus we now have across the group on free cash flow conversion, we'll deliver the cash flow, that we can either use to reinvest in further opportunities or return back to the shareholders as dividends and buybacks as we've said before.

That will be done on a very rigorous CFROI basis, benchmarking those opportunities to see where the best returns can be delivered.

So if we turn to the results for 2012, as we said, I think good delivery particularly in the second half of the year, particularly pleased with how a number of the key objectives we had in the fourth quarter came through.

We highlighted back in October that we had a significant number of vaccines deliveries to make in Emerging Markets especially, but also the US saw a very good take-up from the vaccines business in the fourth quarter as well.

And that is not delivered without a lot of effort from the vaccines business to make sure they arrive with the patients in the right timeframe and in the right markets, and so good successful execution there.

Equally Emerging Market pharma business, consistently picking up the pace since that disruption of the Arab Spring in Q1.

Europe again, also, a slightly lower rate of decline in Q4, I think partly reflecting some of the measures we've already taken, but I think it's too early to call that a trend because clearly the markets remain very challenging.

But I think that also helps contribute to the overall delivery.

I think the US also making progress although we did see slightly less stocking in the fourth quarter than we've historically seen.

That may be a change in pattern where we're still working through how that may flow into Q1.

But I think that is why we've ended up perhaps a little short of where we were expecting in the US, but overall general performance very strong.

At the operating level, good contribution from a variety of cost saving measures, really allowing us to minimize the impact of the top line drag at the operating level to around 30 basis points.

We flagged on top of that the cost of HGS coming in in the back half of the third quarter, and into the fourth quarter we take about 30 basis points this year.

Clearly that's going to fade out as we go into 2013 and then contribute from 2014 onwards.

So overall I think we've managed to deal with a very unpredictable environment and maintain pretty much the same margin as we had last year.

The leverage has really come at the bottom half of the P&L in the financial measures which we've described in the release today.

But good progress on funding, tax, looking at the share count, the benefits of the share buyback, allows us to deliver core earnings per share flat on last year.

Quick word on free cash flow which is obviously one of our core metrics.

Down 17% for the year.

I think that really reflects just a continued focus on generating and converting earnings to cash, but also during the year as we flagged a year ago, we were going to need to put a bit more investment into the capital expenditure behind the delivery of the pipeline.

Also the absolute amount of working capital released during the year lower than 2011 but still a very good contribution that has allowed us to fund GBP6.3 billion of distributions back to shareholders during the year.

If you look at the sales contribution, and look underneath that in terms of the overall mix, as Andrew highlighted we went into the year expecting a material drag from the disposals of the OTC businesses.

We weren't sure exactly when they would get exited.

But we saw that, combined with the final stages of the rolloff of Avandia, and then the comparison with the spike in Cervarix that we saw in 2011 through the five cohort catch-up program in Japan, which really put about GBP600 million of drag into the sales level for 2012.

Now, I'll come back to some of that, still will play out in the first half of next year but that obviously was a material factor.

I think if you then look at the shape of what the contributions from the different businesses have delivered during 2012, you can see immediately the drag factor that Europe and the GBP400 million decline really introduces into the mix.

Because the rest of it is very consistent with the pattern that we've described for you over the last several quarters.

The US broadly flat when you strip away the decline of Avandia.

Generics offsetting the continued growth of the promoted products, and really without new products to add to that mix, the US is holding steady but needs that extra additional portfolio to be able to really move forward.

ViiV likewise experiencing generic pressures and obviously it has an exciting new product with the regulators at the moment, but again, that's going to need new product before that really moves forward.

And then offset by the continued strong performances of our Emerging Market businesses, our Japanese business, and our consumer businesses, which have very consistently delivered over the course of 2012.

And at an absolute level you can see that leads us down 1%, broadly in line with last year, but Europe really being the swing factor in our performance.

And when you look forward into 2013, the reason why we've given guidance of 1% is that we continue to see some drag from those exiting businesses.

Most of that will fall in Q1.

We have about GBP400 million in total to flow through the course of 2013.

When you look at that business below those drag factors and you can see without calling it a very different position in Europe, but again, we need the pipeline to move the US forward.

We need the pipeline to move ViiV forward.

Without that, there remains a relatively high degree of offset against our existing growth businesses, which leaves us expecting about 1% for 2013 on a constant currency basis.

If we look past that at the margin, I think you can see here very much the dynamics that we've talked about before in how we want to manage the P&L to drive bottom line performance.

We've had a number of different offsetting factors but overall the key message that the margin was broadly the same as last year, despite the top line pressures that we've seen, really reflects our continuing balance of releasing cost savings from our established businesses, putting them behind our growth drivers in the Emerging Markets, and putting them behind getting ready for the pipeline if and when it's approved by the regulators.

And that's going to be the pattern very much during 2013.

But I think if you look at the overall mix, you can see there the SG&A block sitting in the middle, which really reflects holding that expense steady in the face of a falling sales line.

We think that's the right thing to have done given if we had pulled back we would have to put it into the business again, we would be slow on the uptake if we get these products approved.

The rest really reflects the mix and the impact of just lower sales against a relatively static cost base.

I think if you look at R&D, this is also a good example where we've been able to manage expense despite obviously a lot going on in the R&D business, that they may maintain their focus on cost control, they maintain their focus on efficiency, and we've got a number of phasing benefits in the course of the year, where they've maintained a very tight discipline on the amount they're investing.

Going forward, they're clearly going to have to also pick up the additional R&D costs as a result of folding the Shionogi interests back in directly to ViiV as we work on dolutegravir, and also the HGS costs.

I think we're continuing to manage that to the broadly flat guidance we gave you at the beginning of 2012 of about GBP3.6 billion, and we'll work within that parameter to make sure that we're really driving the best returns out of the R&D portfolio that we can.

I think on the SG&A side, equally, more consistency, looking to release resource from our developed markets, continuing to put them behind our new growth markets, and you can see broadly that's balanced during the course of the year.

Quite a lot of the structural savings that we've made out of the OE program now coming to an end, and these savings really being about the ongoing measures and the improvements that I've talked about a couple of times before, particularly in terms of our functional capability, or as Andrew highlighted we are continuing to roll out our new ERP platforms.

