葛蘭素史克 (GSK) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the GSK Q1 investor analyst call, hosted by Sir Andrew Witty.

My name is Ian; I am your event manager today.

During the presentation, your lines will remain on a listen-only setting.

(Operator Instructions)

I would also like to advise all parties that the conference is being recorded.

Now, I would like to hand it over to Sir Andrew Witty.

Please go ahead, sir.

Thank you very much, and welcome to our first quarter conference call for GSK.

I am here with Simon Dingemans, as normal.

I am going to make a few comments, followed by Simon, and then we will open up the call to Q&A.

The first quarter was very much in line with our expectations, with sales down just 2% and up 2% for ongoing operations, ie -- excluding divestments such as the consumer product sale in Vesicare from last year.

My commentary from now on is going to focus on just the ongoing business.

I was very pleased to see, once again, broadly based growth coming from the US, EMAP, and consumer health, with Japan held back only by the Cervarix year-on-year comparison, without which, it would have been up 11%.

And even Europe showing some signs of improvement, although I continue to think that Europe will remain very challenging for the rest of the year.

It was good delivery in respiratory, especially from Seretide/Advair; Flovent and Ventolin in the US; oncology, especially Votrient in the US; a robust vaccine delivery, particularly Synflorix in the emerging markets.

Our European restructuring is progressing well, and we are around halfway through that particular program of change.

Our consumer healthcare business delivered excellent growth in all four categories -- wellness was up 8%, oral care up 5%, nutrition up 6%, and skin health up 6%.

And in all regions, especially international and the US, both up 7%.

For our largest consumer healthcare product, Sensodyne, we saw growth of 19% in markets outside of Europe and the US.

And, I think that just signals, once again, the very significant opportunities that exist for consumer health in emerging markets, and also underpins a lot of the opportunity we see for Rx/Cx synergy in that particular high growth part of the world.

We are also seeing continued encouraging R&D progress, with all of our six assets, previously highlighted, now under review in both Europe and America.

We are beginning to see the first stage from the 14 readouts on other late-stage programs in our next wave of new products.

First stages for darapladib and MAGE-A3, both expected during 2013.

We delivered strong cash flow performance in the quarter, up to GBP1.4 billion, led by improvements in working capital, with an overall reduction of 12 days in our cash conversion cycle, down to 203 days versus first quarter of 2012.

After completion of our announced review, we are now progressing to seek the sale of Lucozade and Ribena, subject to achieving appropriate value for shareholders.

And, I hope we will able to conclude that process during 2013.

We have also announced, today, the formation of a Global Established Products portfolio, made up of over 50 of our pharmaceutical tail brands.

This will allow us to focus our resources on the new product portfolio and deliver efficiency gains from our legacy non-promoted brands.

We will crystallize and report separately this portfolio to shareholders from January 2014, onwards, giving greater visibility to another element of our business.

But to give you some idea, this portfolio will have a turnover of around GBP3 billion, and if it had been separated from the business in the first quarter of 2013, GSK, overall, would have grown 1% faster than we reported.

We continue to actively explore options to further simplify the business and deliver focus on our tightly synergistic portfolios to support our growth delivery from innovation and the further, very significant emerging market potential that we see.

We bought back relatively few shares during the quarter, due to the frequency of regulatory processes in which we are involved, which precluded our involvement in trading in the market.

But, we continue to expect to buy back between GBP1 billion to GBP2 billion worth of shares this year.

I am pleased that we have been able to increase the dividend once again, this time by 6% to 18p a share.

And, our 2013 guidance is unchanged.

We remain on track to deliver sales growth of around 1% at constant exchange rates and EPS growth of between 3% and 4% at constant exchange rates.

With that, I would like to ask Simon to give you little bit more detail on the results.

Thank you Andrew.

One, it's still early days.

I am pleased with the start to the year; and after the challenges of last year, I am particularly pleased that we have been able to deliver another quarter in line with our expectations, with continued momentum across all of our key growth markets.

This may be less visible in the reported numbers, given the already flagged comparators.

But it gives us confidence, as Andrew has highlighted, that we remain on track to deliver against our guidance for the year of EPS growth in constant currency terms of 3% to 4%, on sales growth of around 1%, again, in constant currency.

Our financial architecture is allowing us to prioritize better the investments we need to make to drive those growth objectives, as well as identify more clearly where we can release costs and resources and improve our efficiency.

As we flagged before, the main contribution to the leverage this year will come from financial efficiencies.

I am pleased to be able to report good progress this quarter, with both financing costs and tax charges in line with where they need to be to deliver our full-year objectives.

We are also using our financial architecture more rigorously to drive earnings ahead of sales over time and convert more of those earnings to cash that we can either reinvest in the business or return to shareholders.

And, the 6% dividend increase this quarter is clear evidence of the progress we are making on this front.

