葛蘭素史克 (GSK) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your GSK investor analyst call Q2 Quarter Results hosted by Sir Andrew Witty.

My name is Bupendra, I'll be your event manager today afternoon.

For the conference, you will be on listen-only.

(Operator Instructions)

And now, I would like to hand the conference over to Sir Andrew Witty.

Please go ahead.

Thank you very much and good afternoon, everybody.

Welcome to this Q2 conference call.

I'm going to also, in addition to talking about the quarter, just make a few comments on the current situation in China, although these will be limited, given the status of the investigation.

Let me first of all start by just summarizing where we are for Q2 and I'm pleased to say that our business is performing well.

We're delivering on our strategy to improve financial performance for the group and during the quarter, EPS grew 4% to 26.3p at constant exchange rates and we've increased our dividend by 6% to 18p a share.

Importantly, we continue to deliver very encouraging progress on our pipeline.

This quarter alone, we saw three major new product approvals in the US -- BREO, a new treatment for COPD and TAFINLAR and MEKINIST for the treatment of metastatic melanoma.

These new medicines are clear evidence of the innovation GSK is producing in areas of high unmet medical need.

These approvals also speak to GSK's rate of R&D productivity, with further readout expected on 13 more assets over the next 18 months.

I can also let you know that the first two of those 13 have already read out positively in the last few months.

We're very optimistic that we can deliver valuable new product flow and in terms of current products, group sales grew 2% in the current quarter in constant exchange rates with strong performance across the group.

We're very pleased with the performance of our US pharmaceutical and vaccine business, which was up 5%; the best performance for a long time, held by strong growth in respiratory, oncology and vaccines.

In emerging markets in Asia-Pacific, pharmaceuticals were up 7%, while vaccine sales were down 13%; reflecting the timing of vaccine tender shipments, which we previously signaled.

In Europe, sales were flat and in Japan, sales were down 5%.

This is largely due to the continued generic erosion of PAXIL sales, which is masking the good contributions we're seeing from new products.

Japan remains a very positive environment for GSK with around 30 new products to launch there in the next three years.

We're continuing to implement measures to increase the focus of the group by targeted divestments.

We expect to reach agreements to sell LUCOZADE and RIBENA by the end of the year and this quarter, we also received an offer of around GBP700 million for two anticoagulant products, FRAXIPARINE and ARIXTRA and the related manufacturing sites.

In terms of our outlook, we continue to expect core EPS growth of around 3% to 4% and turnover growth of around 1% on a constant exchange rate basis during 2013.

Before I pass to Simon, let just make a few comments on the situation in China.

By the way, unfortunately, there is a limit in terms of what I can say to you now and during questions, given the investigation is ongoing and at an early stage.

As we saw in 10 days ago, our China pharmaceutical operations are the subject of an investigation by the Chinese authorities into allegations of fraudulent behavior.

From what we understand from the authorities, it appears that certain senior managers in the Chinese business have acted outside of our processes and our control to both defraud the company and the Chinese healthcare system.

Seeing these allegations made about people working for GSK is, as we have said, shameful, and for me personally, they are deeply disappointing.

The alleged activities are not what we expect of our people and are totally contrary to our values.

Outside and inside the company, people rightly expect us to operate with integrity and to be crystal clear, we have zero tolerance for this kind of behavior.

I can assure you, we are absolutely committed to rooting out corruption and we are absolutely committed to getting to the bottom of what has happened here.

We are cooperating fully with the authorities and obviously, we are looking into what's happened ourselves.

We've already put in place new resources to deal with this and we will continue to do so.

In addition, we are also going to commission an independent review to investigate what's happened.

As I've said, at this stage, there is still a lot we need to find out, but one thing I can guarantee you is that we will learn from this and we will make changes.

In the meantime, let me say we are committed to China.

We support the efforts of the Chinese government to reform the medical sector and we are open to looking at all ideas to improve affordability and access to our medicines, including changing our own business model in China.

We have a long history and a very large footprint in China and we continue to see the country as a key environment for further investment.

We also continue to believe they're country facing significant healthcare challenges and with critical needs in areas such as hepatitis B, respiratory disease, diabetes.

GSK has many important medicines and vaccines that can potentially benefit the people of China.

With that, I'm going to hand over to Simon to give you more detailed updates on the quarter and then, of course, we'll go to questions.

Thank you, Andrew.

Our performance for the second quarter highlights how our strategy to invest behind the range of growth drivers and build the linkages between our Pharma, Vaccines, and Consumer businesses is delivering a more balanced and broadly-based set of results.

Stronger momentum is evident across the business, even though we continue to deal with the drag from a number of generics and the contribution from new products is still relatively small.