We will have over 75% of our European business (inaudible) by revenues onto the new ERP platform by the middle of this year.

That's starting to drive some significant changes and open up new opportunities as well, to simplify the functional and administrative costs of the Company.

We just opened the first two of our business centers which are really going to be hubs to provide coverage across both Europe and now central -- the central part of the EMAP businesses, three or four more to come.

But I think we're already making significant progress that leaves us confident we can continue to offset the investments we need with the release of cost measures, either one-offs, ongoing, or a combination of both, that will hopefully allow us to play this position forward and that's certainly the plan.

I think what you can see is that fixed sort of flat cost number against the declining sales obviously is the other 0.5% that you saw in the margin impact during the course of the year.

Where we see more pressure is at the cost of goods line.

Many of the measures that are contained within the new change program we've identified today are really designed to address the ongoing competitiveness of our supply chains and how we really adapt them to both the considerable burden of expansion they're bringing, as many new products through the pipeline is going to require from our manufacturing businesses, and they're already gearing up to do that.

Our new products, inevitably take some time to develop to the optimum margin and cost structure.

But also making sure that we are continuing to take cost out of the manufacturing lines supplying into Emerging Markets and those where the price point is different.

I think we've already seen even in the last six months and the focus of these new programs that have been summarized in the release today significant changes.

So take Ventolin where we've had a number of product presentations of Ventolin designed to go into the Emerging Markets.

By taking some of the lessons from the consumer business and really designing those products for value, we've reduced the costs to supply those, but not just sort of 10% or 20%, but 70%, 80%, which not only makes us competitive with the local producers in those markets but also allows us to access more patients and broaden out the access and coverage of those markets, again opening up new opportunities for us to expand in Emerging Markets.

So I think that's just a small example for a product like Ventolin which is 30 years old where you can still make very significant changes by aligning the supply lines with the end customer and making sure that you're really focused on where the value sits in that chain.

I think overall, again, a little bit like you've seen on the SG&A side, cost managements and OE savings along the lines with the sort of programs I've described offsetting a recurrent drag that we have in the cost of goods line, of the mix of the business as it's changed over the last two or three years.

Clearly as the pipeline comes through and those sales go to the US or Japan, then that mix is likely to change, but this is a factor that we need to continue to build into our plans to make sure that we're covering the costs and the impact of that.

I think the shorter-term issue has clearly been volume where in a declining sales environment, particularly one where sales have declined as quickly as they have in Europe, moving the manufacturing chains to respond is quite difficult, particularly when some of our supply lines are 18 months long and we've seen here some volume impact in the course of 2012.

Some of that will still flow into 2013 as we unwind some of the impacts from this year, but one of the reasons we want to shorten our supply chains is to allow us to be much more responsive to these sort of pressures going forward.

So overall, the savings that we're expecting to make out of the new program will total GBP1 billion by 2016.

That's going to be phased as indeed were the savings out of the OE program.

I think like that program, you should expect us to both invest as well as release to the bottom line.

Typically, our pattern has been roughly 50/50 in terms of those benefits, and I would expect that there's probably a little bit more concentration on the investment side in the short term as we get ourselves ready for the pipeline.

But we do expect progressive delivery of those benefits into the mix and we will allow those to flow through as we see the opportunities.

But this will take a number of years to really reach full run rate.

We think that's the right thing to do given the number of moving parts that we're having to manage.

So on the financial side, as I highlighted earlier, we set out a couple years ago some targets to reduce our net funding costs by 200 basis points.

We've delivered that this year, a year earlier than planned and we're continuing to look at ways of improving that, and it's worth remembering, we've taken the net debt of the Company up from GBP9 billion to around GBP14 billion.

The interest charge this year is pretty much the same as last year in 2012, relative to 2011, really reflecting the progress that we've made in the way in which we're funding the group.

Equally on the tax side we've delivered 24.4% this year, again, ahead of the 25% target a year earlier that we set out.

And this really is a function of the continuing efforts we're making to restructure the way in which the group's operations and its financial structure are aligned.

You'll see in the release today some details of some of the moves that we've made to bring substantial amounts of our intellectual property back to the UK.

And that was done during the course of last year.

That has contributed a little bit in terms of how we have ended up this year, but it's really about the story going forward, why we believe we can take 24.4% from 2012 into 24% in '13, and we continue to look for ways to improve that going forward as we now have a significant amount of our pipeline sitting in the UK, available to access the patent box and some of the tax incentives around that, which go with the investment and the activity we're also bringing back to the UK so that we believe that is a sustainable position going forward, and one that is going to contribute materially to the bottom line in future years as the pipeline delivers.

We bought shares of GBP2.5 billion back and next year we're looking again like last year to start with a similar shape of a range of GBP1 billion to GBP2 billion.

We'll see how we progress during the course of the year but that will very much depend on where alternative investments might come.

Maybe they don't, in which case we'll work our way through the range.

But I think it's too early to call that.

We'll keep that under review.

It's very much the pattern that we followed in the last couple of years, so again for 2013.

So I think the other bits of the financial structure for next year is that we should -- we're expecting the financing expense to be, again, broadly similar.

Core tax rate I've identified at 24%.

Hopefully you'll see that with sales guidance of 1%, earnings per share guidance of 3% to 4%, that we are delivering leverage through the P&L, but it's a across the P&L.

And we've always made it clear that we expect more leverage from the financial side in the shorter term until we see the pipeline beginning to make material contributions.

I think the core EPS that we reported, 112.7p, just flag also the total EPS of 92.9p.

When we instituted call we gave you guidance that was typically 10p or 11p of difference or delta between the two.

This year higher than that and really the main difference is a 9p tax charge related to the implications and costs of moving the IP from around the world back into the UK, which is driving the tax benefits I just described.

That's really the reason the delta this year is a bit higher than we've seen previously.

Quickly on IS-19 which we will be adopting from the 1st of January 2013, this as you'll recall is really about substituting return rates on assets for the discount rate you're using.