Now, let me comment on the quarterly turnover and regional highlights in a little bit more detail.

As usual, the focus will be on CER growth rates and core results.

Group sales were down 2%, but excluding the divestments made in 2012, sales grew 2%.

This 2% is after absorbing the headwind of about 1.5% from the Cervarix sales drop in Japan, which I also highlighted in February.

Turning to the US, our pharmaceuticals and vaccines business grew 4%, excluding the Vesicare divestments in Q1 last year.

Promoted brands contributed 7 percentage points of growth, with strong performances from respiratory and oncology, offset by a 3% headwind from generics, including recent launches against Lamictal XR and a number of dermatology products.

Moving to Europe, Q1 sales were down 3%, benefiting from some of the operational measures we have been taking; but more significantly, from a bit less pressure on price due to the annualization of several austerity measures.

Despite this pricing with still a 3% headwind in the quarter, volumes were flat and remain under pressure, and the environment in Europe remains uncertain and challenging, and we continue to be cautious about the outlook here.

In EMAP, we continue to make investments for the long term.

In the quarter, total sales grew 8%, with strong contributions from the respiratory portfolio, up 8%, and Augmentin up 27%.

EMAP vaccine sales grew 7%, which was better than we had originally expected, due to a shift in the phasing of tenders.

This benefited Q1, but will impact Q2.

The shift in vaccines will also likely drag the overall reported EMAP performance meaningfully below trend for the second quarter; but as we have highlighted, we continue to expect the majority of vaccine sales in EMAP in the second half.

Excluding vaccines in Japan, our pharmaceuticals business grew 12%, with strong growth from respiratory, after a strong start to the allergy season.

And several new product launches also contributing meaningfully, offsetting the impact of generic erosion to Paxil.

Our ongoing (technical difficulty) was up 6%, with strong growth across all regions (technical difficulty).

Sales in the US up 7%, in Europe up 4%, and international up 7%, after the impact of the reclassification of certain products in the China business.

The star in this region, however, was clearly India up 19%, with continuing strong growth of Horlicks and a growing contribution from the launch of Sensodyne.

Turning to the costs.

On the operating side, the total core operating margin for the quarter was 29.7%, which included an GBP82 million net exchange gain that we took in the quarter on the settlement of inter-company transactions, driven primarily during the period when we saw rapid strengthening of the US dollar.

Excluding currency, the overall margin declined 2.7 percentage points.

But remember in Q1, last year, the Vesicare turnover and a one-off royalty adjustment, which had no costs associated with them, also disproportionately benefited the margin in that period.

Excluding these two factors, the operating margin was down approximately 0.4% year on year.

Cost of goods as a percentage of sales, excluding the Vesicare and royalty adjustment, was up 1.4 percentage points, reflecting 0.6% of ongoing pressure on COGS from negative geographic and product mix factors.

Volume reductions in inventory write-offs drove the rest, despite being partly offset by better pricing discipline and cost management.

Total SG&A grew 2%, excluding currency, in line with ex-divestment sales, driven by continued investments in our growth businesses.

Also, keep in mind that we are carrying the investment here to support the new product launches.

R&D expense was down 4% in the quarter, reflecting both cost management and the phasing of projects.

I continue to expect us to manage R&D spend to be broadly in line with last year at around GBP3.6 billion.

Overall, we will continue to manage our margin and operating cost base aggressively, including pursuing both ongoing savings and one-off benefits.

I should remind you, the one-off benefit saving we had in Q2 last year of around GBP100 million, we continue to pursue other one-off savings this year, but the timing of these is more likely to be the second half.

Total incremental restructuring benefits in 2013 are expected to contribute approximately GBP600 million.

The phasing of which will clearly vary from quarter to quarter, but again, likely to have a weighting in the second half, given the relatively recent start to the new change program.

Financial efficiencies are also contributing, with our net funding rate helping to keep net-financing expense broadly in line with last year, despite the significant step up in our net debt.

Our core income tax rate of 22.4% in the quarter is 3.5 points better than Q1 2012, keeping us very much on track to deliver a rate of 24% for the full year.

As anticipated, the Q1 tax rate included the benefit of the US R&D credit associated with 2012.

Moving to cash flow for the quarter, we continued to [be counting it] highly cash generative.

Cash generated from operations was over GBP1.4 billion before legal, which reflects good progress in our management of working capital, which as Andrew highlighted, has reduced by 12 days since Q1 last year with particular progress in inventory management.

Net debt for the quarter increased from GBP14 billion to GBP15.4 billion, GBP700 million of this is due to the net impact of exchange.

The balance being the successful completion of our transaction to increase our ownership in the Indian consumer business from 43% to 72.5%.

This left the free cash flow available to fund the vast majority of cash return to shareholders during the quarter, which totaled over GBP900 million, including GBP870 million in dividends and GBP47 million of share repurchases.