With three important approvals in place during the quarter, we're now gearing up the launches of these new products and while it is still early days, we expect them to become a meaningful additional source of growth over time, even if they may ramp up at different rates.

Our financial architecture is allowing us to leverage the whole P&L to reallocate our resources more effectively and drive efficiencies from our cost structure.

This is giving us the flexibility we need to invest behind our pipeline, while also driving earnings per share ahead of sales growth.

This quarter, EPS growth, on a constant currency basis, was 4% on sales growth of 2%.

This is after absorbing the impact of an exchange loss on intercompany transactions of GBP46 million and the GBP100 million one-off benefit to Q2 operating profit last year from changes to our pension plans.

The financial architecture is also maintaining the organization's focus on improving our cash flow and allocating our capital to the best returning opportunities.

Cash conversion remained strong and we generated approximately GBP3 billion in net cash inflows from operations for the first half; this is after investment behind the late stage pipeline and the costs of our ongoing restructuring programs.

We also returned GBP2.3 billion of cash to shareholders over the same period, via further dividend increases and continued share repurchases.

Overall, we're pleased with the progress the businesses has made in the first half of the year.

We are where we thought we would be at this point and we're on track to deliver the guidance for the full-year that we set out in February.

Turning to the results for the quarter, as usual, the focus of comments will be on constant currency growth rates and core results.

Group sales in the quarter were up 2% after absorbing the impact of the GBP50 million headwind from divestments I highlighted for you previously and this is primarily related to the OTC consumer products that we sold last year.

For the half, reported sales were flat but excluding divestments, the ongoing business grew 2%.

The divestments I highlighted in February will only have a very minor effect on the second half of the year.

Details of the impact of the disposal is under discussion with Aspen and the sale of our LUCOZADE and RIBENA drinks businesses will be confirmed at the time final transactions are agreed.

Where we can see attractive values are available, we will continue to seek opportunities to improve the group's focus and release resources we can either reinvest or return to shareholders.

In the quarter, our US Pharma and Vaccine sales were the key driver of growth overall, with sales up 5%; the best reported quarterly growth for this business in over four years.

This reflects getting [passed by] for significant losses to generics as the business has experienced in recent years, as well as the loss of AVANDIA, but it also reflects the refocusing of the US commercial organization and its growing capabilities in our core therapy areas.

Key drivers for the US in Q2 were the respiratory portfolio up 8%, oncology up 10%, and our vaccines business up 14%.

In Europe, our Pharma and Vaccines Q2 sales were flat.

Volume across the business was up 2%, benefiting from the restructuring of our European business and in particular, our efforts to redirect our resources behind a more focused range of growth opportunities.

SERETIDE volumes benefited up 1%, as did vaccines up 5%, with the number of key tender wins, including ROTARIX shipments into the UK helping Q2 performance.

As expected, pricing overall continues to be negative, but the pressure in Q2 was less than prior quarters, due to the annualization of severe austerity measures.

Nonetheless, we continue to have a cautious outlook for Europe.

In EMAP, reported Q2 sales grew 2%.

This particularly reflects the effective phasing of vaccine tenders and a tough compare to last year, resulting in a 13% decline in vaccine sales in the quarter.

We're expecting a better vaccines performance overall in the second half, but as with last year, tenders will likely be weighted to Q4 relative to Q3 and remember, both quarters offer tough comparisons as well.

EMAP Pharma continues to deliver well and consistently, with growth in the quarter of 7% after 8% in Q1 and we saw particularly good contributions from respiratory up 9% and especially SERETIDE up 14%.

We expect continued broadly based growth from our emerging market business in the second half.

The contribution from China is likely to be impacted by the current inquiries, but it's too early to quantify this.

In Japan, turnover fell 5%; primarily due to the ongoing generic erosion of PAXIL, which began in Q3 last year and new competition to CERVARIX and ROTARIX.

Also, our respiratory portfolio was down 7%, as good growth from ADOAIR, which was up 8% was offset by weaker sales in other products reflecting an early allergy season and remember, in Q1, respiratory products in Japan were up over 20%.

In Consumer, the ongoing business grew 5% despite some challenges, which reflects its resilience.

As we highlighted in Q1, our Rest of World performance was impacted particular by new regulations and price reductions in China.

Wellness in the region was also impacted by some PANADOL supply interruptions, but other categories, especially oral care and nutrition, performed very strongly, helping to more than offset these issues.

Turning to the cost lines, at the operating level, the core operating margin was 29.4% in Q2, including the impact of a GBP46 million net exchange loss on the settlement of intercompany transactions.

You'll remember, we had an GBP82 million gain from the same source in Q1 this year and these gains and losses only arise on this scale when there are significant short-term movements in exchange rates.