So increases the cost of your benefit plans.

Restating 2012 takes it from 112.7p to 111.4p, so 1.3p coming off there.

Our estimate for 2013 is that it will have an impact of about 2.5p on a like-for-like basis.

That really reflects obviously the continuing decline in interest rates and obviously the impact of the discount rate that that has.

So turning to free cash flow.

I think I call out particularly here the working capital, GBP400 million of contribution to the cash.

We continue to make steady progress here.

The numbers in days terms during the course of the year, we've got a number of distorting factors in there, primarily reflecting a number of the intangible adjustments we've made to bringing the transactions and the economic interests that we've described, but overall we've made about five days progress.

We continue to set up programs inside the Company to deliver steady and most importantly sustained progress.

And while we have probably made the most progress in the short term in receivables and payables, that has also helped manage our risk in Europe, clearly in terms of sovereign risk.

But we're probably coming to the end of that in terms of where material improvements might be seen.

And so the real focus in 2012 has been putting in place a series of programs to give both the vaccines and pharmaceutical and consumer manufacturing businesses real end-to-end ownership of the inventory across the Company, so that we remove the buffers, we remove the sort of interfaces across the Company where inventory tends to accumulate.

Particularly in the third and fourth quarters last year, we saw those programs already dropping quite a lot of finished goods, materials, and inventories out of the commercial operations, lots more still to do.

But that's really where the opportunity will be going forward.

I think as we highlighted during the course of the year, the legal charges obviously have material impact on the free cash flow, but we've effectively funded those in terms of how we think about it off the balance sheet in the same way as we have done the various acquisitions we've made during the course of the year.

So free cash flow, GBP4.7 billion, pre-legal contributing to distributions of GBP6.3 billion that we made during the course of the year, and really the debt increase, financing that legal charge and also the HGS and other acquisitions that we made during the course of the year, leaving the debt at GBP14 billion on a net basis.

So to summarize, our guidance for the year, 3% to 4% on a constant exchange rate basis at the earnings level.

That is the key metric that we're focused on, driven off an assumption for sales growth of 1% again on a constant currency basis, really reflecting the mix of those different growth drivers, the US waiting for the pipeline, and the continuing offset from the exit of Avandia, the OTC disposals, and Cervarix which you'll remember the third wave of that came in Q1 2012, so there's a little bit more of that to come.

But even absorbing that, we still expect to grow this year.

Most importantly, the leverage coming through the P&L with the financial side contributing more, allowing us to continue to invest behind the pipeline, behind those growth drivers, and make sure that we're building the right and most sustainable platform to deliver earnings per share growth in the future.

With that I'll hand back to Andrew.

Thank you very much, Simon.

Let's open up for questions, please.

Good afternoon, Florent Cespedes, BNP Paribas.

A few quick questions.

First, on Emerging Markets could you tell us what is behind the success and good performance of this division this year?

Is it due to the restructuring you announced last year?

Or is it due to certain measures?

I remember a few years ago you presented a slide where, with Tykerb in India you have decreased massively the price.

At the same time, you saw kind of strong increase in volumes.

My second question is on the recently launched products.

Could you share with us if there is some new dynamics on new products there, because they represent still 7% of your total turnover?

And third one, on restructuring -- could you share with us, could you give us some color on what new could be done at Glaxo on the restructuring side, notably in Europe?

No later than yesterday some of your competitors suggested that if you want to keep some pricing power in Europe, you need to keep some operations and some business like new research, high value added business.

Thank you.

Okay.

Great.

Thanks.

So in terms of the EM success, first of all, I am very proud of the performance there because we've continued to see very robust growth.

We had that wobble at the beginning of last year with the Arab Spring, really, in the Middle East.

But since then we've seen a very strong recovery.

What are the key observations?

First of all, actually it was very broad-based, so every region in our EM business portfolio continues to do very well, Latina, Middle East, Africa -- even the least developed countries growing dramatically.

Very strong China performance, very good India performance, very good Russia performance, actually.

So across the board we're seeing all the regions move well, and in a funny way it's very analogous to consumer.

Consumer is also delivering very broad multi-region, multi-category growth, which I'm very encouraged about because it feels very sustainable, actually.

So that's the key.

How is that happening?

Again, we're seeing across all the key products.

I think in the top 15 products in Emerging Markets, the only product that didn't grow last year was Cervarix, because it was rolling off some big tenders.

Every single other product was growing.

So it was very deep growth.

Within that you've got products like Votrient going great.

You've got a product like Synflorix -- new product's going great.

And you've also got Ventolin Zinnat -- when was the last time we ever talked about Zinnat?

Again, chipped in about GBP10 million of growth last year in EM.

So all the way through that portfolio.

What does that reflect?

I think an increasing ability to drive access of every product.

Where we've got older products we've used price typically to drive our way into another tier of the marketplace from where we were before.

We talked about that many times strategically as a goal.

I think it remains quite a key differentiator for us versus most of our peers.

And then, gradually the Emerging Markets are doing for us better and better job with the new products.

The innovative products we're starting to capture opportunities as we go through.

I think there's every chance that will continue.

It's just to reflect maybe -- I think this is quite a good thing to reflect to you, actually.

As some of you know, we've restructured our interface between R&D and commercial into franchise groups, which is essentially the mechanism through which we get from the countries input to R&D of what they need, and through which R&D communicates to the countries what's coming through the advanced pipeline.

Historically, that's been dominated by US and Europe.

And within Europe, it was dominated by the UK, Germany, and France.

We have seven franchise groups; I think it's a very interesting reflection on how we view the world.

The UK, Europe no longer sits on any of the franchise groups.

The UK only sits on one.

France, Germany, and Italy sit on two or three each.

Japan is on all of them.

America is on all of them.

Brazil is on all of them.

China is on all of them.

That tells you everything you need to know about what we think about the future.

And the whole way in which we're thinking about this, we start to see increasingly significant opportunity to layer on more and more innovation opportunity on top of that access strategy.

And the key is, can we do both.

And I think that's really -- it's encouraging so far, but that's really the key executional challenge for us in the next few years.

So that's the first part.