The level of share buybacks in the quarter has been restricted by the limited windows we've had given the current data flow, but we are still targeting to repurchase GBP1 billion to GBP2 billion of our shares this year.

In summary, we knew this was going to be a negative growth quarter because of the comparisons from last year, but these complete their roll off in Q2.

And aside from the distortion of our reported numbers, our Q1 performance is very much in line with our expectations and keeps us on track to deliver our financial guidance for the full year.

With that, I will turn it back to Andrew.

Thank you, very much, Simon.

I am delighted to be able to open up the call for Q&A, so perhaps the chair of the call could, once again, describe what the protocol is.

Certainly, sir.

Ladies and gentlemen, your question-and-answer session will now begin.

(Operator Instructions)

Andrew Baum, Citi.

Three questions, if I could.

First, both with your global tail business, now, and previously with ViiV, you have two assets which could be monetized outside GSK as well as within.

Perhaps you could talk through the operational issues and potential triggers which will determine both the decision and timing for any moves to externalize the assets and monetizing them?

Second, I know that you're reluctant to give any long-term guidance on tax, but perhaps you could give some kind of sense of the increase in economic profit that is going to be booked in the UK over the next five years as a function of the investment you announced last quarter, in terms of restructuring some of your operations and bringing them back to the UK?

And then thirdly, regarding emerging markets, your first-quarter growth in EMAP in 2012 was 2%, which makes the 8% you posted here look somewhat less than you might have imagined.

Is vaccines the only reason for that, or are there additional factors to explain why there wasn't a stronger earnings growth, given the pretty low comp first quarter 2012?

Thanks, Andrew for the questions.

I will ask Simon to comment on the tax guidance point in a second.

As far as the two sets of portfolio, Global Established Products and ViiV, they are obviously very different types of profile businesses, albeit we are developing a somewhat similar approach to the way in which we crystallize them as more visible groups within the Company for you to look at and understand better.

ViiV, of course, is moving into potentially a very interesting growth phase with the potential approval of dolutegravir later in the year.

And as a consequence, our view of that business will be very largely dictated by what we believe to be the medium-term growth prospects, not just from dolutegravir, but also from the follow-on programs, and particularly, the long-acting programs, which are looking very exciting, actually.

I think the ViiV business judgments we need to let some water flow under the bridge around what the real growth profile of that will be over the next few years.

I have to say, it's been extraordinarily successful in achieving its goals since we created it, and I'm delighted that we did it.

The Global Established Products is a very different kind of proposition, so this is a very substantial, fragmented portfolio across the group.

The first order of business is really to bring that business under a coordinated focus to make sure that we are driving our manufacturing efficiencies, simplification efficiencies, winning every tender we can win on these older products, simply by focusing on it.

Secondly, what we are also doing is we are taking the opportunity inside the Company to really guide all of our employees.

We essentially have three sets of products within the Company going forward.

We have the new products, or as we would call them, the franchise products, because they are going to be led by our new franchise launch organization, which Moncef's now established and is fully up and running and really driving all of the launch agenda for the new products.

We have the new products, franchise products; we have the classic products, which are the large promoted products on which the Company current relies; and then, we have the Global Established Products, which I have announced today as essentially the tail.

So, what that then allows the Organization to do is to start to make some very clear allocation of resource decisions and prioritization decisions to make sure that all of the businesses get the right resource.

Because obviously, as we move into launch mode with the advanced pipeline -- we have a whole new business about to arrive at GSK, and to make sure that we get the right value, really, from all of the business, we need to have that kind of focus.

The first two or three orders of business for the Global Established Products, Andrew, is very much around internal efficiency, capturing value, and ensuring the Organization remains focused and allocates resources appropriately, as and when, the new products arrive as well.

It obviously creates optionality for the future.

How we choose to execute that optionality remains to be defined, but I would expect that you will start to see the focus that we are making on this portfolio -- I think you should expect to start to see some things happen as a consequence of that relatively sooner than later.

But, whether or not we go all the way into something like a ViiV-type structure; and then, whether we went all the way to some sort of flotation, I think, is an unanswered question.

But, I am very happy to have the option opened up as a consequence of this decision.

As far the EM growth is concerned, we very often see Q1 as being a relatively slower growth quarter for the emerging markets.

In fact, the most encouraging part, I think, was that the Pharma -- what we saw this quarter, was that Pharma and vaccine had very similar growth rates.

It was not one thing or the other which was driving the quarter.

Historically, we've tended to see the Pharma business be quite slow to start; and in fact, that was certainly the case last year.

I am actually quite -- I think this is quite a robust quarter, actually, and we are pleased that we got a little bit more vaccine business a little bit more quickly than we expected.

And that's, obviously, helped.

