葛蘭素史克 (GSK) 2014 Q1 法說會逐字稿

Thank you very much and welcome to our Q1 call.

I am joined today with Simon Dingemans, who I will hand over to in a couple of minutes, to take you through some of the detail of the quarter.

I thought before doing that, though, it was worthwhile, and actually I think the quarter is quite good exemplar to just remind you and review where the strategic shape of the group is, particularly in the light of the three-way transaction that we announced last week with Novartis.

Clearly, we are focused on successfully launching and establishing further growth opportunity in our respiratory portfolio; secondly, development of our vaccine business -- in particular, of course, helped with the proposed transaction with Novartis; then of course developing a premier CX business, consumer business, between ourselves and Novartis.

All of that really built on the foundations of very strong industry-leading R&D capability and global footprint.

I think the first quarter is a key quarter in terms of signaling the kind of transition that is under way for the business.

Of course there are, as always, other issues like price competition and the like in the environment.

But what's really going on in this quarter is the beginnings of the full roll-outs of our new product portfolio, including of course in respiratory, and also the transmission, if you will, of business from the older portfolio to the new.

As we've said many times before, it's very difficult to synchronize that transmission perfectly quarter to quarter.

But our goal is to make sure that gets done over the next several years.

Our strategy is very clear.

I think the transaction last week really emphasizes where we are focusing our attention for the future.

Key to all of this is new products.

Actually, I think we are seeing good performance from new products in Q1.

If we look across and start in respiratory, obviously Breo has started a bit slower than we would have liked, entirely in our view due to the pace at which we were able to build insurance coverage in the US, partly because of missing the insurance window, if you will, for contract negotiation last year, due to just the timing of the launch, but partly no doubt because of the tighter pricing environment dynamic that we are seeing.

With the launch of Breo, though, it's given us obviously the opportunity to get in and start to negotiate those contracts.

I'm delighted that, as of today, we now have 70% coverage in Medicare Part D for Breo.

That compares to only 3% on January 1, very substantial improvement.

I'm also delighted to see the continued pick-up in the prescribing performance of the product.

Again, it is a slower start than we would have liked, but actually the underlying trends look good, and the leading indicators look very promising for Breo.

We remain very optimistic about its potential.

Of course in the same quarter, Advair had a step-down in market share, again really driven by that pricing dynamic, with de-listing at the ESI high control contract had an effect.

But what you can see in all of the market share data is that effect is really a one-off step.

We've seen good stabilization of share over the last several weeks.

Of course, we have also seen some weeks where it's just ticked up a little bit, as well, more recently.

Obviously a change in dynamic for Advair, but as the product becomes more mature, inevitable that it's going to attract more competitive pressure.

The good news is we've now got the newer products in the market ready to pick up the strain.

The challenge, of course, is the pace at which the new products start and the older product matures.

Anoro was launched last week.

Anecdotal feedback is extremely good, very promising.

I'm also delighted that we have already been able to secure the first of our Medicare Part D contracts.

That clearly is very significant contrast to the Breo situation.

I think reflects a more convenient timing for launch in terms of the calendar of contract negotiations; and also, of course, reflects the fact that Anoro is a first-in-class new product into the US.

So off to a good start there.

I think the US, we look with optimism towards our respiratory future.

Given all of the pricing dynamics in the US market place, I'm delighted we've got those new products to help us to ensure that we can sustain strong returns despite the tougher pricing situation that we see.

Elsewhere, we have also seen the approval for Incruse, our third respiratory product, now in Europe and Canada.

Of course we continue full speed ahead with the next six of our respiratory products in the pipeline, including mepolizumab, which you've seen good data on in the two Phase III studies in the first quarter for severe asthma.

We've just announced that we have put that molecule into Phase III for COPD, as well.

Respiratory pipeline continuing to deliver, launch is under way, leading indicators look encouraging, transmission of business from essentially relying on Advair to the others happening.

Elsewhere in the new products, we're seeing very good performance.

Tivicay in the V business unit performing extremely well, and now looks to be the most successful HIV product launch in that category for the last five or six years.

In oncology, we continue see very strong performance from MEK/BRAF, very good market share achievement.

Votrient also.

Flu QIV, which also was launched last year, we're seeing a very good early order book for this year, so we're optimistic for future growth from that.

Further back in the R&D organization, around 40 new molecular entities in advanced development.

We continue to see those progressions well.

We would expect to describe that in more detail to you as we move through the balance of the year.

We've been delighted to see the continuation of major approvals in the first quarter, including obviously Tanzeum in both Europe and America, and Incruse, as I've said already, in Europe and Canada.

The transaction we announced last week with Novartis, three-way deal, really is designed to surgically enhance two key parts of our business, the vaccine and the consumer business, and also sort and found the right owners for our nascent oncology business, releasing significant value for our shareholders.

