葛蘭素史克 (GSK) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the GlaxoSmithKline's investor analyst Q3 results conference call hosted by Sir Andrew Witty.

My name is Butendra, I'll be your event manager this afternoon.

(Operator Instructions)

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

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

Thank you very much.

Good afternoon, everybody.

Thank you for joining us for the Q3 analyst teleconference.

As usual, I'm joined by Simon Dingemans, our CFO, who, after I've made a few introductory comments, will add his commentary to the quarter and then we'll open up for Q&A.

So GSK's third-quarter performance has seen us continue to deliver a broadly-based sales growth, bring significant new products from our R&D pipeline to market, and grow returns for our shareholders.

If I turn to the numbers first, total sales were up 1%, core operating profit up 11%, and core earnings per share were up 16%, 28.9p.

The increase in core operating profit was driven by continued strong cost control, including a reduction in R&D expenditure, and the delivery of a further benefit from the program of initiatives we started in 2012 to reshape and reduce certain long-term operating expenses.

As we saw last year and signaled to you earlier this year, contributions from this program are unevenly phased, and we will continue to look for more of these types of opportunities to help deliver the same reductions in costs and balance sheet liabilities.

We continue to return cash to shareholders with the dividend again increasing by 6% to 19p a share, and GBP1 billion a share to repurchase by the end of the quarter.

I can also today reaffirm our full-year guidance of core EPS growth of 3% to 4% on sales growth of around 1%, both at constant currency.

Sales grew 1%, despite the impact of a significant decline in China sales and the timing of various vaccine tender shipments.

This is a resilient performance and is being driven by contributions across the group.

In the US first of all, sales grew 2% impacted by wholesaler and retailer destocking in the quarter, which if this was excluded growth would have been around 5%.

This performance marks the continued growth of our business in the US and is encouraging, given the obvious intensifying price competition we continue to see in the market.

With our significant new product flow and the changes we've made to our commercial model, we remain very optimistic about future growth in the US.

I was also pleased to see pharmaceutical and vaccine sales grow at 5% in Europe, and while the environment here remains tough, I believe we are starting to see the results from our restructuring effort to focus this business on our core assets in key growth areas, such as oncology, vaccines, and respiratory.

The performance in EMAP this quarter, down 9%, has been impacted by the timings of both vaccine tender shipments, and of course the significant decline in China sales.

If we exclude just China, pharmaceutical sales growth in the region was 5%.

Operations in China were clearly disrupted in the third quarter with sales down 61%, but we remain fully committed to supplying our products to patients in the country.

At this stage, it's still too early for us to quantify the longer term impact of the investigation to our performance in China.

The investigation is ongoing and it's complex in detail.

We continue to fully cooperate with the authorities and to respect the process of the investigation.

As such, there is very little further I can say until it has reached its conclusion; however, I do want to reiterate that the activity described by the authorities are very serious and totally unacceptable, and are contrary to our values and everything I believe in.

We very clearly recognize there is a profound need to earn the trust of the Chinese people again, and we will take every action necessary to do so.

The round-off on the business performance for the quarter, consumer healthcare sales grew 4%.

We continue to focus this business around a portfolio of key core brands and drive growth through geographic expansion and innovation.

Before closing, I'd like to highlight the great performance from the R&D team.

2013 was always going to be an important year for our R&D organization, and I'm delighted with the progress to date, with four of the six key assets highlighted at the start of the year already approved.

Given how difficult drug development remains, this level of achievement in the last nine months is remarkable and unprecedented for GSK, and I want to pay thanks to everyone who has worked hard to make this possible.

The four approvals consist of Breo for COPD, Tafinlar and Mekinist, both for metastatic melanoma, and Tivicay for HIV.

In addition we have received approval for our quadrivalent influenza vaccines in the US, and significant new indications for three other products.

Taken together, these approvals represent substantial new growth opportunities in key areas of oncology, HIV, and respiratory disease.

I'd particularly like to highlight our respiratory portfolio.

Last week, we began shipping Breo Ellipta to US wholesalers.

This product is also now approved in Japan for asthma, and has received a positive opinion in Europe for COPD and asthma.

We also received in the quarter a positive recommendation from an FDA advisory committee for approval for another product, Anoro, for COPD.

The regulatory decision here is expected before the end of the year.

These achievements mark the latest developments in our 40-year leadership of this therapy area.

They are clear indicators of our ability to expand our current portfolio with new medicines in inhaler technologies, which can make a real difference for the lives of patients with respiratory disease.

I also want to highlight the positive findings seen earlier this month for our malaria vaccine, RTS,S This is something myself and the whole Company is delighted with.

As many of you may know, we have been working on this project for around 30 years, and we're now preparing to file for approval with regulators in 2014.

The vaccine has shown to reduce by approximately 50% cases of malaria in children age 5 to 17 months, and given the terrible nature of this disease has the potential to help transform public health in Africa.

Finally, as we deliver our pipeline we continue to reshape our business and divest non-core assets.

We've agreed to sell Lucozade and Ribena to Suntory for GBP1.35 billion, and have accepted an offer of GBP700 million from Aspen for our anticoagulant products, Arixtra and Fraziparine and their related manufacturing site.

We believe these represent good value for shareholders.

With that, and to give you a little more detail on the quarter, I'd like to hand over to Simon Dingemans.

Thank you, Andrew.

To recap, in the third quarter we delivered 1% sales growth despite significantly lower sales in EMAP, which are impacted primarily by a decline in China sales but also the phasing of tender shipments in our vaccines business.

The broad range of growth contributions we're now seeing across our business more than offset these pressures in the quarter, and if you exclude China pharma and vaccines, the rest of the groups' operations delivered overall turnover growth 2% in the quarter.

Our results for both the quarter and the first nine months also show how we are improving leverage across the P&L.

This is reflected in core operating profit up 11% and EPS growth of 16% and 1% turnover growth in the quarter, but also EPS up 5% on turnover in line with last year for the first nine months.