In terms of generally new launches -- as I said repeatedly we've had lots of new launches but they've generally been niche, specialty products.

Actually, as you rightly say, they now account for about 7% of turnover.

Given that there's no single big product in there, or no several big products in there -- not bad.

So what are the lessons we're seeing?

First of all, we're seeing great performances in shares.

You look at things like Promacta in the US; you look at things like Votrient -- particularly since the approval of sarcoma, very strong performance.

You look at the performance actually of Votrient across the world.

You're look at Volibris in Europe, very strong performance.

So you're seeing very good performances, generally lessons learned, everything's taking about a year longer than you would expect from old models, so all the curves are about a year to the right.

It's about patience, resilience, and sticking at it through that first year or two.

Seeing the same thing with Benlysta -- everybody expected big bangs at the beginning.

We're seeing a nice, steady click-forward through Benlysta in the US.

So those -- it's all about being a little bit more patient than we used to be.

Why?

Well, because the whole world is more cautious from a price and access point of view.

All systems, almost everywhere in the world, have got more grit in them than they used to have; there's more inertia in the system than there used to be.

What we are finding is, we're needing a fraction of the resource we used to need.

Much lower levels of sales forces -- we're now talking about specialty products launching in America with less than 50 people per product -- very dramatically down on where we would have been historically, all because of the change in the structure of buying patterns, all because of the change in structure of where decisions are being made, particularly accelerated in parallel to the ACA, right.

So very different from that point of view.

And actually, we're seeing great performance again in the US of businesses which were restructured first toward our new ways of operating.

So, oncology, specialty business, vaccine business -- all performing very well, which is why we've got high degrees of confidence with the primary care business, which is now also reformed the same way, ready for the pipeline of products coming.

In terms of creative solutions to Europe -- we're working on it.

So I think we are, as I said in my introductory comments, we view this as a strategic shift, and therefore we want to explore whether or not there are strategic options for us to resolve.

We're going to do the obvious things.

We are doing the obvious things in terms of right-sizing, scaling, and all the rest of it.

We have very few R&D centers now in Europe.

We have Britain as a very material R&D center.

We have a unit in France and we have a unit in Spain.

The unit in France is one DPU.

The unit in Spain is our neglected disease research unit.

Those are the only two research facilities we now have in Continental Europe.

We have manufacturing in maybe four or five countries, but not in all of them.

So over the years, we have relatively small amounts of that.

There's been absolutely no evidence to me that, that's made any more easy or difficult to get things done in Europe.

It's just difficult.

There's not a lot of obvious examples to me that others who have got lots of footprint have it any easier.

So I don't think that's particularly relevant.

What is relevant is, you have data; and the key to the future for Europe will be who can get the incremental access points versus everybody else.

Whether that means a little bit more price or a little bit more speed or a little bit more openness of volume in terms of the opportunities, it all comes down to data generation, production of the right persuasive data.

But all of that is going to be against a relatively contractionary world.

Because I think there's very little evidence to support the view that healthcare budgets are going to grow significantly in Europe in the next five to ten years.

I just can't see how you get there from the macroeconomic situation.

So if that's the background, then it's all about trying to find that extra point of opportunity within what is a pretty difficult box.

That's why we need to keep looking to see what might be alternative approaches.

We'll see as we go through the year.

As I've said, some of those things are already under way, like looking for partners.

Whether there's anything more exciting than that we'll have to wait and see.

Okay.

Andrew.

Andrew Baum, Citi.

Three questions.

First to Simon, you've taken a very significant charge of GBP420 million in order to relocate the intellectual property.

I'm aware that the Inland Revenue is becoming increasingly transparent in helping you think about the tax implications for the business.

So my question is -- given you have now taken this charge, would you like to give us some further guidance of whether the tax rate at GSK long-term is going to go below 20% once the patent box is fully enacted?

Second question is to Andrew -- if the Supreme Court do not take your case versus Humana, what is the risk in terms of liabilities?

Given my understanding under the Third Appeal Circuit decision is, you're liable for double damages for the Colorado fraud cases.

So perhaps you could help me understand how that works if the Supremes don't take the case.

And then the final thing is -- on continuous manufacturing, could you just give us some idea of when continuous manufacturing for both your existing and new products is going to be introduced?

Because my impression was, it's still a little bit far out in terms of when it actually starts to roll off the line and into the marketplace.

Let me take the last two and then I'll hand over to Simon.

I'm not going to comment on any of the cases, because, as always, we feel particularly, today of all days, when we've just released our results we feel fully provided for and disclosed around all of our legal situations.

So there's absolutely nothing to add from what we've got.

I think this might have been the first ever GSK annual set of results where there were no new legal observations in the report; which, if you haven't got to that page, you should have a look at it and dwell on it and enjoy it just as I did yesterday.

So nothing to add on that.

I think it would make no sense to go further into it.

In terms of the continuous process manufacture, we've already started to deploy, so the first units were being installed last year.

The first pipeline assets, which have been developed accordingly are moving through the process.

So not the lead ones, but the next wave coming through.

For example, in the red, disease space, particularly those have been focused on.

But we've already started to deploy the first production versions in the UK factories, and we'll continue to now do that as we go forward.

And actually, I think the biggest lever will be -- there are really three big areas.

One I won't go into today, but two big ones I've touched on already.

One is continuous process manufacture.

The other is enzymatic reaction replacement of synthetic chemistry.

As I've said, we've already started to deploy that as well, and we will continue to implement that as we go through the next few years.

Tax?

On the tax front, clearly we wouldn't have taken the charge or put through the restructuring unless we thought there was more to go for.

I'm not going to get into any further guidance than the one year forward that we're giving in other circumstances as well.

But we think there are good opportunities.

But remember, not everything you put in the UK is going to go in the patent box.

We're still going to have a very big US business if the pipeline comes through.

So the tax rate there will remain relevant.

And so you have to look at the overall mix as to how far we can go.

We've already made quite a lot of progress, and I'll give guidance a year ahead as we can see that with enough certainty.

But back to where we started.

We wouldn't have done it if we didn't think there was a big opportunity.

Yes, great.