Excluding currency, the overall margin declined 0.3 percentage points and you'll recall from last year that we noted operating profit had benefited by about GBP100 million from changes to the cost of future pension obligations.

Excluding this benefit, the margin improved 1.3 percentage points versus last year, reflecting an improved mix in Q2 this year helped by growth in the US Pharma business, but also the better performance in Europe, as well as the benefit of ongoing cost savings in our restructuring programs after we funded investments in growth businesses from behind the pipelines.

As expected, the cost of goods margin increased in the quarter, even excluding the elements of the pension credits attributable to manufacturing as they continued unwind of under recoveries from 2012 more than offset the restructuring and improved mix benefits, despite encouraging progress in the manufacturing restructuring programs in recent months.

Cost of goods remains an area of pressure as we initiate commercial volumes in these products.

Restructuring benefits have more of an impact on our SG&A expenses, which remained broadly flat, excluding the one-off benefits last year and our restructuring programs are particularly helping us to be significantly more flexible in how we allocate our resources and how we can reallocate them behind the pipeline in particular.

I should remind you, also, that during the second half of last year, we had a number of similar one-off benefits that reduced our operating cost, including a GBP290 million favorable pension adjustment recorded in Q4.

I expect the combination of ongoing cost management benefits, including savings from existing programs, plus other one-off value opportunities to largely offset the comparative drag during the second half of 2013.

R&D expense was down 6% in the quarter, primarily reflecting restructuring savings coming through, productivity improvements, but also the phasing of trial and study costs, particularly as a number of late stage projects move to filing and complete their development phases.

However, I'm currently expecting R&D expense to pick up again in the second half and to be higher relative to first half.

On the bottom half of the P&L, we continue to leverage financial efficiencies to help drive EPS growth.

We significantly lowered our net funding rate this quarter over last year and its keeping our net financing costs broadly in line with last year, even though we have stepped up our net debt materially.

Our core income tax rate of 24% is 1.5 points better than Q2 last year and keeps us on track to deliver an overall rate for the year of 24%.

On cash flow, we continue to be strongly cash generative.

Net cash inflows from operations after tax were GBP3 billion, up 8%, and cash conversion remains strong.

We made further gains in our working capital program and reduced cash conversion days a further day this quarter.

This makes 10 days since this time last year, excluding the benefit of assets being held for sale which now drop out of the calculation.

This is helping to minimize the additional cash requirement for working capital necessary to support the group's growth and reduces the impact on free cash flow.

Cash returned to shareholders for the first half were GBP2.3 billion, including GBP1.9 billion in dividends and nearly GBP400 million of share repurchases.

We're now up to nearly GBP500 million, included purchases since the end of the quarter and we continue to target GBP1 billion to GBP2 billion for the full-year.

I should remind you, though, that we've been out of the market for extended periods and will continue to be out of time because of the status of our regulatory files.

In conclusion, these results are very much in line with our expectations for this stage of the year and leave us on track to deliver our financial guidance for the year of 3% to 4% EPS growth and turnover growth of around one 1%, both on a constant currency basis.

With that, I'll turn it back to Andrew.

Thanks, Simon, very much and I'd like to now just open the call for questions.

Operator, perhaps you could just remind people of the protocol.

(Operator Instructions)

Graham Parry, BofA Merrill Lynch.

Starting off with the situation in China, I wonder if you can confirm whether the Chinese investigation is part of a parallel investigation by the US authorities, prompted by an FCPA investigation, in any way at all as certain blog websites might have suggested?

A few product questions, just on the Flamingo data for DOLUTEGRAVIR, where should we expect that to be presented and when?

On BREO, it looks like there's a little bit of slippage in terms of launch timeline to the third quarter/fourth quarter rather than just third quarter.

Is that just reimbursement or is there anything else going on there?

Then finally on DRISAPERSEN for Duchenne muscular dystrophy, I know that Sarepta has now announced it intends to file its similar product on the back of Phase II data in 2014.

Is there any reason why GSK wasn't able to file on Phase II?

Following this news, can you accelerate or augment your file?

As far as we are aware, the China situation is a China situation, period, and the investigation is a domestic investigation.

Secondly, as far as the DOLUTEGRAVIR flamingo data, we haven't announced yet where that will be published.

Obviously, we'll do that through the (inaudible) organization in good time.

BREO timelines, everything is progressing on BREO.

We are putting in place all the various steps we wanted to.

We're tracking maybe couple of weeks behind where we initially thought.

I'm pretty comfortable about that because it's absolutely critical we get this right and we're going to just take the time to make sure we get everything absolutely nailed, which is why we simply signaled it may slip out of Q3 to into the beginning of Q4.

No big deal or drama, quite a lot has been done in terms of getting ready for this in terms of reshaping our US sales force with extra focus on respiratory, as an example.