The 1% growth in turnover reported in Q3 is without any material contribution yet from our recent launches.

We're pleased that in the US our marquee pipeline launches, such as Mekinist, Tafinlar, and Tivicay are underway and since the quarter end, as Andrew highlighted, Breo has started shipping.

As more geographies and products come online, contributions from our portfolio of new products should grow, but we continue to expect that in the current environment they may take some time to build.

To insure that we deliver against this opportunity, we are continuing to invest behind the pipeline while tightly managing our cost base.

Our ongoing restructuring programs are on track and delivering in line with our plans, and in aggregate they contributed additional savings over the last year of over GBP200 million and total savings are now running at an annualized rate of over GBP2.7 billion.

We also continue to implement the program we started last year to identify specific initiatives that could reshape and reduce our long-term operating expenses.

Particularly this quarter, we delivered a significant reduction in our long-term employment costs through a restructuring of our post-retirement medical benefit program.

This is something we've been planning for over a year, and was reflected in the guidance we gave at the start of 2013.

The restructuring contributed GBP267 million in savings in Q3, but will also contribute ongoing savings in service costs, and reduces our balance sheet liabilities, very much like the other elements of this program that last year, that is to restructure our pension obligations releasing savings in Q2 2012 of around GBP100 million and in Q4 of GBP290 million.

Overall, provisions for pensions and medical plans are now GBP1.4 billion lower than a year ago.

We continue to look for further opportunities along these lines, but it is unlikely that any more will be delivered this year.

This will clearly create some comparative issues for Q4 as you think about your models, given the timing of delivery to last year's savings relative to this year.

So overall, despite the impact of China, the momentum we're seeing elsewhere in the business is offsetting this drag, and as a result we are today reaffirming our guidance for the full year of EPS growth on a constant currency basis of 3% to 4% on sales growth of around 1%.

Turning to our top line performance, as usual I'll provide some additional commentary on the performance in the quarter, and my focus will be on constant currency growth rates and core results.

In the US in the quarter, US pharmaceuticals and vaccine sales were impacted by further destocking of our wholesalers and retailers, and this cost this part of the business almost 3 percentage points of growth.

Despite this pressure in the quarter, the US business still delivered growth of 2%, even though we're also seeing an increased level of price competition in certain areas of our portfolio.

This particularly affected the respiratory business which was down 3%.

Newer products grew more strongly, particularly oncology up 14%, and remember this is before any material contribution from the recent launches, and list of sales doubled.

The US vaccines business put on a particularly strong performance, up 24% with continued benefit from ongoing shortages of a competitor, but importantly the first shipments of our new quadrivalent flu vaccine also provided a significant contribution, with flu sales up 29% to over GBP100 million.

While the majority of flu sales were in Q3 we do expect further sales in Q4, and remember last year we sold almost all of the capacity we had in Q3.

In Europe our pharmaceutical and vaccine sales were up 5%.

The reported growth does reflect the annualization of a number of austerity measures and a weak comparative quarter, but it also reflects the benefits of the refocusing of our resources behind key brands such as Seretide, down 1% this quarter versus down 6% a year ago, Votrient, which more than doubled, and Duodart which grew 27%.

We're also being more aggressive in pursuing vaccine tenders, and improvement in the growth of vaccines up 4% shows the benefits of these efforts.

Despite the clear progress we are making we do remain cautious on the regions overall outlook, due to the potential for future austerity measures as well as increased competition to Seretide.

In EMAP, the Mainland China pharmaceutical and vaccines business was down 61%, reflecting impact of the current investigation.

Given that it is ongoing, it's too early to make any reliable assessments of the longer term impact.

Beyond China, EMAP was also affected by the phasing of vaccine tenders, which continued to be lumpy in the region and heavily phased to the fourth quarter.

However the rest of the EMAP business continues to deliver, with pharmaceutical sales outside China up 5% driven by good contributions across the portfolio, but particularly from respiratory up 9%, CNS up 19%, and dermatology up 9% as well.

In Japan, we saw another strong quarter for the pharma business up 7%, with particularly good contributions on the respiratory portfolio with Adoair up 8%.

Vaccines were down mainly due to the suspension of the government vaccination program for Cervarix.

On consumer, our top line growth of 4% was driven by growth in Europe up 6% and rest of the world region up 5%, despite a significant decline in China where price controls and regulatory changes that we flagged in the previous couple of quarters continued to affect spend bit and contact, and reduced overall consumer growth by approximately 2% in Q3.

This is likely to continue to be a challenge for the consumer business through the balance of the year, particularly as price reductions in China are finally implemented in Q4.

The fourth quarter also faces a tougher comparison given the strong start to the flu season we saw in 2012.

On the cost side, at the operating level our core operating margin in the quarter was 31.6%, which included an exchange loss of GBP49 million on the settlement of inter-company transactions.

Excluding currency, the operating margin was up 3.1 percentage points and benefited from the delivery of the specific restructuring initiatives we covered earlier, as well as our ongoing cost reduction programs.

The benefits of this particular restructuring fell mostly in SG&A, but also benefited to a smaller extent COGS and R&D.

Cost of goods margin was up slightly, 0.4 percentage points, and this reflects the continued unwinding of prior year cost of manufacturing shortfalls that I previously flagged, as well as mix partly offset by lower write-offs, restructuring benefit, and other cost saving initiatives.

I continue to expect cost of goods to remain under some pressure due to mix, but also as we initiate commercial volumes of our new products.

Excluding currency, the SG&A margin declined 1.9 percentage points, with cost savings and restructuring benefits more than offsetting the continued investments we're putting behind the pipeline and our other growth market.

R&D expense of GBP791 million for the quarter was a decrease of GBP91 million versus last year, and this reflects the completion of some of our more significant late-stage programs, but also continued efficiencies in our R&D operation.

I now expect that the full-year R&D costs will likely be a bit below the total for 2012, which was GBP3.5 billion.