Actually, it looks pretty robust, and I think we're off to a pretty decent start, particularly when you compare this -- when you look at our sustained growth rates over the last several quarters compared to most of our peers.

So, I think this is a decent start for the year -- plenty of challenges to come, but not a bad start.

And on the tax, I'll ask Simon to comment.

Yes, Andrew, thanks for the question.

I think as we've discussed before, on the tax side, my objective is to deliver a structure into the Company which allows us steady downward progress in the rate, and you are seeing that delivered over the course of this year.

And, the Q1 rate was very much part of that plan.

We expected to get the R&D credit in the quarter, but it's part of the overall position for the year.

I think beyond 2013, to your point, yes, we do see very material value to us and our shareholders coming from the patent box and the benefits of being able to move quite a lot of our pipeline into the fence that surrounds that.

But, it is also not just that, it is about the shape of the business, pulling some of the revenues away of higher tax jurisdictions, like the US, and making sure that our central activities are really benefiting from where the best incentives lie.

So, that is really what makes this a sustainable proposition.

I'm not sure I can quantify it to this point because it depends how the products, themselves, do, but I certainly think we see lots more opportunity to go for.

Brian Bordeaux, Barclays.

Two questions, please.

One on cost of sales, and second question on the development pipeline, please.

First on cost of sales, I see you've mentioned there that there were some costs due to the unwinding of cost of manufacturing volume shortfalls.

Could you please explain a little bit more further detail and illustrate what that actually is?

And, how important that is in the context of the 1.4 percentage point increase?

Second question on the development pipeline, specifically, with regard to your BRAF and MEK inhibitors.

I see you've filed the combination in Europe; you announced this a little while ago.

There is no news about a similar submission in the US, so I'm just wondering if you are still hopeful of being able to submit those for the combination in the US prior to the readout of the Phase III study, whether you can get something similar there, or whether it's a definitive -- no, thank you, from the FDA?

Thank you, very much.

Brian, thanks, very much.

Let me ask Simon to comment first on the [COG], and then I'll come back to you on the (inaudible).

Yes, Brian, this issue really stems down to the way that we account for the inventory we have the supply chain.

So, if you think about our vaccines and Pharma products, we have talked before about how long some of those supply chains are -- the costs go to the balance sheet in inventory as we manufacture the products and are released as we sell.

And, some of the volumes we made in 2012 are only now being sold in Q1 2013.

And, if you also remember, the environment we were in last year where, clearly, we were under pressure in a number of our businesses that related to lower volumes than we had originally been planning and some under recovery of costs, which were part of, therefore, the overall mix.

And, that's why I flagged to the full year that we were likely to see some pressure from the cost of goods in the quarter and in factoring the balance of 2013.

This will probably be largely a first-half effect, although not completely, but that's how it arises, and it is about 0.7% of the 1.4% increase that we called out.

Thanks, Simon.

Brian, as far as the MEK/BRAF is concerned, obviously, we are not going to predict a specific filing time, but we fully anticipate being able to file during this year, and we have no particular concern around timing or the potential opportunity for us to file.

So, I think everything is on track there, and not much more to say, really.

Thanks, very much.

Next question?

Tim Anderson, Sanford.

A few questions -- in the past, you have described Relvar and Breo not really as a replacement for Advair, but rather as something that rounds out your portfolio of products in respiratory.

Is this still how you view the drug?

It's not clear to me how you are going to position one product versus the other.

Can you give us any guidance on likely pricing in the US?

Second question is on respiratory as well.

FDA earlier this year commenting that they wanted to get a guidance document out on combination respiratory generics.

I would just be curious to get your perspective on this, and whether you think that, at some point, we might actually get true generics in the US?

It seems like the FDA putting this guidance document out raises that possibility.

And then, last question, can you give us specific timing on seeing the darapladib and MAGE-A3 data in 2013?

I know both, I believe, are supposed to come out, but can you narrow down the timing?

Tim, thanks very much for the questions.

As far as Relvar/Breo is concerned, what I've said repeatedly is that we shouldn't -- the observers of the Company sometimes have got themselves into position where you'd think the only product GSK had in respiratory, and sometimes the only product GSK had at all in full development, was Relvar/Breo.

And, one of the things I've been trying very hard over the last five years to do is to ensure people understood that there was a lot more to our respiratory portfolio than simply Relvar/Breo; and also, that there was more to our development portfolio.

And as a consequence, we should not get over-fixated just on that single product.

Now obviously, it goes into a very significant and important category for us; and as I've made clear at least two Investor Days, one of the things that we are very keen to do is to secure and protect, if you will, our market share of the categories of the respiratory business that we are already in and to grow market share in categories in which we aren't already in.

So, Relvar/Breo plays a very critical role for us, in terms of securing the long-term share for the Company on the Seretide/Advair business.