Obviously, we're now in the process of making sure that we've got everything ready to go.

As far as the Duchenne muscular dystrophy is concerned, the big difference is we're focused -- we believe we'll have a package which is focused on clinical endpoints rather than (inaudible) markers; different strategy and we like that strategy.

James Gordon, JPMorgan.

I had one question on emerging markets.

I appreciate it's too early to comment on China, but more generally, do you think the level of visibility you had on employee marketing practices in China was similar to that in other emerging markets?

Now that these activities have come to light in China, are you investigating practices in other countries?

Also, just one question on -- in the US.

There's a pulmonary (inaudible) meeting scheduled for September 10, do you know yet whether that will be an (inaudible) for ANORO?

No comment on ANORO and nothing I can tell you there.

In terms of sales force practices, basically what we're being told, what we understand from the Chinese investigators, is that what happened here was a number of managers who seem to be operating outside of our processes and systems and controls to allegedly generate this fraud.

Obviously, we're working through all of that.

Clearly, one of the things that we want to do is to understand exactly what's happened here, which is going to take some time, I suspect.

But we need to understand exactly what has happened here.

Clearly, once we understand that, we're going to be making sure that we've got all -- whatever is necessary to try and prevent it in other places where it could be potentially possible.

I would say there are a lot of unique characteristics, to state the obvious, about China and therefore, some of the circumstances that may exist in China just simply aren't replicated elsewhere.

But the general point is important, which is that once we understand what's really gone on, of course, we're going to be looking to make sure that there isn't any similar risk elsewhere.

I should make the point that all of our group companies are subject to extensive control audit check-ins and we have a very strong policy in the company of expecting individuals to live up to the values of the organization.

If we find people who've broken those rules, which we do from time to time, they get dismissed or they get disciplined and you can see in our annual report that we publish those numbers.

We are very active on that front.

If it turns out that there is some new information in this particular situation which may be pertinent elsewhere, we will clearly act on that.

Andrew Baum, Citigroup.

My understanding is that unless there's clear evidence for the fraudulent behavior in your US operations, there's no impact on the corporate integrity agreement you've got with the Department of Justice, whatever happens in China.

Could you confirm whether that's a correct interpretation when I'm thinking about the potential risk to your Medicare programs?

Second question, you've highlighted the potential for developing your distribution models, particularly in Europe, to reflect the new economic outlook.

You've obviously created a mature products or brought sets of mature products together, you've divested some products.

Could you outline some of the movements in pilot programs you're beginning to run as you think about reframing your cost base for that part of your business?

Nothing else I'm going to add on the investigations which have gone on or anything else.

I think not helpful to -- nothing that I can really helpfully add.

As far as Europe is concerned, we are obviously in quite a big period of restructuring, if you will, our European business.

If you think about what we've done in the last eight/nine months, we've reduced the size of the cost base substantially, so a significant reduction in back-office, in particular, reduction in sales force size, less of a percentage reduction in sales force size, but a very big redeployment of the sales force.

Although we've reduced the sales force by around 16%, we've actually increased the amount of resource we have behind respiratory, oncology, and vaccines.

Those are three big growth franchises for us in Europe.

That, I think, is why we've seen an improved stabilization, if you will, and an improved relative competitive performance on volume.

Data I've seen indicates that we're now the third best volume producer in Europe of our peer group competitors.

That's encouraging.

We've also, of course, seen a somewhat more benign pricing environment as some of the annualization phenomena roll through the system, so big changes there.

Secondly, as we created the established products, we've begun to actively look at how we might best then manage those products, which are not going to be drivers of growth for us in the future and where those products make sense to be exited from the group.

Obviously, we're doing and you can see that with FRAXIPARINE and ARIXTRA.

Significantly, the majority of those business are (inaudible) in Europe and of course, with divesting subject to the agreements, we're divesting of the products, a substantial number of personnel, the costs of the personnel will go with those products, as will a factory.

That's quite a major piece of infrastructure, which is going to be exited from the organization alongside the brands.

We will now continue to work through that portfolio of established products and basically, ask the question, what is the right solution for each of those blocks of business?

Now, for some of them, they're just going to stay in the group and unchanged.

For others, it may be that we partner, maybe they'll be Viiv-like relationships for certain elements and for others, it may be we just exit them from the organization in the way that we are doing for FRAXI and ARIXTRA.

Very much underway, as I said to you last year, we were determined to take, not just a short term, but a much more strategic response to Europe.

We're doing that.

I think we're seeing the benefits of that in the short run, but of course, it's fundamentally giving us a more streamlined business.

As and when we get new products approved in Europe, even though we know that's going to be a relatively more difficult space, we should have a leaner, more focused organization able to take advantage of whatever opportunity we can access, despite the austere environments in which we operate.