On the bottom half of the P&L we've been able to continue to deliver on the funding side with a net funding rate for the quarter significantly lower than last year due to the shape of the refinancing that we've completed.

This has enabled us to keep our net financing costs broadly in line, despite the significant increase in net debt given some of the acquisitions we've made over the last period.

Our core income tax rate was 23.5% in the quarter, bringing the year-to-date rate to 23.3%.

It looks now that we'll do a bit better than the 24% we previously expected for the full year, but how much will depend on the final mix of trading during the fourth quarter.

We continue to focus on cash flow, and operating cash in flows in the quarter of approximately GBP2.1 billion reflected strong conversion ratios.

Working capital also remains a priority and we're eight days ahead of Q3 last year, while still driving significant improvement in service levels into our business, and also putting significant inventory behind the pipeline launches in other growth market.

The remaining four days reduction is the impact of disposables.

It's early days, but the conversion cycle improvements are clear signs of the effectiveness of the supply chain restructuring that's under way.

Receivables and payables also continue to improve.

Our strong cash flow enabled us to increase the dividend 6% for the quarter.

The dividend clearly remains the priority, but we also see our shares as an attractive investment and so are continuing to return cash to shareholders through the buyback program.

We purchased nearly GBP1 billion by the end of the quarter, and through the mandate we had in place during the close period we've been able to repurchase an additional GBP300 million of shares to bring the total to date to GBP1.3 billion.

We continue to target being in the range of GBP1 billion to GBP2 billion for the full year, and remember there will be periods during the year when we're not able to be in the market as you look at how that plays out over the balance of the year.

Before concluding I should remind you that in September we finalized agreements to divest Lucozade/Ribena to Suntory and also our two anticoagulant brands to Aspen.

We expect to complete these transactions in Q4, and together expect after tax proceeds of roughly GBP1.9 billion, which represents a very attractive return.

The proceeds will be used to reduce debt in the short term, but what we incorporate it is the group's available resources for future investment or shareholder returns.

We also expect to record a substantial non-core gain on these transactions in Q4, and for modeling purposes you should assume the revenue of these products and these businesses drop out of the end of 2013.

So finally in summary, despite the impact of China we continue to expect to deliver for the full year 3% to 4% earnings growth in constant currency terms on turnover growth of 1%.

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

Thanks very much Simon, and very happy to open up the call to questions, please.

(Operator Instructions)

Our first question is from the line of Graham Parry from Banc of America Merrill Lynch, please go ahead.

Thanks for taking my questions.

Just on the pensions benefit.

Given you brought GBP395 million last year, you're only booking GBP267 million this year, am I correct in assuming that's about a 2% headwind to operating profit growth in 2013, and if I add in Vesicare of about 2%, your guidance is really implying underlying EPS growth of more like 7% to 8% after we strip out those two headwinds?

And then looking into 2014, should we think of that as a base to add pipeline growth onto, or would we expect that GBP267 million benefit for this year to drop out next year and just be pure headwind?

Secondly, on China, if you could just explain how the phasing of your business has gone through July, August, and September.

So which is the worst month?

Is September starting to look a little better than August,?

Are we seeing any kind of stabilization there at all?

And then thirdly, if you could quantify the European contracting benefits to pharma and the wholesaler benefit to wellness sales in consumer in the EU, just so we can track the underlying growth properly there?

Thanks.

Thanks very much, Graham.

Simon may want to add a little bit, but I think your math on the impact of the headwinds of Vesicare and the year on year between the pension adjustment we made last year and the US health benefits program we confirm today, I think your math works out.

We're obviously not going to give you guidance for next year, but certainly your assessment of what the equivalent headwind is for 2013 I think makes sense.

China, won't go into too much detail, but I would say kind of July/August were worse than September, and I wouldn't call that a trend yet but we want to see how October and November plays out.

But I think it's very clear that July and early August were particularly difficult for us.

I'm not sure I completely understood your question on Europe.

I'll ask Simon, did you understand?

No, I was going to ask him to repeat it.

Graham, you're going to have to bear with us and just repeat that, if you wouldn't mind.

(Operator Instructions)

Okay, I say Graham, if you want to ask again, come back on and we'll come back.

And I'm sorry, I just couldn't quite follow the thread of the question.

If we could move onto the next question then, please?

From the line of Tim Anderson from Sanford Bernstein.

Please go ahead.

Thank you.

If I can just go back to China, and really how this might influence other markets outside of China, whether that's in emerging markets or developed markets.

In your press release you say you've notified the US Department of Justice and the UK's Fraud Office of the China situation, and I'm wondering why you would feel compelled to do that.

Second question is on generic Advair in the US and the IP landscape specifically, which has never been 100% clear to me because it entails both the drug and a device, and I know you guys talk about the last device patents expiring in mid-2016, but is it in the realm of possibilities that you'll be able to exercise some sort of additional IP that could end up delaying generics beyond that?

I would imagine you'd be pulling all available levers here.

Tim, thanks very much for the question.

I mean as far as communicating with various regulators, that's kind of a routine thing.

We signal that even at Q2, I think, and nothing particularly unusual, but absolutely the appropriate things to do in these sorts of situations.

As far as generic Advair is concerned, I've always believed there's much more to the genericization of products like Advair than simply the IP environment, and there's really in my view three discrete things that have to all happen.

One is, obviously, a clear runway from an IP perspective, and as you well know, and you allude to, we retain, particularly for the discus device, IP protection in the US through into 2016.

So there's an issue around can people -- is there a clear runway on IP.

Secondly, are there clear guidelines about how to register such a product.

And thirdly, even if you have one and two, can you actually manufacture the product to the specs which have been agreed within the regulatory process.

And what we've seen with a repeated number of punitive generic competitors that one or other of those hurdles have proved insurmountable for them, and then it's not always the same hurdle.

Now over time, obviously the IP hurdles start to diminish by definition, but those other hurdles still remain.