Graham Parry, Bank of America-Merrill Lynch.

Firstly, on your drinks strategic review -- in the press release it reads more of a geographic expansion that you're leaning towards rather than divestment.

Are we reading that correctly?

If that's the case, have you started to do an analysis yet of what incremental spend would be required to achieve that?

Secondly, in the release, in your initial comments you talked about margins improving over the medium term.

Just wondering if you could define medium term.

Is that two to three years?

Previously you've talked about potentially capping margins at about mid-30%s.

Are you still thinking that's an achievable level, given the environment you're facing in Europe?

And then, on the GBP1 billion savings -- could you split that out a little bit more between how much is R&D, how much is Europe, where the R&D savings come from, and are any of your new manufacturing technologies included in those savings for the enzymatic manufacturing, for example?

Great, okay.

As far as the drinks are concerned, I think you are probably slightly misreading.

There's no signal in the press release that it's going to be one thing or the other.

What the press release signals to you is it currently is geographically banned.

I think you can interpret from that, either you might conclude we should invest significantly to try and globalize, or maybe somebody who's got a global distribution capacity is a better owner.

You could end up at either end of the perimeter based on that observation.

So you shouldn't necessarily read anything into that specifically.

As far as margin is concerned -- obviously we've moved to give you EPS guidance.

We're not going to get into detailed discussion of the various line items.

I think the bottom line for all of this in the short term, we're not really expecting anything dramatic to happen up in the margin structure, but equally we're not going to spend another year talking about 20 basis points here or there.

So we thought it's probably better to make all of our lives easier, more enjoyable, just focus on one number at the bottom.

In terms of what I define as midterm -- I would say the three to five years is midterm in this industry.

I continue to have exactly the view I've always held, which is, the margin is a function of sales growth in this business, and the pace of margin expansion will correlate with sales growth, and the more the sales growth comes from the higher-margin US, Japanese businesses the faster all of that will play together.

For me, that's really the piece.

Is it possible we could end up in that situation of 35%?

Entirely possible.

And obviously is something that we want to strive towards over time.

But in the short term we're focused on delivering this EPS growth for this year and retaining the freedom to maneuver expense up and down the P&L to get the best possible return, rather than fixate on how do we get to within 20 bps or 10 bps of any given number -- which I think actually ends up being totally the wrong tail wagging the dog.

R&D -- break up of the restruct -- Not going to give you that, sorry.

And in terms of where is the R&D saving going to come from?

That will really come from modernization of infrastructure, actually.

So going from some of the -- again, we've taken a lot of infrastructure out.

We now have the opportunity to modernize, particularly as we adopt some of these new technologies.

So a lot of it will be around modernizing infrastructure, reducing some of those costs, reducing cycle times, all of that kind of thing.

So we think R&D -- I won't give you a big breakdown, but R&D is the smallest part of that total GBP1 billion.

It's more manufacturing in Europe.

And the manufacturing technologies include the rates -- (inaudible - microphone inaccessible)

The first parts of it are, but not all of it.

Next question.

Yes?

[P.

V. Hill], Morgan Stanley.

Just a few topics, Andrew.

We've seen one of your competitors in the UK try to launch major products while restructuring and not doing a very good job of it.

I was just wondering how you're thinking about that, given the importance of respiratory to your potential big launches in Europe.

Or should we be thinking about it as other companies -- just get a good price in Europe for the reference opportunity internationally.

Then on to vaccines -- could you just refresh our memory.

When you look at the portfolio, the technology you've got in vaccines, any gaps that you see?

I think in the past, or a few years ago, you did a -- open to potentially entering JVs with other vaccine players.

And then lastly just on diabetes, I think your introductory remarks hint at what you might be thinking, but the diabetes space is getting more competitive.

Whether you feel you've got the right resource to potentially launch and support Syncria?

Thanks.

In terms of the last one first, the albiglutide diabetes, we've begun a process of looking for commercialization partner, particularly in -- essentially a co-promotion partner for the US and either a co-promotion or a marketing partner in Europe.

That process is under way.

We've been very up front about that.

I think that is -- of the lead pipeline, that is clearly the one drug where we don't have established infrastructure, sufficient scale, and we don't necessarily have the portfolio to really play in there on our own.

So we want to explore whether or not there's a good proposition there with somebody.

And actually, judging by some of the interest, looks like there probably is.

So that absolutely we are looking at.

Vaccine technologies -- one of the things we really wanted and we've been looking at for a long time and we secured last week was a low cost scenario vaccine opportunity, particularly for the developing world; and that's why we did the deal last week with Bio E. So I actually feel like we plugged what was really the last significant gap within the mix.

The rest of it we continue to do small acquisitions of technologies here and there.

And you'll see that those tend to be a bit below the radar, but end up being important.

But beyond that, I think we're in decent shape.

In terms of respiratory -- we're very focused on that question, which is one of the reasons why you'll see absolutely no reference to restructuring in the US in this conversation today, because it's all about the US getting ready to launch products.

And clearly, the front end of the commercialization curve has to be about America.

So America is all about stable, lock in what we've got, lock in what we're doing, no more changes, no reorganization -- exactly to your point.

Europe, yes, it's a risk.

But what we are doing is what -- as I mentioned, some of the job in Europe is to reallocate as well as reduce; and respiratory is a beneficiary of the reallocation.

So actually the respiratory organizations in many countries will be getting strengthened rather than necessarily reduced.

So I can't say there is zero risk there.

But I also recognize that, although we should get relatively -- Europe is a relatively rapid primary regulator, if all goes well, it is a very slow price negotiator.

So we have a reasonable amount of time before we practically have the challenge in Europe and we are -- not everywhere, but in large numbers of places -- the respiratory business will not be affected negatively.

It will actually be affected positively because we obviously, that's one of the key pieces of future opportunity everywhere in the world, but including of course Europe.

Next question.

One question was just on run rate in terms of different geographies.

Firstly -- in Europe, would it be fair to say that you're talking about for 2013 that we could have pricing mid-single digits and then 0% to 1% volume headwind, so the 6% down that we saw in Q4, that is a plausible run rate for this year?