(inaudible), Bernstein.

This is (inaudible) for Tim Anderson.

I have two questions, please.

First, we are under the impression that FDA may be putting out a guidance document on generic inhalers sometime in the current year, which could simplify the process for generic versions of ADVAIR to launch in the US, maybe sometime in 2016.

What are your expectations on this guidance in terms of timing and content?

The second question is on your established products division that you have now created and what we'd like to know is can you realistically see floating this division out in to a separate publicly-traded company, for example?

How should we think about it in 2014 and beyond for this division?

I've got no comment or insight with regard to any potential guidance.

My overall position on the ADVAIR marketplace for the US really hasn't changed.

I remain of the view that a fully substitutable generic is extremely difficult.

I remain of the view that it's unlikely we're going to see anything in the next several years.

Obviously, the further out we go in that projection, the less certainty anybody can have, including me, but my view overall hasn't materially changed.

As I say, we have no insight into any potential changes.

As far as the established products are concerned, we have no intention at this point in time of floating this off as a separate business.

I've made it very clear that what we'd aim to do with the creation of the established product is essentially three things.

The first is to make sure that inside the organization, we have a mechanism to allow our -- particularly our support structures to allocate resources behind our new pipeline products, our existing promoted products, and then the established products, so that we create a structure in the business which allows the appropriate dedicated resource to be attached to the different bits of business.

They have different challenges, different needs and as we now acquire new pipeline business through the R&D performance, we need to make sure that we are not, in any way, going to lose sight of what we have to do on some of the older products and partly, it's an entirely internal management device.

Secondly, we believe that with a focus on the established products, which by the way are the vast majority of which, over the next couple of years, will be outside of US -- I'll explain why in a second.

Those businesses are characterized by significant complexity, lots of brands, lots of SKUs and lots of countries.

There is a real opportunity for us to really have a simpler focus, streamline that business, take out costs, make our manufacturing organizations' life easier, improve the margin, and allow us to focus on new products.

We believe there are potentially selected tender opportunities, which by focusing in this space we can develop.

The reason why that business increasingly becomes a non-US business, of course, is that the products which are in the established portfolio in the US are already [genericizing].

As time goes by over the next couple of years, those products themselves will become less and less relevant in this context.

The third and final point really refers to the comment I made to Andrew a couple of minutes ago, which is that, within that established portfolio, there are clearly blocks of business which we could either sensibly sell from the company and create shareholder return quickly.

FRAXI and ARIXTRA are a perfect example of that or where we may find alternative ways to develop those businesses perhaps through a Viiv-like partnership in certain areas, which could again create enhanced value versus the way the way they're currently managed.

That's really the story of the established product.

No intention to float this off as a business at this point in time.

Obviously, if somebody wants to come and make me an offer I can't refuse, different conversation.

But in the absence of that, that's where we stand on this portfolio.

Kerry Holford, Credit Suisse.

Firstly, on BREO, we saw that CVS Caremark announced its 2014 drug exclusions list for its national formulary last week and BREO was on that list of drugs to be excluded from January next year.

I guess it's notable that Caremark made this move, even before you've launched the product in this market.

Is this the first sign that managed care do not buy into the benefit of a once daily dose product in COPD and are you concerned that this exclusion for BREO could extend more broadly across the US market?

Secondly, on ADVAIR, we saw that the list price, the year-on-year list price, in the second quarter the US is fully retained.

I think that's marked contrast versus previous quarters and I wonder if that represents anything new, any reduced rebate pressure on ADVAIR or is that just really too be viewed as a one-off positive this quarter?

Lastly, on ALBIGLUTIDE, any progress there on finding a partner for this product?

On ALBIGLUTIDE, we continue to explore options there, but no definitive answer for you.

On the ADVAIR pricing piece, it is good news that we were able to retain that, but largely, I think, due to various year-on-year comparisons around RAR, so in terms of partly benefits this year, but partly also less positive last year.

I think that's as much an [actor] -- there is no bad news in there, but it's a little bit enhanced by the year-on-year comparator of RAR.

The BREO thing I think is not [signaling].

We are only just beginning to get into sensible contracting conversations with managed care companies.

All of the signals we've seen from patients, physicians, and payers is actually there is quite a strong interest in the once a day COPD product, not least because of the sense of the cost of full compliance with twice a day products.

If there's anything that can be done to improve compliance, therefore reduce hospitalization, and of course, the managed care companies haven't yet seen our net pricing proposition.

I'm well aware that the [faith] price is in the marketplace, but nobody's seen the net price proposition.

I don't think that should be read as in any way signaling of what is going on and over the next couple of months, we will start to see how the real conversations go.

Keyur Parekh, Goldman Sachs.