And again, even with things like draft guidance, and emphasize the word draft so it presumably still has a potential to change from FDA, there remains the challenge of whether or not people can manufacture.

And I think even if you talk to companies like AstraZeneca and you talk to companies like us, there have been times in our history whereas the originator of the products, we've had delays in product launches as we've made sure manufacture is absolutely where we needed it to be.

So we know those issues are real, and I think the composite of all of that continues to tell me that this is going to take a while for anybody to get through.

Certainly everything we're hearing from the latest front runners in the generic debate is that even they think that this is multiple years away, and whether or not they can ultimately get to a substitutable generic is, in itself, a further hurdle of uncertainty.

Now, from where we sit, I'll be honest with you, Tim, our focus is moving on from the debate around will there or won't there be a generic of Advair and is much more focused on the new portfolio of respiratory.

So you think about where we are today versus a year ago.

We have Breo approved, shipped, in launch phase in the US.

We have it approved in Japan for asthma.

And we have it recommended for approval in Europe for COPD and asthma.

The entire world, major mark is essentially ready to go on Breo.

We have Anoro now at its very final stage with the help of a positive recommendation from Adcom for the US.

We filed in the last few months our umec LAMA monotherapy, we filed today our monotherapy steroid.

We're progressing very well with our Phase III program for mepolizumab in severe asthma, We're going to be progressing that molecule into different disease indications you'll see shortly.

And we're, it's no secret that we're chasing down the triple combination opportunity as well.

And it's really that portfolio which is going to be the future of the respiratory business.

I fully anticipate Advair is going to be a very substantial part of our future for a very substantial number of years, just as Ventolin is 40 years after we launched it and 20 years after we lost the patent.

So I really do feel today very materially more optimistic about what our long-term game plan has always been, which is to remain respiratory market leader and to grow market share over the next several years, and that is all about confidence and delivery of the advanced respiratory pipeline.

Tim, thanks for your question, and next question please?

I think Graham may be back on to clarify his trivial pursuit question.

Graham, go ahead.

Graham you're in the line now, please go ahead.

So it's a question.

In the release you said in the EU you're seeing some contracting benefits in pharma, and then you also saw some wholesaler benefits to your wellness sales in consumer in the EU, both in questions about the EU business.

So I'm just wondering if you could quantify what those benefits were, both on the contracting side for pharma and on the wellness side in consumer EU?

I think on the consumer side, we've seen over the last several quarters the European business delivering at low single digit growth, and that's probably the underlying trend.

We saw stocking in the quarter reflecting that contracting position and some internal restructuring as well, which will unwind in Q4.

I think on the pharma side it's less significant and not something I think that we should break out from an overall improved focus in the business, which is driving the top line performance.

I think in the growth of 5% that we've got, if you want some guidance on that, I think that's kind of running probably a couple of points ahead of the underlying trend in the quarter, but it is only a quarter.

So I think the overall improvement that you're seeing quarter by quarter really reflects the broader set of initiatives where -- that we're putting into the business.

So hopefully that's helpful.

Thanks, Simon and Graham.

Thanks for bearing with us to clarify it.

Next question?

Andrew Baum from Citigroup.

Please go ahead.

Yeah, good afternoon.

Couple of questions.

First, US script trends for Advair and Flovent continue to deteriorate, I think about minus 8% now in volume terms.

How much of that decline of volume of the market share is just due to pricing pressure?

I read the recent (inaudible) review highlighting the 75% increase in pneumonia with Advair versus Symbicort.

How challenging is that for you in the marketplace?

And then following on from that given Breo's greater redundancy in the lung and the [fated] pneumonia signal, how much is that going to be a challenge for you as you try and rollout that product?

And then perhaps you could also comment separately on the Express Scripts' formulary restrictions and how we should be thinking about the impact on the marketplace over the next 12 months?

Thank you.

So what we've seen on Advair over the last several years is gradual slow script volume decline, which bounces up and down according to where the market is.

So the market's slowed down a little bit over the last couple of quarters,.

That's just not that script decline down into the minus 4% or minus 5% territory.

At the same time, what we typically get is shifts in prescription size, which often brings that volume back up again.

And then of course as various price effect, whether that be list price effect or RAR effect, and one of the things that we've been very, very good at over the last several years is to manage very carefully are discount exposure in the US, and particularly in Advair, and that contrasts quite significantly, I think, to some other products in the sector.

Flovent, similarly what you see in products like Flovent are swings, as you see slightly more dynamic contracting.

So in Flovent what we've seen during the year are some shifts where we've seen more exposure into Medicaid businesses, we've seen shifts in and out, interestingly.

So early in the year, we saw some shifts out of some commercial books of business.

We've actually seen some of that decision making go back the other way in the last few weeks in our favor.

And so you are going to see, I think, on these older, more established products in the US, you're going to see a lot of not necessarily quarter-to-quarter volatility, but you're going to see volatility over a 12-month period as the variant swing -- puts and takes of contracting plays through.

and it's one of the reasons why in the release I made the point that it is a more dynamic pricing environment in the US.

There are more companies trying to use discounting in the marketplace, and you have to respond to that, and of course that's what you're seeing a little bit in some of these shifts as you go through.

Now, that makes it very frustrating for you to forecast because you can win a block of business and it makes a big positive difference.

You can lose a block and it can go the other way.

The ESI decision-making, it's really important to understand what's happened here.

So first of all, for Breo, we're actually on or ahead of our expectations for coverage in the US, making great progress in the blocks of business that really matter particularly in Part D blocks of business.

And actually I often say to my team it is the first time we've launched a product in the US where we've actually got coverage before we start, because we normally launch very quickly after the NDA approval.

Because we want to take our time to get everything right this time for Breo, particularly making sure we had enough volume and batches manufactured to go, it gave us a bit of a window to get some coverage in place before we start.

So we're actually launching into an environment which is much more positive than we normally do at this stage, and I've been very pleased with that.