In Emerging Markets, it was an acceleration in Q4.

But then there is the issue that you had, some vaccine tenders.

What would the run rate actually look like there if we were to strip those out?

And would that be a fair run rate?

As far as -- again, I don't want to get into huge amounts of very specific kind of guidance -- but clearly, for Europe we expect something mid-single digits.

As I said to you, we've seen that zero, we've seen basically over the last year Europe for us be plus 1%, zero, minus 1%, that type of territory.

Obviously, we're focused on making sure that volume moves back enough, exactly why I said I think we should be moving resource back into some areas, not just reducing.

So our goal is to improve the volume profile in Europe.

There's not a lot I can do about some of those price pressures, although at the moment we would expect it to be a tad lower than it was on average last year, given it's what we think ought to be a little bit better outlook for Europe this year, but still negative.

As far the Emerging Markets are concerned, I don't think Q4 run rate is a run rate you should project -- absolutely not.

I think you should continue to expect lumpy quarters coming out, particularly from EM, because it's particularly influenced by vaccines.

I do think that high single-digit, double-digit annualized run rate is -- I think that is a reasonable kind of place to be looking for as we go forward.

And if you look at the way in which many of our peer group companies have fallen short of that, I'd be very happy if we could continue to click along at those sorts of rates.

But to do that we need all those geographies to keep running in the way I described; we need to keep winning vaccine tenders year on year, et cetera, et cetera.

Good news is, I think we've taken a clear view on things like price cuts in India and China.

I think they've come out more or less -- no surprises.

So we're not coming into the year feeling like there's been a big negative surprise in any of the EMs.

In fact, pretty much the opposite.

That leaves us reasonably confident, I think, being able to maintain a decent clip.

As you've heard me say before, there will be a disaster, a currency devaluation, and a coup somewhere in the EMs.

Have to hope it's not a big somewhere.

The other one I was going to ask is on R&D.

I gather R&D is going to be flat this year.

But does the cost savings within R&D mean it could stay flat for a while?

Or should we think that, that's maybe a one-off and it's still going to creep up?

I think we should -- so R&D has done, I think, a phenomenal job in GSK of delivering huge output for essentially a fall in investment.

Because within the overall R&D number, we've seen increases in areas like dermatology, HIV, consumer, vaccines, and basically all funded by reductions in pharma.

Most of the pipeline has come from pharma.

So you've got a very significant achievement there.

I don't think that's going to continue.

I'm not pushing them to make that happen.

So my brief to R&D now is, don't over-fixate on reducing costs.

Totally focus on delivering pipeline.

It's all about quality pipeline and sustainability of pipeline.

They will, of course, continue to do that at a sensible level.

But we're not out there looking to disrupt R&D.

We feel like we've got a good model.

I would say that, while I think, as Simon does, that there's not going to be anything very exciting going on around the R&D lines, I can tell you right now if [Mon Sefan Patric] came to me this afternoon and said, Andrew, we need GBP200 million to do project X, I'd say yes.

I wouldn't lose a minute's sleep about making that decision, even if it meant that R&D bumped up.

I think that we -- that's exactly the right way to think about the business.

So no big drama, nobody should be expecting this to get into a steady growth.

It probably is going to be more or less where it is, but it might bump up and down, and if it does, it will be opportunity driven.

I think that's the right signal to send to the R&D organization.

Thank you.

Alexandra, do you have another one?

Three.

Oh, good.

When I look at your second slide, which put these -- categorized your businesses into four different boxes, that seems to neatly fit into the sort of good old VCT matrix of the stars and the dogs and the cash cows and the rising stars.

The way you touch on some of the potential strategies for what seems to be the dog in the portfolio, i.e., Europe, seems to also sort of confirm that this matrix, the good old matrix, can actually save the sinking.

Is Europe actually at risk to have some two dog features?

As in, no growth and potentially at risk of no longer earning its cost of capital, as in exit may be the only solution?

So are we at there is just relatively unattractive but still a good return business?

Second question is for Simon -- how have you amended your planning process the end of last year so that this year we will -- you can rule out that you're not going to be surprised by an environment that is more negative than you planned for?

The third question is I'm really surprised that nobody has asked that yet is, what catalyst are you most nervous for this year?

Okay.

So in terms of Europe -- for me, it's around growth.

Europe is a very high return business, actually; remains a very profitable business for us.

It's a good business for us from that perspective.

And obviously, it's a very significant volume business.

So even on a bad day you look at Europe and you say -- if people have businesses this size with this kind of structure and this kind of cash production you'd say this is a great business.

The challenge is around growth.

We want -- we know that almost every other part of GSK, notwithstanding we make a huge mistake, or there is some unforeseen torpedo that's headed our way, is set for growth.

And Europe is that one place where it's very difficult to get super confident about.

You can create scenarios, but if you start your analysis in macroeconomics, it's quite hard to convince yourself that Europe is going to become a strong growth environment.

It's very hard to do that.

So our thinking isn't, oh my God, this is a wound through which we're going to bleed to death -- which I think is your kind of, you must exit.

It's more subtle than that.

It's more around, are there strategies where you can absolutely hit the sweet spot of maximizing your overall growth position for the Company by doing things differently in Europe?

And that may be accessing the pipeline without any incremental investment by using partners in the albiglutide scenario.

So that's one scenario.

It may be other, more dramatic approaches.

The focus is around how do you -- are there smarter ways to deal with the challenge of Europe being a low- to no-growth environment against a backdrop of 80% of the rest of the group being a very healthy growth proposition?

And what are the pros and cons of how you do it?

That's actually really -- the return model is fine.

It's much more that impact on growth, which, in reality, this sector is a growth-rated sector, and we want to make sure that we're really asking the tough questions.

Maybe there's nothing we can do.

Maybe the best you can do is organic, super-charged housekeeping, which is what we're doing, plus sensible partnering and investment minimization, and that's it.

Maybe that's all that's available.

But before we conclude that, we want to make sure we cover the broad perimeter and not excluded things, just because nobody's never done them before.

Planning?

We made a number of changes, actually, back in 2011 in terms of how he we integrate the plans across the Company.