Andrew, I realize there's limited stuff you comment on what's ongoing in China, but to the extent that you can, I would appreciate any color you might be able to share around if you believe these practices or these allegations are purely in the Glaxo or do you think this is an industry-wide issue that the rest of your peers will be facing as well?

What I'm just trying to understand is, to the extent that you can, do you think Glaxo's practices were different of everybody else's?

Secondly on the product side, I note that your Japan vaccine revenues were impacted this quarter by increased competition, both on CERVARIX and ROTARIX.

Do you see this as a quarterly phenomenon or is that a new level of sale that we should be thinking of going forward?

As far as Japan is concerned, we've clearly seen a slowdown in the HPV marketplace and over the last year, we've seen a significant share decline for CERVARIX.

I don't think we're going to see anything very dramatically change in that scenario.

ROTARIX is a rotavirus and much more positive situation where we continue to hold very substantial share, despite new entrants.

I think rotavirus is likely to develop into a continued positive story.

I think on the HPV side, less so.

I think on it back to China, again, I just want to reiterate it's very early days.

We haven't been able yet to get into a full investigation much ourselves.

But working with the Chinese authorities, it appears that this is a consequence of individuals working outside of the controls and processes of the Company to defraud the company, as well as to then go on and do things which are potentially illegal.

I think that it's important to recognize that it appears that we're also seeing an inflection point in the Chinese environment in terms of how the government wants to see their entire healthcare spectrum modernize.

I want to make comments about anybody else.

We're all looking at the same (inaudible) screens reporting what's going on and I'll leave it to you to draw your own conclusions.

But it's inappropriate for me to a comment on anything beyond GSK.

Seamus Fernandez, Leerink Swann & Company.

A couple of quick questions more as it relates to, first-off the direction of gross margins.

We see, in the back portion of your report, the gross and operating margin performance ex R&D actually improving in most of the divisions.

Can you talk a little bit about directionally where you see improvements going forward?

That question's for Simon.

Beyond that, as we think about the key pipeline opportunities going forward, where are the areas that you're particularly excited about?

We've got MEPOLIZUMAB data coming up, we're on the cusp of the DOLUTEGRAVIR approval, but what are some of the key products that you focus on in the next, call it, 18 months?

We're through a first seven here and we have a number more to go and I'd just love to know which ones you're most excited about?

On the operating margin going forward, I think as we highlighted in the quarterly commentary, we're already seeing a number of benefits from our restructuring programs across all of the three major cost lines and we very much think about those together in terms of delivering operating performance.

We highlighted back at the beginning of the year an additional restructuring program which is designed to deliver about GBP1 billion of savings over the next three years, which will contribute to that.

But alongside that, I think as we've highlighted also, we are expecting to see some pressure, particularly on the manufacturing side, as we ramp up new products and that's probably where the greatest strain is.

But we will be working the whole of those mix factors to deliver our medium-term objective to improve operating margin and it'll come from a number of places to the overall total.

I think that's probably the best guidance I can give you the moment.

Thanks Simon as far as R&D is concerned, there is a tremendous amount going on in this company on R&D.

I've worked in this company since 1985.

I don't think it's ever been more exciting from an R&D perspective and that's because we have significant products being approved, significant products awaiting approval, a whole [raft] more of products and indications coming through immediately behind and some very exciting stuff coming up in the early phase discovery organization.

Almost at every level we're seeing some very, very cool stuff happening inside the R&D organization.

To focus on the short-term, the next couple of years, what really stands out, obviously, the impending decisions over the next few months on DOLUTEGRAVIR, on ANORO, on ALBIGLUTIDE are important.

The continued global process of seeking approval for the two melanoma drugs and BREO, of course.

That's real, it's right here.

We've had a good year so far.

Obviously, we're working hard to ensure that we are able to continue to seek approvals around the world and also to convert those approvals into successful launches.

That is a very mobilizing phenomena in the organization and I can tell you, particularly in the US, it's had an extraordinary impact in terms of the way in which the US is thinking about the future and at least partly, I suspect, is one of the reasons why we're seeing the US perform so well, even before those drugs are actually in the marketplace because I think it's having a deep impact in terms of how they view their future.

I think if we then look into what else is coming, I'm going to start in places in which you probably least expect me and it's products like VOTRIENT and it's products like ARZERRA where we've got products in the marketplace, but we are gradually acquiring more data, gradually able to file for new indications, gradually get those approved, and gradually build a building momentum behind those products.

VOTRIENT is a super example of our ability to do that and actually, if we look at what's happening in that marketplace, coming very quickly through the ranks into being a potential market leader.

ARZERRA is obviously a biologic with a very long period of potential exclusivity and we have a great opportunity to continue to develop that brand as well.