Now ESI, and I think this is a feature of the dynamic of that marketplace, has decided to institute a very high control formulary for a subset of its patient population, not for all of its patients, somewhere between maybe a quarter and a third of its patients may be affected by this.

And of course what they've done is they've looked to all of the major products, including products in other categories like diabetes, where they are looking to try and drive some opportunity for discounts.

Now the question is whether or not those high-control formularies are actually going to drive huge amounts of change in the marketplace or not.

History tells us from other people who have done that is that it takes a long time and doesn't always move the share that's anticipated.

Have to wait and see how that plays out.

Within the overall potential for Advair Breo, though, this remains a small part of the overall number of lives covered, and as I said, we're feeling very confident about the Breo coverage as we stand.

As far as the data you described, I'm guessing that that refers to one of the AstraZeneca-sponsored studies done in Scandinavia, and I think called PATHOS.

If I'm incorrect on that, obviously come back, but I'm guessing your talking about the PATHOS study.

We don't think that's really indicative because first of all it was a retrospective study.

Secondly, it looks at a part of the world where, for obvious historic reasons, where the non-Seretide product in the class dominates the space, and therefore we think there is a kind of, if you will, almost a selection bias which happens in that trial where essentially our product ends up being used by folks who are potentially more severely ill.

And as a result of that, we're not convinced it draws any particularly important or relevant conclusion.

Obviously, Andrew, if you're talking about a different study you should get in touch and we can talk about that more offline.

As far as Breo is concerned, I think from the overall FDA review and all of the data that's been generated, we feel very confident we have a very effective medicine with an appropriate risk benefit described in the label.

As is always the case with GSK, we will make sure that that balance is properly communicated to prescribers.

So all of the sensation we get so far is that the balance of all of the aspects and features of this medicine are something which is very attractive for potential prescribers, and we're thrilled to be in a position to be launching it right now hard on the heals of three other launches in the US, which is already started successfully.

With that, our next question please?

It's from the line of Mark Clark from Deutsche Bank.

Please go ahead.

Yes, good afternoon.

I just wanted to ask a question about China.

The 61% reduction, is there any way you can give us some feel how much of that is due to inventory rundown by sort of scared wholesalers if you like, how much is actually end user demand collapsing?

And I'm also interested in that some products that one would expect to lose share to directly competing products, for example, Advair to Symbicort, I'm sure we could all have guessed that they would lose out, but some of your products are essentially the standard of care, and yet those are also highlighted in the statement as having fallen sharply.

So I wonder if you could just talk us through some of the dynamics, just so we can at least make our own assumptions as to the scale of any rebound.

Thank you.

Thanks, Mark.

I won't go into huge amounts of detail, mostly because I think it's (technical difficulties) time to call a trend here, and I think there is a lot of potential volatility.

As I signaled earlier, it was worse at the beginning of the quarter than at the end, but again, I'm not going to call that as a trend.

It's just a fact.

As far as a couple of things just to be aware of.

You will all be aware that some time ago, a year, maybe 18 months ago, China changed the pharmacopoeia of vaccine, which affected many importing companies including our own.

And what that meant was a number of vaccines were no longer able to be imported because of the pharmacopoeia change.

Has absolutely nothing to do with the events of the last three months.

That alone accounts for about 15% of the decline we've seen in this quarter.

So a chunk of this, although we've characterized appropriately the total decline in China, a chunk of this is clearly really nothing to do with these events.

If you then look into the rest, there is clearly a destocking effect.

Now, the problem we can't tell you really what that truly is, data doesn't exist in the US -- in China in the same way as it exists in the US to be able to call out inventory, but it's clear there has been a destocking effect.

We can only really get to the bottom of what that looks like over the next six to eight weeks, I think, where what we see through September, October, November, maybe even December really will start to give us a proper trend of what's going on.

So very hard to call out beyond those guidelines.

I think it will be misleading for me to get into more specific analysis because it's just as likely to be noise in the system of something real, and it's as frustrating for me as it is for you.

Next question?

From the line of Andy Kocen from Redburn.

Hi there, I've got a couple.

One on SG&A which grew pretty strongly on an underlying basis if you exclude the provision reversal.

So is that down to launch costs, and if it is, how long should we expect this sort of bulge to last for?

And then secondly, on R&D, should we expect another update on your IRR from R&D at the full-year results?

Now we're a couple of years on from the last one.

And also, how do you really feel you've delivered in terms of genuine innovation?

And I apologize for this, it feels childish in light of all of the launches you've got this year, and I'm not saying you haven't delivered, but clearly, the innovative scientific risky products that you've pursued over the last couple of years have tended not to work, and the ones that you're launching now, whilst important have not really been that novel in terms of mechanisms.

So kind of philosophically, how do you feel about your R&D going forward?

Okay, let me take the SG&A question.

I think a little bit in the same vein as the benefits that we've delivered on the medical side.

I wouldn't focus too much on the individual quarter.

If you look at the nine months, you're broadly flat on last year in terms of overall SG&A expense, and that's really being driven by recycling of the savings we're making out of our ongoing programs as well as some of these particular initiatives that we've identified to give us the flexibility to support the pipeline launches without a big bolus or ramp-up in expenditure, as we've talked about a number of times.

So I would kind of step back from the quarter and just look at the underlying trend, which is broadly steady, and that's probably what you should think about going forward.

Thanks, Simon.

So Andy as far as R&D is concerned, yes, we would intend to do an update on the rate of return analysis for the full year.

As far as the -- how innovative or not have we been, I think the reality is, it's a portfolio, isn't it?

We've developed over the last several years what we think is a balanced portfolio.

We all know, and in fact I think Glaxo in the 90s fell into the trap of having a portfolio which was all unprecedented mechanisms, and I remember an era where we had medicines in there for stroke, cognitive function, et cetera, et cetera, and they all failed, and partly created one of the big gaps in the Company's history.