Obviously, we have generics for Seretide in parts of the world; and if possible, we will have them at some point in the future in the US -- and I will come back to that more specifically in connection to your second question.

We don't anticipate that in the short run, but of course, in the long-long run, it is possible.

So, it is appropriate for us to look to Relvar/Breo to be a product which can take up some of the strain, if you will, for us on that particular challenge.

Ultimately, though, the product is only going to get used if it is perceived by physicians and patients as an improvement or a more appropriate medicine for them versus their current options.

And I think, when we look at Relvar, what we see, particularly around the dosing frequency, we see -- particularly around the clinical data in COPD for the US, we think there is a compelling proposition there.

When you add to that the improvements in the device that we have made, all of the feedback we're getting from, actually from everybody, from patients, from physicians, and from payors is pretty positive.

And I think, ultimately, that is what positions the drug.

This will go where the benefits take it, in terms of its profile, and I think there are some real opportunities.

Of course, as time goes by, with our [Solfit] study and the Summit study, we will have new data coming out, which hopefully will bring even further crystallization to the clinical benefits in COPD.

So, it's an important drug for us.

It is not the only drug in our portfolio; and I think, for me, that has always been the critical thing for people to understand, that we were moving from a company dominated by one or two drugs to a company with a broad portfolio of new opportunities.

This is a very important part of that, and it will be, I believe, a very important product for the Company.

I am not going to get more into positioning, Tim, or pricing for all the obvious competitive reasons, no need for us to do so.

And I think, better for us to keep our powder dry until we start.

And obviously, the positioning, in particular, will be dictated by the final label that's agreed with the FDA.

So, inappropriate to get into that kind of detail until we know exactly where the FDA labeling sits because that is what drives it.

As far as the generic risk is concerned, bottom line, I and the Company don't believe -- our view hasn't changed.

We don't think there's chance of a substitutable generic pre-2016, may be longer than that, but we certainly don't think it is pre-2016.

3, 3.5 years is a long time, so things can change, but a lot would have to change for that to be a substitutable generic.

It's not the first time there have been conversations around guidelines, and you'll be well aware that last year the FDA, themselves, tried to -- commissioned work to try and find a way to [issue or] populate those sorts of guidelines with things like the exhaled nitrous oxide test, which ultimately failed.

So I think, actually, not much has changed.

I think, for as long as we've had Seretide, for long as I have been CEO for sure, we've had these 9, every 9, 10 month cycles.

One day, presumably, there may well be a change; but as of today, we don't see that.

And, for all practical purposes, we don't anticipate a generic in the US in the next several years; and certainly, we now are in a position where we feel highly confident that if the FDA approve our products, we are going to have a decent amount of time in the US marketplace without there being generics.

And, if we think back to where we all were back in 2008, when people were telling me -- and I think the sell-side consensus was zero Advair sales, now, if you think about where we are, now, versus where people thought we might have been in 2008, it is a remarkably more positive situation, and I think we are in good shape.

As far as MAGE-A3 and darapladib are concerned, we've told you many times, this is an event-driven trial, so I can't give you the precise month or date that this data is going to come out.

We would expect the melanoma MAGE-A3 trial to start to read out this year.

I think the lung trial is more likely to read out in early 2014, but I think we will start to see the melanoma trial readout in 2013.

And again, I think we will see the first -- at least the first study start to readout on darapladib this year.

What I can tell you, it will not before April 24.

I can't tell you how much later in the year will be, but as soon as we know, you will know.

Thank you.

Kerry Holford, Credit Suisse.

I have three.

Firstly, just on FX, given the significant differential between the impact of the sales and the operating profit line, I wonder if, Simon, you can give us any guidance for this contribution from [EGO] through the remainder of 2013?

If you mean the current spot FX rates remain, it looks as though the FX impact on the top line should become more positive.

What should we really expect for the bottom line?

Secondly, on the Global Established Products portfolio, I wonder if you could give us a broad idea of the current geographic split of that group?

I presume it is quite heavily weighted to Europe.

And then, thirdly, just to clarify royalties, which were [a bit] stronger in Q1, you mentioned a prior-year catch-up adjustment there.

Is it fair for us to assume that the royalty income returns to around a GBP70 million to GBP80 million per quarter going forward?

Many thanks.

Thanks, Kerry.

Let me take the established products question, and then Simon can pick up the FX and the royalty question.

Simply put, roughly, about 30% US, 30% Europe, 20% EM, 10% everywhere else.

But, importantly to recognize that the US 30% is dominated by a handful of brands, everywhere else is more like 50, so the complexity and the proliferation is massively skewed ex-US, with Europe and the emerging markets being a bit similar in terms of profile, if you will, of complexity.

But, the actual revenue reported is about 30%, 30%, 20%, 10%.

On the FX and royalty, Simon address that?

I think, on the FX, the gain we recorded in the first quarter will stay with us.