I think there's two elements of this, which is how you develop the plan in the first place and then how you monitor it.

And so I think what we took away from last year was really a monitoring question of, how do we improve the visibility?

And that was quite challenging in the middle of the year, given the way in which some of the austerity measures were playing out.

But we now have improved our feedback loop so that it's not just quarterly, it's obviously multi times during a quarter that we're checking that we're on track without burdening the business, because you can kind of suffocate the business with replanning if you're not careful.

But we can get that now through the financial organization very quickly, because the finance organization is much closer to the business than it was historically, so there's much better monitoring going on.

But fundamentally it's much more about the drill-down of the plan process we went through at the end of last year to say, okay, what is the realistic target that we have for the different regions?

How is that built up from a product-by-product basis?

That's not something that has been done before at that level of detail.

Where are we allocating resources from a returns point of view back to the European differentiation we just talked about?

I think that's the reason we feel more comfortable about the position we've laid out for you in terms of 2013, is that we're starting with a more robust place in the first place; and we have better alarm systems in terms of what we then might need to do to reallocate.

I think it's fair to say we have drilled much harder on the down side.

If I think back to 2011, I think that probably that budget was more or less locked in October, November; and the European budget for GSK 2013 was locked last week.

So whereas last year we carried in some assumptions which were already outdated before we started, this year we've been a lot more cautious in terms of trying to load in what we think of the down side.

We may not be pessimistic enough.

Who knows?

But I think we've tried much harder than last year, and by waiting until the very last minute to try to maximize all the knowledge we could, which is sort of obvious in hindsight.

But clearly when you're not really -- historically, Europe's always been -- it's not been very exciting, but it's always been reliable.

And then suddenly you get a change where it really significantly stepped out of its trend for us.

That clearly is not something we want to have happen again.

That focus has been much more intense.

And you still decline the plan for Europe since you have closed it in October?

Is it getting worse or is it --

No, funnily enough, our confidence -- actually we're slightly more optimistic.

Interestingly enough, if we'd done it the other way around, if we carried on the old practice, we probably would have had a lower number for Europe -- not for the group, necessarily, but we probably would have been slightly more pessimistic in October than we are now.

I wouldn't say it was very materially different, but a little bit different.

And the checks that I talked about give you how accurate are your forecasts and are you delivering.

I think we feel a lot better about the visibility we have, compared to the middle of last year when that basically disappeared.

In terms of catalyst and nervousness -- at one level, I'm nervous about them all, right, but I think for me it really is a story of the portfolio on the pipeline.

And I said what makes me most nervous despite five years of talking about it, is that people, the watchers, that you guys don't look at the portfolio and you look just at one asset.

So the whole strategy of the group from the first day I took over was that this is not about recreating a blockbuster-dependent business.

It's about trying to create a portfolio of assets, which then complement the portfolio of geographies and portfolio of businesses.

We're right on the verge of doing that.

And the only thing that makes me nervous is that people obsess watching one event in a portfolio of events.

Because I think that would be a complete misread of how we're viewing it.

We're viewing this as the first six, if you will, definitive read-outs will start to happen as regulators review; we'll get two huge read-outs around MAGE-A3 and darapladib, which we've always signaled are highly binary and risky but nonetheless pretty interesting to get.

And then we're going to get 13 other sets of data rolling through the year, 14 other sets of data rolling through the year, which underpin the next step of the drugs.

For me, it's all about what is the total composite yield from all of those catalysts.

My nervousness is, can I generate -- or will the Company generate -- a good yield?

I'm nervous that other people watching us will fixate on one event and it will be a big mistake because that's not what we're trying to do; it's never been the goal.

It's always been about trying to produce the portfolio.

I hope that as we go through the year we can keep everybody focused on the real goal, which is the yield from the portfolio rather than one particular event.

There's nothing more exciting than knowing that you're going to hear tomorrow whether the trial worked, the drug got approved, or it did or it didn't.

Some days it goes your way, and some days it doesn't.

But it makes it interesting.

Next question.

Mark Purcell, Barclays.

I have four questions.

First one is on Advair in the US.

Wondering if you could help us understand the current dynamics of that franchise.

You have a positive price effect and a negative volume effect.

Is this because you're giving up the low-value business to price-cutting competitors such as Dulera and Symbicort?

And I wonder if you could hazard a guess in terms of assuming [Brio] success, how the pricing dynamic of that franchise could change going forward?

The second question is on pricing in Europe.

I wonder if you could help us understand, of the minus-5% drag, what proportion is coming from austerity measures or industry [are for] measures, and what proportion is coming from pricing pressure from competitors?

I'm thinking here particularly within respiratory.

We also understand what happened in Germany on Seretide.

I don't understand what's happening in other countries, I'm just wondering whether a component of the drag is based on value brand, reference pricing, when respiratory and that should start to analyze going forward.

Third question is on your US sales force.

Just wondered if you could comment on the relative productivity of the field force post the changes you made in marketing practices, is a question I often get and I find it difficult to answer.

And the last one is just on the melanoma assets.

I think the six month action dates have passed.

I just wondered if these drugs are being reviewed with a standard review by FDA, or whether additional submissions have triggered extensions to the time line on those two assets, so that's the BRAF and MEK inhibitors.

So on that one, they're both under standard review.

In terms of sales force productivity in the US, actually all the metrics we're seeing show improvement or better on things like service levels, customer engagement, access -- huge increases in access to physicians who didn't used to see us.

Access to accounts who never saw us before -- integrated systems as an example.

And significant improvements in product performance, particularly in those areas where we haven't had access.

We've seen no evidence of any negative from it at all, actually.

As you'll also see, our US business is stabilizing.

So it stopped falling and it's beginning to look a bit more encouraging in terms of its overall performance.

And I think all of that adds together.

Performance of Promacta, Votrient, and other newer products, also I think reflect nothing lost in terms of the sales force changes at all.

So I continue to believe -- I know there's an awful lot of people who want to see this fail.

I continue to believe this is totally the right thing to have done in the business, in the industry; and it sits absolutely perfectly with the way the Affordable Care Act is going to drive changes in behavior in the buying side of the healthcare economy.