We can all think of other companies, competitors of ours, who have been very, very dominated again by unprecedented mechanisms and have sequential failures, very late stage developments and which then went on to cause great strategic challenge for those companies.

So it's important to have the blend.

Now, what's then critical, I think, is that within the blend everything creates value for the patients and for the payor, and that's where I think you have to really look at the GSK portfolio, and you've got to give it some credit for that.

So yes, Breo isn't a first-in-class product, but it addresses the two or three fundamental needs that we know patients are really striving for in COPD who are using inhale therapy.

They want, basically, a full 24-hour duration of action drug.

They don't feel that that exists in the marketplace and they want it.

They want devices which are easier to use, and that's what we've striven to build into this.

Now, the data which will potentially really define this product will come with things like the summer study, but by definition that can't come before we start.

But the investment we're making there demonstrates the confidence we have in the potential of this drug.

If you look at Anoro, it's a first-in-class.

Now, okay.

It uses two mechanisms which is preexist, but nobody else has been able to put it together at the speed we have and be able to get it at the stage of development it is for the US marketplace.

And I think again, really demonstrates an ability to leverage our skills to create value to hopefully for patients in the US an extraordinary contribution for COPD.

You then say, okay let's look at the rest of the portfolio, the MEK inhibitor is a first-in-class, unprecedented mechanism first-in-class, BRAF is the second into market.

These products must have something to say for them because in the first 12 weeks of marketing we've taken a 50% market share of new prescriptions, so presumably somebody sees some therapeutic value there.

I believe they've got remarkable benefit as individual treatments for melanoma.

If we look at Tivicay and HIV, widely now been regarded, I think, as a very, very substantial breakthrough in terms of quality of asset.

Yes, it's the second into its category, but as we've seen many, many times before, the second or third drug is very, very often superior.

What we've seen is in head-to-head trial after trial after trial, great data coming forward.

So again, very positive.

I think flick down the list of what's coming, and you start to look at things like mepolizumab, looking at that within severe asthma as well as new indications which we are just beginning to move in broad Phase III.

If you look at the P38 map kinase inhibitor for ACS, if you look at the darapladib, if you look at the May 3 program, if you look at our new oral med for malaria, vivax, if you look at our program for threatened preterm labor it talks about Oxytocin-receptor antagonist, if you look at work in amyloidosis, if you look in our (inaudible) map, all through the pipeline you will see drug after drug after drug which is either a very thoughtful substantial clinical enhancement of what preexists, or is going into an unprecedented area.

The bottom line is we have a very, very substantial pipeline, which as a portfolio we believe creates the opportunity for great value creation over the long run, and if you look at the thing that really matters, which is how much of this asset portfolio makes it to the finish line, then you can see that whether you look on a one-year basis where we've had four major NDA approvals, the next best-performing company only has two in 2013.

If you look over the last eight years where we've had 17, and major NDA's approved in the US of which I think 11 are new molecular entities, that's really the track record that we're looking to deliver, and that's why I think we're going to deliver an improvement in our rate of return as we're bringing these projects through to fruition with profiles which can underpin confidence of future sales.

Next question?

Is from the line of Jeff [Holford].

Please go ahead.

Hi, thanks for taking my questions.

Just on relative pricing of Advair and Breo in the US market.

Can you give us anymore color on how you expect to proceed here going forward now that the launch is getting underway?

Do you intend that you keep these on parity pricing with each other, and are there any initiatives like couponing which you'll particularly apply to Breo to help force some switch there?

And them also just related to some of your comments earlier Andrew, now you have a bit more visibility on these disposal gains coming through.

You sound a bit more cautious than usual in terms of increasing the buyback more aggressively, at least through to the end of this year, anyway.

Is that just to do the timing of when the proceeds will be received, or does it reflect any slight shift in sentiment on capital allocation from you as you (technical difficulties) from disposals?

Thank you.

Thanks very much.

I think on the latter, no shift in our mind set vis-a-vis capital allocation, and I've said repeatedly that while again we're not you giving you guidance for next year, you would -- I think you should be surprised if we gave you any guidance different on share buybacks than we've given you for the last two or three years.

We're very, very comfortable with the notion of starting the year saying, look we're going to buyback between GBP1 billion and GBP2 billion.

That sometimes proves quite difficult to do when you have very very busy regulatory years like we have this year, but the intent absolutely is to continue to lean into the buyback at a nice steady pace, not create lots of drama and noise in the buyback space, but a nice steady pace, combined with a commitment to constantly increase the dividend.

That is exactly where [we're done].

You're quite right that proceeds of these disposals won't come until the end of the year, but the reality is no change in terms of our, I think, balanced sustainable commitment to how we use capital, and most importantly reaffirm the signal that we're not in the business of creating reserves of capital to go do some major acquisition.

0We remain very much of the view that we are tilted towards the seller rather than the buyer of assets.

It doesn't mean we'll never buy an asset or invest in a business that maybe we already partially own, but as you've seen over the last 20 months or so, we've been very much a divester rather than an acquirer.

Why?

Because we want to continue to improve the quality of the Company as the pipeline and the pharma vaccine business portfolio strengthens, take out complexity, take out lower margin businesses, take out businesses where we believe that others may be better owners than we are at a time when we have a tremendous amount of opportunity to prosecute in the pharma vaccine space.

So that's really the position that we have on that.

Next question?

Next question is from the line of James Gordon.

Please go ahead, from JP Morgan.

Hello, thanks for taking my questions.

This is James Gordon from JP Morgan.

The first question was just following up on the response about the use of divestment cash.

I was wondering, do you worry about fines, and that might mean that you mean to carry a larger than normal cash buffer?

What's the right level of net debt for GSK, or how much cash do you need to carry?

And one other question was on emerging markets?

And if we exclude China, EMAP pharma vaccines grew 2% this quarter, but what's a realistic run rate for Q4 and for next year if we exclude China?