If I look, then, at the slightly newer stuff, what would I call out?

Probably, three or four things in the next 1.5 years.

One is MAGE-A3, the antigen-specific vaccine program.

You know the first stage on that's coming.

The second is DARAPLADIB -- both, I'm going to say widespread in every comment for the last five years, high-risk, but potentially high reward.

I'm not naive.

I'm completely open to the possibility these programs fail, but we always believe there was a good reason to believe and a great prize to go after in terms of the potential patient benefit.

Those two are going to come to fruition in this time period.

MEPOLIZUMAB, I think, is an extraordinarily exciting program for severe asthma.

We've got tremendous amount of data, particularly safety data and other indications in which this drug was hooked up before.

It looks very, very exciting.

The last one, actually, is the zoster vaccine which, although it's an event-driven trial and it looks like that vaccine is probably going to report in '15 rather than '14, actually the opportunity for us to bring in a very competitive vaccine into the zoster space very important for us.

We think the technology of that vaccine, given that it's not a live virus space vaccine gives us much more flexibility.

We think it has potential utility beyond where the current product is in the marketplace.

That's another very exciting one.

I think there is a raft of products coming through.

As I said, we've got 13 sets of data to readout, we've already had two.

I haven't even mentioned the multiple respiratory combinations and individual products, which are coming in the background.

I think that's where R&D sits today and it's the product of an extraordinary amount of hard work over the last several years and I'm extremely grateful and proud of our research and development organization at GSK.

Peter Verdult, Morgan Stanley.

Firstly on RELVAR, BREO -- just given the advances you see versus ADVAIR, could you just talk us through some of the pushes and pulls in terms of deciding to pricing parity in the US?

The second part of the question is, on Summit and Salford, they were (inaudible)outcomes data, could you just remind us when we expect to see the top line data there because I'm hearing the Salford study is recruiting slower than expected.

Secondly, on China, I realize it's both delicate and ongoing, and I'm probably pushing my luck here, but in terms of how we should be thinking about what the worst-case scenario could entail, does that include forced price cuts or maybe even a ban from certain regions or therapeutic areas?

On China, there's really nothing I can add there, Peter.

Very early days, we're working very cooperatively with the authorities, but it's way too early to take a view of what, if any, implications there are down the road.

I remind you, these are allegations.

We need to get through the investigation, figure out what really happened, what the consequences are, what the impact is on individuals and/or the company; plenty of time for that to come.

We are very early in this situation.

As far as BREO RELVAR is concerned, I think what you see and I would refer you actually not just to BREO and RELVAR, but also look at the pricing positioning of the two melanoma drugs; both of which we brought in at a discount to the current product in that marketplace.

We believe over the next several years, around the world, and also in the US, the pricing of new products is going to remain a focus.

We've always made it very clear that our R&D strategy was to try and find a way to deliver multiple products.

We appear to be in a position where that may be possible.

That allows us, I think, to reduce the need for any individual product to, on its own, carry the entire future the company, reduces the pressure on pricing, and allows us to be able to be more thoughtful, more creative, and I think price, in very different ways for very different sorts of products.

Our view on the RELVAR BREO positioning was that this gave us an opportunity to deliver added value, different value in terms of the dosing frequency and the obvious consequences, new device, better device, device that we know patients prefer.

But actually for -- and actually build that proposition at a value for money price and that's what we've really aimed to do there.

In terms of Summit and Salford, we're looking at 2015/'16 for those programs to conclude.

Jeff Holford, Jefferies.

I've got three questions, none of which have the word China in them I'm sure you'll be glad to hear.

But just first off, on working capital, it looks like you're making good progress there.

Can you just remind us on how that's tracking versus the original plan you had there and how much further you have that you think you can go on working capital, in terms of days and really thinking there?

Secondly, just on the respiratory market in general, you've got a number of new products coming to market.

You got initial parity pricing announced, but can you just talk a bit more about is that a stable proposition going forward for the parity pricing?

Sometimes a company will look to raise the price of the older product once the new one's actually on the market to help force switching over.

Can you just maybe talk about that a little bit?

Any further help can possibly give just narrowing down timing open on the MAGE-A3 and DARAPLATIB would be good if you can.

Simon, go ahead on the working capital.

On working capital, I think overall, we're probably a little bit ahead of where we originally expected to be, but with the very clear objective of trying to deliver steady and sustainable progress.

From a trend point of view, you've seen us do that over the last couple of years of making consistent reductions and that's very much the objective going forward.

I think we probably made the largest progress on receivables/payables and the areas outside of the core inventory question and that is now where the focus is really sitting in terms of trying to restructure our supply chains to make sure that we can make sustainable reductions in the needs of inventory as we grow the company, again in both the Vaccines and Pharma business.