And I think it's met with a lot of positive engagement, particularly from the integrated healthcare systems, which now are increasingly dominating the leading edge of the market.

So I think from that point of view it's fine.

EU pricing -- last year there was probably without 2 points, which was Seretide special pricing, almost all of it coming out of Germany, and almost all of it in the first three quarters of the year.

Remember that the German price got referenced to about 24 other countries.

So it's one of those gifts that keeps giving and keeps turning up in different geographies simply because of the effect in Germany.

Personally I think this intra-Europe reference price is probably the single most dangerous piece of policy that exists in the European environment.

As we go forward and as of now, we're not seeing a lot of very -- if you look at our price pressure, you see general pricing, which is everybody.

You see parallel trade price effects.

So there's quite a bit more parallel trade -- all sorts of theories about why, one of which is that, because governments aren't paying some pharmacies and wholesalers, maybe they're trying to liquidate assets on a cash basis, which allows to trade more than they would normally have done.

Who knows whether that's true or not, but it's a possible theory.

That costs us something.

And there's increased generic subsidization, which is not a Seretide issue, but an old product issue.

As you know, GSK's had for a long time done pretty well actually with quite a big tail in Europe.

That has come under more pressure in the last two or three years as you've seen more accelerated generic substitution in France, for example.

As we go forward, I think we will see more price pressure on Seretide.

It's now the biggest or the second biggest brand in Europe.

There aren't going to be mass generics.

There's going to be sporadic generics.

I think it's entirely possible that, in return, if you will, for maintenance of big volume positions there ends up being some price negotiation.

I wouldn't be at all surprised to see that, and it's one of the reasons why, again, we don't necessarily see Europe as being a very vibrant place, because Seretide itself will attract some of its own pressure.

That isn't a terrible deal for the Company.

Because obviously, if we maintain the bulk of that business and there aren't generics, then that's obviously a good result even though it hasn't got necessarily the growth.

As far as Advair dynamics are concerned, there's a price effect obviously; there is a mix effect within the strengths; and there's a script size effect, all of which are going positively.

We're seeing better value of mix of the strengths, we're seeing better value of script size.

And of course price is there, although as you well know a lot of that list price gets knocked back down through the discount structure.

You're absolutely right -- we have less business today than we had previously in the very deep discounted federal markets, which are now running at really dramatic discounts.

So you lose turnover.

You don't lose very much on the margin.

Actually, you'll see that in two or three places in the US.

So you'll notice -- none of you really look at this but if you look at something like Levitra, we essentially walked away from a whole class of federal contracts.

Had a big, maybe GBP130 million on the top line, basically zero on the bottom line, or close to zero.

So you'll increasingly -- we took a view over the last 12, 18 months that we were going to not be chasing that business unless it brought with it a decent return; and for sure that's happened to some degree in Advair.

Yes, there's some of that going on.

In terms of what we're seeing in the general script market, we've seen a sustained acceleration in the combination market over the last seven, eight months; we've seen our shares hold steady, and more importantly we've seen the dynamic shares stabilize.

So what does that mean?

It means that Dulera's dynamic share, Symbicort's dynamic share are all plateauing.

Advair's share has plateaued, holding on to a much higher share than we held onto in Europe.

Looks like we're moving into that stable, this is what the market's going to be.

That's good for us before, hopefully, the next generation of products come.

Also very good for us as we're starting to see this market grow again.

Obviously we're a very big beneficiary of that.

We'll see how this year plays out.

But I think there's some quite reasonable causes for optimism for us on the US respiratory market.

(inaudible - microphone inaccessible)

Nothing to say on that.

Let's take one day at a time with the new products.

Thanks.

Yes, please.

Mark Clark, Deutsche Bank.

You gave us a bit of a warning on the first quarter revenue growth because of the VESIcare issue.

Is it likely that we'll see quite a lot of volatility on the earnings line through the quarters?

Because I note there's some quite large one-off gains in Q4, and if I recall correctly the same is true in Q2.

Or will you be seeking to smooth as it were through the year?

The second question is about Emerging Markets; it's about Duncan Learmouth's group.

What proportion of the Emerging Markets business does that now represent?

It's obviously wonderful as a sort of corporate asset in terms of reputation.

Is it actually growing faster than the overall Emerging Markets group?

What proportion is it up to now?

Thank you.

As far as the least developed countries, it does grow faster than the average.

But it is a very small proportion of the total.

It's less than -- I think I'm l going to say it's less than 2% or 3% of EMs.

It's a small part of it.

The EMs are dominated by Middle East, India, Latina, China.

So the LDC group is small, very fast-growing, doing a great job I think, actually, but not a material element of the overall EM business.

Simon?

On the quarters, I think kind of the principle you should take away -- we don't manage the business to the quarters and we don't manage the cost base to the quarters.

As we did this year, in 2012, we're holding quite a lot of cost in the business to support the ongoing growth drivers as well as get behind the pipeline; and so as the revenue takes that comparator hit in Q1, I think you should expect to see quite a lot of pressure on the margin as a result, which will then roll out as you go into the balance of the year.

I think just to pick up a point on the Emerging Markets that we touched on earlier -- remember that is also quite a lumpy business even in its ongoing mix.

So the visibility we have of tenders today would suggest that Q1 on the Emerging Market side is going to look relatively thinner than last year; quite a lot of that volume shifts to the second half of the year from a trend point of view.

So you've got sort of double impact to manage in Q1.

But we're not going to pull the cost back just because of that.

We're going to continue to invest.

As to the one-offs that we've highlighted -- I think as I said in my presentation, they're one-offs because they're lumpy.

Doesn't mean that we're not continuing to look for similar opportunities; and we put those in the overall pots of value that we're releasing from the Company that we can reinvest or drop to the bottom line; and they again will not be managed to the quarters, they'll come when they come.

Obviously that's all taken into account in our overall wrap up guidance.

With that we're going to bring it to a close.

We certainly welcome any more conversation over coffee outside.

But in the meantime, thank you very much for your attention.

Thanks.