And then just a final question, which was it's about year after the HGSI acquisition.

Benlysta growth was good for the US, but not doing much outside the US.

So my question there would be, how should we see this acquisition, and do you think Benlysta is going to accelerate a lot now?

Is it going to become a very material product for GSK?

And I suppose the other part of the HGSI acquisition, or one other part, would be the not having to pay royalties to HGSI for albiglutide.

hat are the plans there in terms of, is that something you see you are going to sell yourself or partner with someone?

Okay James, we'll try and cover all of that.

So as far as fines, what's important and the number you should be looking at is what legal provisions we take.

Our obligation, quite rightly, is to make sure that we've provided in our accounts for what we believe to be the most likely outcome of liabilities for the Company, whether they be legal or any other liability, and we review that regularly every quarter and we make adjustments up and down according to that.

So that signals to you what our composite view is of our legal liabilities.

And I think if this quarter we're holding a legal provision of about GBP750 million, something like that, and within that, that covers a whole raft of things.

I would say that that is at the low end of where its been for the last several years because we resolved a huge amount of litigation over the last few years.

We can't give you any guidance on EMAP growth rates because that would be guidance.

So we will wait and do that in February, and we'll decide what we share with you at that point.

But it's fair to say that EMAP remains -- growth rates remains slightly volatile quarter to quarter, mostly because of vaccine, and there's no question, just as we've seen in the last several years, that you should anticipate Q4 being a substantial vaccine quarter for EMAP because that's just the way the customers choose to order the product.

As far as HGS is concerned, actually, Benlysta has had a slow start ex-US, but it is beginning to build it quite nice momentum, particularly in Europe.

Interestingly enough, we've soon a very similar phenomenon with Prolia, the drug we partner with Amgen, very slow to start, very prolonged period of market access negotiations, but gradually beginning to get in place and actually beginning to see some quite nice movement.

So I think we will now start to see, particularly through 2014 and 2015 Benlysta start to move up in Europe.

I've been very pleased with the continued progression, as you highlight, in the US.

I think it's also worth remembering we bought HGS for a whole variety of reasons, one of which was raxi, the monoclonal they have for anthrax, which is, we announced earlier in the year we secured a whole series of quite important business opportunities in terms of stockpiling.

We've achieved all of our synergy goals, and of course we've taken full control, not just of Benlysta but of the darapladib, and of course albiglutide.

We continue to explore opportunities for partnership with albiglutide, which maybe different region to region.

And we'll update you when and if that's appropriate, but albiglutide is obviously the sixth of our six key assets that we profiled.

We're expecting a regulatory decision towards the end of Q1 of next year.

So it gives us a little bit of time to finalize exactly what we're going to do there.

I have to say, given all of the data we've seen through the eight studies, I think our potential positioning for this drug looks very, very compelling and I think it's a product that we are increasingly motivated and excited about.

Next question?

Is from the line of Keyur Parekh from Goldman Sachs.

Please go ahead.

Good afternoon.

Thank you for taking my questions.

I have three, if I may.

First Andrew, just I notice that you're not talking about pricing pressure in India in addition to what you're facing in China.

Can you just help us think about the possibility for further pricing pressures across the rest of the emerging markets?

Secondly for Simon, as you look at the ongoing benefits from this, for the cost reduction and substantial benefit you're getting this quarter, how should we think about the ongoing benefits on the service cost?

And then thirdly Andrew, as you launch kind of the respiratory products, what is going to be your marketing message?

Are you looking to switch patients from Advair to Breo, or should we think of this more as an opportunity for new patient starts?

Thank you.

Thanks very much.

So as far as India is concerned, as you know there's been a new price control regulation brought into India.

That's affected a whole raft of companies.

Of course, as one of the biggest companies with very big products, we've been affected by that.

I think that's going to take, obviously the next couple, three quarters to really wash through the system, and you're going to see some adverse quarter-on-quarter comparisons as those price cuts come through.

It's also worth remembering that some of the products which were in the old price control system will now be able to have price increases, not immediately but in the future.

So that again GSK had a lot of products in the old system, so there's puts and takes there.

And the key to India is really the key to the whole price question for emerging markets, is understanding what the volume elasticity of demand is.

So the reality of course is that India in particular, every product we sell, almost every product, has multiple generic copies out there, very often sold at lower prices than our own.

So I think it's highly likely that as we see prices cut, we're very likely to see volume go up, because if you had the choice between the generic and the lead brands, in a market like India I think we're going to see increased volume demands for the product.

So I think what you will continue to see is governments intervene periodically on pricing.

I don't think that's unexpected or surprising.

I continue to believe that the underlying demographic momentum of most of these countries means that over a period of two or three years very often the volume compensates for that price effect.

You just have to realize that over a period of a decade, you're going to have two or three rounds of price interventions at different points.

Simon, if you want to answer, and then I'll come back to the respiratory question?

I think in terms of the ongoing benefits, as well as the particular benefit we reported this quarter, I think if you assume a few tens of millions you're probably in the right sort of territory, but remember each of these reduces similar kinds of savings so they build up over time.

And the other important thing to remember is it also addresses significant balance sheet liabilities which require cash funding over time as you agree to valuations of those.

and so it's reducing the volatility of those requirements and leaving us cash free to invest elsewhere or return to shareholders.

So there's a number of benefits from these programs.

I'd just like to add to this and complement Simon actually, because right from when I first announced Simon's appointment and people asked me why we'd hired Simon, I explained that I wanted him to focus on a number of things in the business, but also to really address A, our tax strategy; B, our interest rate exposures; and C, our long-term financial exposures, and at the time I talked about pension.

And Simon's done a fantastic job over the last two or three years on all three of those dimensions.

And on this latter piece of these significant, long-term costs which frankly many companies have not tackled, this Company hadn't tackled for a long time, what you're seeing is a program year after year now of taking on these big areas of day-to-day P&L costs, but also significant balance sheet liabilities which needed to be addressed.