This is, as I explained in my comments, really about crystallizing a gain on intercompany trading, so it's genuine contribution into the earnings of the Company.

If you roll forward the period-end rates from the end of the first quarter through the balance of the year and assume that the EGO is in place, which is the exchange gain, then we would expect probably about 1.5% current gain at the top line and about 3% at the bottom line, really reflecting the amortized benefit of that exchange gain over the period at the time.

That is the reason for the difference, primarily.

And then on royalties, I think we are expecting that these probably go back to similar levels quarter by quarter to what you've seen.

There was a bit of a catch up in the first quarter, but that's not going to repeat itself.

So, [where] your comments are in the right direction.

Graham Parry, Bank of America Merrill Lynch.

Firstly, just a broader question on the established products business and the potential ultimate divestment.

And, [Pfizer has] gone down that path and has not been able to or willing to divest that yet, so I just wonder your initial thoughts would ever be a buyer in the market for those kinds of products?

And secondly, on Advair dynamics in the US, we've obviously seen a bit of shifting around of price and inventory.

Can you explain to us where inventory sits now, so are we high or low?

And then, on pricing, we have seen two price increases since October, and there was a double-digit price benefit year on year in the quarter, should we be thinking that as a trend for the foreseeable future?

And then, thirdly, if you could just give us the exact price impact for Europe, year on year, during the quarter, as you've done in prior quarters?

Thanks.

Graham, on the Europe it is [minus 3] on price; volume rounds to zero -- it was about [plus 0.4] or something like that, so price was minus 3 for the quarter.

In terms of the established products business, there are buyers out there.

Whether there are buyers out there for a single block like this is a different question, but there will be buyers and there are buyers out there for elements of it.

One of the interesting questions for the people who are going to be focusing on this is, are there elements of this business which would be better on the outside of the Company than the inside?

And, I think I would encourage you to think not just that this is now -- because we've called out as a block, that all actions, going forward, will only apply to the block.

It may very well be that the focus we are giving to the block reveals that there are subsegments where we want to do something different from other subsegments, and I would just encourage you to think that way.

I think that, notwithstanding that, this type of business is extremely amenable to ViiV-type structures, rather than necessarily straight disposal-type structures.

And, you could imagine that different companies will have broadly similar goals of trying to drive efficiencies and synergies through these sorts of tail businesses.

So, it may be that those sorts of options have more legs on them than, again, a huge big-block sale.

If you asked me today, I would say more likely to be subsegment solutions for sale, if that indeed is a path we want to go down.

Or possibly, ViiV-type solutions, rather than big-block sales, would be my guess.

But, I would reiterate what I've said all along -- we have got no specific agenda in mind at this point in time for the whole business, and our initial focuses are going to be on driving the value out and operational efficiency, with the very nice problem to have of created optionality, which we didn't have yesterday.

I think that is really what we want to try and do, and let's see what comes.

I'm sorry, Graham, just repeat your second -- Advair dynamics on volume.

And price --

Essentially, we have seen fairly significant destocking across the whole of the US chain for our business in -- actually, all the way through December and most of Q1.

So, we are running at -- I think our end-market inventory is now the lowest we've had for three years, as a proportion of sales, so selling days actually held in inventory in the retail and wholesale chain.

We have seen a sustained destock run all the way through December, which is very atypical.

We normally see there is a buildup in December.

We actually saw a destock through December.

We have seen a sustained destock at wholesale and retail run all the way through the quarter.

So as we stand today, our overall inventory -- and respiratory is absolutely no exception, and Advair is no exception, is running out very, very low levels relative to history.

Obviously, we didn't particularly call it out, but it is one of the reasons why I feel that this first quarter -- I feel very good about this first quarter in terms of how we've done because that's been a fairly material underlying hidden headwind in the system, but it's -- we've continued to deliver good numbers, and I think for the US, in particular, I'm pleased with that.

On the flip side, for the US, we have had one or two surprise generics coming on the very tail end of the business, and -- with things like Lamictal XR, Bactroban, things like that, which that has been slightly on the negative side and slightly disappointing -- small, but they add up at some level.

So, it's been an interesting quarter for us in the US around inventory, around one or two generic things.

We have seen some very nice strengthening of underlying performance of Advair, helped a little bit by price, but nonetheless, we have seen a continued quarter-on-quarter improvement in the performance of the Advair business.

And, that is obviously good for the short run, excellent platform for us to introduce Relvar and the Zeffix program, assuming that they're approved.

(Operator Instructions)

Kyle Rasbach, Cowen and Company.

Earlier this week, Novartis, as you may have seen, reported its LABA/LAMA combination data for QVA149 and showed that it met its primary COPD exacerbations endpoint.

Glaxo doesn't appear to have a comparable study underway for Anoro.