We believe that's the right approach to take to further strengthen the vaccine and consumer part of the organization, without disturbing our R&D business, which clearly is a big driver of future value for the Company.

EPS guidance remains unchanged at 4% to 8% for the year.

We expect to grow sales, a little less clear exactly the rate of sales growth, given some of the dynamics that we're seeing open up during the year, particularly the early approval of Lovaza, combined with some of the price pressure we're seeing in the US.

Nonetheless, we feel confident to deliver sales growth and very confident to deliver an EPS within the range of 4% to 8%.

This quarter is an interesting quarter, in a sense, because, for many people on the outside of the Company, there is great focus on the apparent reliance of GSK on Advair.

This quarter, clearly Advair had a difficult quarter, significant reduction in sales in the US.

Yet the group delivered 2% EPS growth.

I think that really emphasizes the strength of the diversity of the organization, and really exemplifies the value of the strategy that we've been deploying.

Finally, I'm delighted to also be able to confirm that the dividend will be at 19 pence a share, which is up 6%.

With that, I'm going to hand over to Simon to take you through in a bit more detail.

Thank you, Andrew.

This quarter we've seen continued momentum across many of our key growth businesses, including in emerging markets, Europe, Japan, ViiV and vaccines.

These helped to partly mitigate the impact of increasing competition in the US, particularly for Advair, and supply disruptions to our consumer business in the US and Europe.

The quarter was also impacted by a number of items we've previously flagged, including the phasing of vaccine tenders, and stocking patterns by wholesalers and retailers.

But despite these pressures, the benefits of the reshaping of the group over the last few years are clearly evident in the breadth of positive contributions to growth that we are now delivering across the business.

New products are making an increasing contribution, while that is still relatively early days in the launch cycle for the eight key new products we have had approved since the beginning of 2013.

The more specialist launches in HIV and oncology have made the most progress to date, Veev on the back of ongoing success of Tivica in the US growing 4%, and our MEK and BRAF oncology products also continuing to gain share.

The broader respiratory launches are now also under way, although coverage for Breo is taking longer than originally anticipated to negotiate.

Despite this, as of May 1, coverage levels for Breo will be over 70% of Medicare Part D lives.

Anoro started shipping during April, which should contribute to improved momentum from the new respiratory products during the balance of the year, although we continue to expect it will take time to build this new portfolio to its full potential, and that progress will be more visible in the top line in the second half of the year.

The quarter also delivered further progress in our continuing restructuring and cost-reduction programs, with benefits at both the cost of goods level and in operating expenses that held operating profit flat in constant currency, on an overall sales decline of 2%.

Together with further financial efficiencies, these initiatives resulted in EPS growth of 2% in constant currency, very much in line with the objectives of our financial architecture, to drive EPS growth ahead of sales through operating leverage and financial efficiency.

This despite the top-line challenges we experienced in the quarter.

Over the full year, we continue to expect that the substantial majority of the benefits of our restructuring programs and other cost-control measures will be reinvested behind the new launches, leaving financial efficiencies as the larger contributor to the EPS leverage we expect in the short term.

We continue to expect to grow full-year core EPS between 4% and 8% in constant-currency terms, and on an ex-divestment basis.

We also continue to expect to grow sales on the same basis, but the ultimate level of growth in 2014 will depend on a number of factors that have introduced a particular degree of uncertainty in this year of transition for our portfolio, including the pace of roll-out of our new products, the level of generic competition to older products including Lovaza, which saw a generic approved in April, and the timing of re-supply to our consumer business would also be a factor.

Despite these uncertainties, our financial architecture is maintaining our focus on returns, and continuing to convert a high proportion of our earnings to cash to fund returns to shareholders.

As usual, the focus of my commentary on the quarter is on CR growth rates and core results.

But before we get into the detail, I should highlight that the sustained strength of Sterling against almost every currency, and some very meaningful devaluations in the emerging markets, has clearly had a more significant impact than usual on our reported results.

The impact on the quarter was compounded by the swing in exchange gains and losses between this year and last.

You'll remember last year in Q1 we had a GBP82 million settlement gain.

This year we have a GBP20 million loss.

This element alone impacted reported earnings per share by around 6%, and was a significant contributor to the greater impact of currency on earnings relative to the impact on sales in the quarter.

The alignment of costs relative to the geography of sales drives much of the rest of the difference.

Turning to the detail of the quarter, overall group sales were down 2%.

As I've mentioned, this mainly reflects the impact of lower sales in our US business, and the impact on our consumer business that offset growth contributions from many other parts of the group.

US pharma and vaccines were down 10% in the quarter, 7 percentage points of this related to de-stocking by wholesalers and retailers.