And we planned last year to do the UK pension environments, it's a very difficult thing to do.

We did that, we've planned this year to do US healthcare for folks who are still in employment but are going to retire in the future.

We have other things that we've planned for next year.

And it seems to me completely right that we should be putting in place a very sustained program, not just to tackle the things we can turn on or off in a quarter, but to really fundamentally get a grip of the shape of some of those cost areas which actually aren't talked about very often on these calls, but actually represent enormous expense for the Company, and in some cases can create almost unlimited liabilities in the long run.

And I just want to thank and congratulate Simon for extraordinary leadership in delivering this, and that's one of the reasons why just like in two quarters last year we have another quarter this year where unfortunately we have this slightly lumpily-phased benefit, but it's real value, and it's part of a long term multi-year program.

And I would guide you to expect more of these sorts of things over the next few years.

As far as the question you asked about respiratory, I'm not going to go into the detail of how we're going to compete with Breo.

It's a very competitive marketplace, obviously.

But it's fair to say that the benefits we believe that Breo brings will be interesting, not just to patients who on Advair but to new patients coming into the marketplace and people who are on other competitive products.

This is the first once-a-day product, and it's a 24-hour duration-of-action medicine.

We know that that's something that many patients are interested, many physicians are interested in.

When you combine that with the very easy to use device, we believe that we've got here something which will be very attractive to physicians and to patients, and we'll see over the next, I guess next 6, 9, 12 months we'll see what the reaction is in the marketplace.

But it's a very exciting time at GSK to have hard on the heals of two new cancer drugs, the HIV drug, now respiratory drug all launching in the US marketplace.

We have time for one last question.

It's from the line of Luisa Hector from Credit Suisse.

Please go ahead.

Actually it's Kerry Holford of Credit Suisse.

Three questions please, if I can.

You just hinted that.

Andrew, about sort of the restructuring plans for 2014.

I wonder if you can give us any more detail on what they could be?

Could they be as sizeable as those as we've seen this quarter?

And then really a conceptual question as to whether they should be treated as core within the core earnings going forward?

We also touched on earlier about the destocking, particularly in respiratory in the US.

Do you think that (inaudible) to reverse in the fourth quarter, or is it something that is unlikely to change going forward?

Do you think your US wholesalers are now just happier to run with lower inventory levels for many of these respiratory drugs going forward?

And then lastly, can you concern whether you've recruited more sales reps ahead of the US Breo launch, and do you plan to recruit more ahead of Anoro launch early next year?

Many thanks.

Thanks, Kerry.

So just on a couple of those points.

I'm not going to -- so first of all, let's not -- we're not so much restructuring, as for these -- it's a restructuring of our way we treat things like benefits.

So there's no big costs associated.

I don't want people to confuse that there are big costs associated with these changes in the way we would normally talk about restructuring.

These are -- I prefer the word reshaping the long term cost profile of the business.

We have a plan for more of these things next year.

I'm not going to tell you what they are just yet, for some obvious reasons I think.

This year's benefit is somewhat lower than next year's.

We'll potentially give you some sense of that next year.

Simon, you might want to add to that, and also why don't you make a comment on the core earnings piece, and then we'll come also back to the others.

I think as Andrew highlighted, they're not restructuring in terms of charges and savings from fixed costs as the OE program or our major change program would be.

This is about changing the nature of benefits we're providing in the future, and the savings arise therefore from the accrued savings that you make over time.

And those are two of the core P&L.

Those charges otherwise would flow through the core P&L.

So we only think it's appropriate that the savings should flow through the core P&L, and that's how we thought about it last year.

This is very much more of the same.

What we plan for the future will be treated in the same way as well.

Thanks, Simon.

So just on the last couple of points.

So the destocking we've seen has been pretty sustained over the last 12, 14 months, and not clear to me whether it will restock in the fourth quarter or not.

I think it's possible.

We've often seen restock trends in the fourth quarter, but occasionally, for example last year we didn't.

So we just have to wait and see what plays through on that front.

What has been interesting, I think, over the last six or nine months is we've seen destocking both at wholesaler and retail level.

We've seen a lot of these companies talk about cash management.

So it wouldn't surprise me if this was a bit more permanent than temporary, but again, we just have to wait and see what comes from that.

As far as our sales force is, if your real question is should you expect a big jump up in SG&A because we'll hire a lot more people, the answer is no.

We feel like we have the right overall scale of operations to deal with the products we're launching at the moment, including Anoro if we're able to get approval at the end of the year.

I would say we have reconfigured, as you would expect, our deployment of resources in the US as we move from the older portfolio to the new portfolio.

So I'm not going to quantify that, but I can tell you there's substantially more people involved in our respiratory business now than there was a year ago.

More importantly, we've reconfigured over the last four years our entire US operations to be much more, we believe, aligned with where the modern customer dynamic is really going in the US.

And we believe that combined with our innovative incentive system puts us qualitatively in a different place than many of our competitors in the US.

I think the launches which are underway, the success we've had with MEK and BRAF, the initial progress that we're seeing, although very early days in HIV with Tivicay, and we'll see with Breo, but so far so good in terms of really, really testing whether or not our new approach to the US marketplace is going to work.

Very, very encouraged by the early signals.

I'm incredibly excited that we've got the first one today, neural bronchodilator combination so far ahead.

Maybe there will be never be another once-a-day product as far as I can see from other companies in the US.

And right hard on the heals of that we have the potential to get Anoro.

So the opportunity to completely step forward in the US is there, and I'm excited to see the early results we've got coming in.

We'll see how it plays out.

It's very early days, we aren't taking anything for granted, but I can tell you we are totally focused on making the most of these opportunities.

With that, I'm going to thank everybody for their attention on this call, and if you of course have individual questions, the IR team at GSK is at your disposal.

Thank you.

Ladies and gentlemen, that concludes your call for today.

Thank you for joining.

You may now disconnect.