There some longer-term safety and tolerability trials underway, with exacerbations as a secondary endpoint, but these trials appear to be undersized to garner any kind of exacerbations claim.

Maybe if you could tell us about how you see the competitive landscape for the LABA/LAMA combinations developing, and how important an exacerbations claim may be?

And then, just a quick and easy question; and that is, whether or not the factors that contributed to the GBP82 million SG&A benefit in Q1 will also continue in the second quarter?

Thank you.

Simon, why don't you hit the SG&A question, and I will come back to the LABA/LAMA.

The GBP82 million really results from the period when you saw the dollar strengthen very rapidly, so it's about the intercompany trading during periods like that.

Assuming that doesn't repeat itself, no, there will be no further contribution during the balance of year from those kind of factors.

Okay.

As far as the LABA/LAMA competitive landscape is concerned, I think particularly for the US, I'm pretty optimistic as we stand today.

Obviously, we have a file under review as we stand for once-a-day treatment.

It's not at all clear to me what the timing of our competitors are going to be in terms of being able to get there on a similar basis.

And, we continue to build up our clinical profile.

Whether we have everything there on day one, we may not, in terms of every single claim that we hope one day to be able to get for the product.

But in terms of timing of arrival, I think we are in very good shape compared to where we all stood two or three years ago.

I think, again, if we went back and read what the commentary was of the marketplace in terms of who was going to get there first and with what type of profile, I think things have really reversed very significantly.

So, I think timing is very good for us.

I think dosing frequency looks very good for us as a competitive advantage.

And gradually, I think we will be building up a very compelling data package, and I think we are very optimistic about this program -- coming hard on the heels of Breo/Relvar and in advance of a series of further respiratory products.

If all goes well with FDA, then I think it puts us in a very strong position in terms of portfolio, both of inhaled and other products, particularly excited to see the mepolizumab Phase III data coming next year as well.

So, for me it's about portfolio, dosing, timing, and clinical package.

I think we are absolutely there, big time, on timing, subject to FDA dosing and portfolio.

And, we are building up our clinical package.

You'll see a lot more data on Zeffix at [VATS] in May, and I think that will continue to reassure people about the profile of the product.

Peter Verdult, Morgan Stanley.

Apologies if some of these questions have already been asked, I jumped on late on the call.

Andrew, maybe on Ribena and Lucozade, am I right in thinking annualized sales around the GBP0.5 billion mark at the moment, wondering if you could give us a sense as to what growth rates were for those brands 2012 and the first quarter this year.

And if I may be so bold, in terms use of proceeds, if you do divest this year, should we think about it as being used for general corporate use?

Or, is their intention to fully redistribute those proceeds straight to shareholders?

And then, just again, on the Global Established Products, can you give me a sense as to what the geographic split is?

And again, what sort of growth rates that business is posting?

Any detail there would be appreciated.

Thanks.

As far as Ribena is concerned, let's wait and see when we sell it, what we get for it, and then we will tell you what we are going to do with the proceeds.

I don't want to get too far ahead of myself.

I think is as general point, going forward, we have a variety of different calls on cash, both in terms of shareholder and in terms of just managing the business.

I think as a general holding point, I would say it's going to go into that pool and support the various priorities we have made super clear, in terms of what we want to do with cash.

We will be more specific about that when we get there.

In terms of growth rates, very strong growth particularly -- Lucozade, in particular, has a footprint which is dominated by, basically, Britain and Northern -- and Ireland.

That business, in the quarter, was basically down 2%.

It has a very significant business in Nigeria, one or two other smaller emerging markets, that business is up 16%.

We've got a bit of a mix going on, and I think it's not a surprise, I suspect, for you to know that the UK was affected by a very long, very dull, very cold spring; and when you're selling a product like Lucozade, having some sun makes a huge difference.

A little bit down in the UK/Europe, down 7%; up 16% in the emerging markets, dominated by Nigeria, giving a total quarter performance of down 2%.

We've got some very exciting new product launches coming up in the next few months; and if I believe the BBC and we are going to have a hot, long summer, I would expect that number to improve as we went through the rest of the year.

Can you just repeat your second question for me?

On the Global Established Products -- I'm sure this question has already been asked, but can you remind me, again, what the geographic split is for that business -- that GBP3 billion tail business, and what sort of growth you're seeing for that business?

It is more or less 30% US, 30% Europe, 20% EM, 10% everywhere else, more or less.

I made a comment earlier, Peter, but just for your benefit, the complexity of the business, ie the number of brands is not reflected that way.

So, there is a handful of brands in America, there are, then, a lot of brands in Europe, EMAP, and the rest of the world, so complexity isn't reflected by revenue shares.

In terms of growth rate, Q1 it was down 7%, and if you'd taken that business out of our numbers, just for the sake of it, GSK would've grown 1% faster than we reported.