That's where you should probably expect the greatest progress going forward.

Thanks, Simon.

Respiratory market, I'm sorry, Jeff, I'm just going to be very irritating.

It's obviously a very competitive space.

It's very important to us we try and take whatever competitive advantage we can.

I'm not going to go into a lot of detail on how -- what our pricing strategy is going to be.

I'm sorry about that, but clearly it's our goal to establish BREO.

It's our goal to continue to develop our absolutely strong position in the respiratory marketplace and with products like BREO and hopefully ANORO, we've got tremendous short-term opportunities to do that.

In terms of data productions, we'd expect to first study for both DARA and the first study for MAGE-A3 to report that before the end of this year, with a second study for both reporting out next year.

Florent Cespedes, Exane BNP.

First on the US business, could we have the breakdown of the US (inaudible) of volumes and price and is the good Q2 performance sustainable?

In the second question is more clarification, could you confirm that the real-life trials on BREO will have the results only in 2015 and not 2014?

Could you explain how is it possible to launch BREO without the results of this real-life trial?

Thanks, Florent.

As I said earlier, we're expecting those trials to report out '15 onward.

We actually feel very -- I think we feel increasingly good about launching BREO in advance of that.

We always knew that was going to be the case and made perfectly clear that those trials would never be finished in time for the launch.

I think what's become clearer to us is the benefits of BREO in terms of not just the dosing frequency but the device, the potential understanding and concern within the payer environment about compliance, costs, and the like and simply the interest of patients, if you will, for a new option in COPD we think, is pretty real.

That gives us a degree of confidence, of course, I think it will be excellent to then come along a couple of years post-launch with further, hopefully, reinforcing data.

I think that, for me, makes perfect sense.

In terms of the US business composition, I think it might be worthwhile just reflecting on a couple of things.

Yes, there's some price benefit and yes, we've been able to, if you will, capture more of that price benefit for reasons I've touched on earlier.

But I think it might be worthwhile you understanding that we promote, in the US, 82% of our sales base, so 82% of the revenue in the US is promoted by the Company.

The residual 18% is not promoted by the Company and that's made up either of products which are going generic, so in process of genericizing or are simply a very small number of products which are neither generic nor are they promoted.

Just to put that into context, 82% of the business is promoted.

8% of the business in Q2 was generic or genericizing and about 10% of the business is simply not promoted and not genericizing.

That 82% grew 11.5 percentage points, the generic 8% fell 31 percentage points, and the non-promoted business was basically flat.

What you see in the US is a lot of volume being destroyed as per usual in the generic side of the house, but a lot of growth and obviously, some price benefit in the promoted side of the house.

I think when you see that 82% growing at 11.5%, then you start to consider the introduction of the two melanoma drugs, BREO, and then, with the fair wind, future new products, you can see that our US business is in a very robust shape to receive and start to move forward with the next generation of the product.

[Vicki Buxey, FMC].

I had two questions, it's coming back to China.

The first question is, can you confirm that there's no connection between the previous difficulties you've had around fortification of data and the exit of the head of R&D and the current set of allegations?

Secondly, have you given any consideration to whether those, should these allegations be proven, GSK could be prosecuted under the UK Bribery Act?

As far as we're aware, there is no connection between the individual's behavior at the R&D site, which has been more reported.

I have no comment to make other than to say, as you would expect and as is appropriate, we have opened channels to various oversight regulatory agencies in different countries around the world, on both sides of the Atlantic.

I have nothing further to say to that.

Fabian Wenner, Kepler.

Just two quick questions -- first one, what are the actual charges in China?

Are there any charges against you that involve economic damages in the sense of excessive drug prices or the like?

Thank you for any light you can shed on that.

Secondly, can you give us or remind us of the milestones with Theravance with regard to potential approval of ANORO in the US?

Very little I can add on China.

As I've said, this investigation is at the early stage.

You've probably seen reported from China the same commentary I've seen.

We are going to continue to work with the authorities on this.

Our understanding, at this point in time, from the authorities is that this is around individuals, (inaudible) people in senior management of the company in China, who are alleged to have worked around our systems and controls to both defraud us and then to potentially do things inappropriately in the marketplace.

But obviously, it's in early stage of the investigation and we have to wait and see how that actually matures.

Simon, I think, has the information you asked for on the milestones.

Its GBP30 million due on launch and GBP30 million on approval for both BREO and (inaudible).

That's GBP30 million each.

You've got two payments of GBP30 million on each.

Thanks, Simon.

It's time to bring the call to a close.

Thank you very much for your attention.

Obviously, the IR team at GSK are available to handle any detailed follow-up.

Thank you very much.

Thank you.

Ladies and gentlemen, that concludes your call for today.

Thank you for joining, you may now disconnect.