So, it is dragging about 1% off the reported growth rate for the Company and the business itself was down 7%.

Thanks very much.

Florent Cespedes, Exane.

First one, on cost, could you tell us how do you see the marketing and R&D costs in the next quarters knowing that you will launch new products and you will still have to invest in your portfolio?

Second, on research with more on the projects, as we understand it, MAGE-A3 will be the next exciting product in the pipeline to report a result.

Would you share with us your thoughts on this one, and how we should read the first data, and when we should have a clearer idea of the potential of these projects?

And last question on the European area, could you give us some color on the environment there, and how you see the trend going forward?

Do you see any deterioration, or improvement, or [status quo] improvement?

Thank you.

Thanks, Florent.

Let me just quickly touch on your three points.

As you know, we are not giving guidance on individual line items of the P&L.

We have given very clear earnings guidance; and so, beyond what we've already said, we are not going to go into more detail on the rest of the year.

The broad brush points is we are confident we are going to deliver our earnings guidance, but we are also going to make sure we invest in our growth opportunities, in particular, as the pipeline evolves.

And, that means we want to maximize our flexibility up and down the P&L.

We are helped this year through the delivery of some financial efficiencies, which Simon has already touched on during this call, but we are going to take full advantage of the flexibility of the P&L.

And, if we need to spend a bit more in R&D and a bit less in SG&A to do the job properly, or vice versa, then that's what we are going to do.

We are not going to give further guidance, as we didn't at the beginning of the year, we are not going to now.

I've already touched on the timing of MAGE-A3 on the call.

I think the best time to talk about the potential of that program is once we get the results.

We all know this is a high-risk project, and it's no less high risk today than it was five, six years ago, we are simply getting closer to the endpoint.

I think it would be prudent and sensible for us to be talking about this in more detail once we see the actual data, and I've already described the timeline on that.

European environment, we have touched already on the pricing dynamic.

I think we continue to see actually very similar to over the last two or three years, a fairly negative environment, continued pressure from governments, continued price pressure -- it cycles up and down a little bit depending on annualizations of prior-year hits and when new ones arrive, but I would say it was still pretty challenging.

There are some very unhelpful reference pricing going on from country to country, as different countries go into crises and their prices are dramatically reduced, those prices get exported.

And, we are continuing to see a step up in genericizations of all the products.

So, I don't think much has changed.

I think the quarter external pressure for us was a bit less because of some of the annualization events.

We are seeing a bit of a strengthening of our volume generation capability, which I think is an encouraging sign of what we're doing is working, but I would say it was too early to declare victory there.

I think it is one quarter; I think we need to see several more quarters, and we will have to wait and see whether or not we do see several more quarters to be confident that we've turned a bit of a corner there on volume.

But, early signals, encouraging.

I continue to have a bearish view about the European environment; even though, when I look at published data, I think GSK's volume generation in Europe is, I think, we are the third or fourth best generator of volume in Europe, and there are a lot of companies in worse shape than us.

I, actually, continue to have a fairly bearish view.

I think the macroeconomic challenges will continue to play through as sustained challenge for our sector.

And therefore, I continue to look at options which are more strategic than we have so far deployed, in terms of internal reorganizations and cost cutting, as ways in which we might further improve the profile of our European business.

And in some part, the established products announcement we made today goes some way toward that because a fairly significant part of the European business is in the established product fence.

And, what we're saying today is we're going to look at this in a slightly different lens, looking for more ways to create value or drive efficiency.

So, I think you should expect us to look for those sorts of things, as I have made very clear, very difficult to predict a timeline on when we do individual things.

But for me, Europe is a strategic challenge, it is not a one-year challenge, and we need to continue to look for ways in which we can appropriately respond to that.

Meanwhile, the rest of the group -- [80%] of the group is in growth environments.

I look at the overall group -- at the potential opportunity for the pipeline, particularly in the US initially, and I look at the volume opportunities we continue to see in emerging markets, that's where, really, the real strength of the opportunity sits, and we continue to invest very hard for that.

So, there is a challenge for how we manage the European profile as best as possible over the next several years, and I think you should expect to hear more on that, piece by piece, as we go along.

And, our goal is to fully maximize this extraordinary pipeline of advanced products opportunity; and at the same time, continue to open up volume in emerging markets.

Put those two things together, and that's really the whole basis on which we see the growth opportunity going forward.

With that, thank you for all of your questions today.

Obviously, the IR team at GSK is available if you have any more detail question you'd like to follow-up on.

I know many of you had to be on other calls to start with, and maybe you missed some of the stuff at the beginning; but certainly, the team is there to answer questions, if that was indeed the case.

Thank you very much.

Thank you, sir.

Ladies and gentlemen, that concludes your conference.

You may now disconnect.

Thank you very much for joining us.

Do enjoy the rest of your day, today.