The balance of the reduction reflects a generally more competitive environment, but also more specifically, increased price and contracting competition the ICS LABA market, which particularly impacted Advair.

Advair saw a step-down in market share in the quarter, with underlying volume down 13%, as a number of contract terminations, most notably ESI's pulmonary control program, were implemented at the start of the year.

Market share trends have since reverted to more normal patterns, although price pressure remained significant, with price and mix impacting Advair sales in the quarter by 7%.

We expect price to remain an issue for Advair going forward, as we continue to evolve our own contracting strategy, but also as we invest behind our new launches and drive access for our new portfolio.

Remember, we are following our strategy of building a portfolio here to maintain our leadership in respiratory medicine, and grow the sales in aggregate.

I encourage you as we move forward to focus on our overall total respiratory sales, because we do expect some give and take between individual products as we further build and strengthen our respiratory portfolio, especially on a quarter-to-quarter basis.

Moving to Europe, pharmaceutical and vaccine sales were up 3%, which continues to reflect the benefits from the restructuring and re-focusing of the business on the priority products with growth potential.

Growth from these areas, including oncology, vaccines, and Duodart, more than offset a 3% reduction in Seretide, which itself benefited from stronger focus, holding the impact to price to minus 2%, with volume only slightly down at minus 1%, despite further new competitor launches into this category from a number of competitors.

Looking at the emerging markets, total sales of our pharma and vaccines business grew 2%.

This reflected the balance of pharmaceuticals up 7% and vaccines down 8%.

Excluding China, as well, which continued to act as a drag on the business, the overall growth for the emerging market business was 4%.

China was down 20% in the quarter, showing continued stabilization.

This growth was delivered by further progress in respiratory, up 7% excluding China; oncology up 35%; and Avodart up 30%.

These offset lower sales of vaccines, which were driven primarily by the phasing of tender shipments, particularly Simplirix.

Japan had a particularly strong quarter, helped by a government order for Relenza, but also strong performances from Aduair and Avodart.

These products both benefited from wholesaler stocking patterns ahead of a local tax increase.

We'll likely see some de-stocking in Q2, but the underlying trend is encouraging.

Other respiratory products in Japan were down due to a weaker allergy season compared with last year.

Turning to consumer, the business was flat in Q1 in reported terms, compared with market growth of 2%, impacted in both the US and Europe by temporary supply disruptions, mainly on smoking-cessation products and Alli.

We're working hard to resolve the situation, and expect to re-stock supply during the second half of the year.

In the quarter, supply issues cost the business about 5 percentage points of growth.

Elsewhere, the consumer business continued to show strong momentum with the business's largest key brand, Sensodyne and Holex, delivering continued strong performances, with growth of 13% and 14%, respectively.

The rest-of-world markets also showed good progress, broadly up 6% in the quarter.

Looking at our costs, the operating margin excluding currency-impact improvement, 0.7 percentage points.

This reflected the benefits of our ongoing restructuring activities and cost control, which in total delivered around GBP100 million of incremental savings versus Q1 last year across each of the major cost lines; but also an improved manufacturing performance, particularly delivering lower write-offs, as well as further reductions in R&D spend, as a number of ongoing trials came to an end.

Together these benefits helped offset the impact to the decline in sales to deliver flat operating profit, despite the impact of reduced royalties, which was GBP70 million this quarter versus GBP113 in Q1 last year.

You will recall that we've guided that royalties will be lower, given the catch-up that took place in Q1 last year.

We delivered further financial efficiencies in the bottom half of the P&L, with interest down relative to Q1 last year, reflecting the improved funding of the group, and our income tax came in at 22%, both in line with our expectations.

Turning to cash flow, the business continues to convert a high proportion of earnings to cash.

In Q1, adjusted net cash in-flow from operations was approximately GBP1 billion, and free cash flow proximally GBP0.5 billion, each down around GBP400 million on Q1 2013, reflecting mainly the impact on reported profit of currency movements, but also the divestments we made during 2013, which remember helped us to generate GBP2.5 billion of proceeds in the latter part of the year.

Working capital days at the end of March were 205, reflecting the regular cycle of stock build we make during the first quarter of each year, particularly in vaccines and consumer.

Excluding the impact to disposals, working capital days are up about eight over Q1 last year, which is mainly driven by currency impacts on the calculation.

Net debt in the quarter is GBD13.7 billion, increasing mainly due to the GBP700 million, approximately, that we spent on increasing our share holding in our Indian pharmaceutical company.

Lastly looking at returns to shareholders, as you know, our commitment is to use free cash flow to support increasing dividends, undertake share repurchases, or where returns are more attractive, re-invest in the business, including through bolt-on acquisitions.

We announced a 6% increase in the dividend for the quarter, reflecting our confidence in the momentum across the business, and are continuing to target share repurchases during the year of between GBP1 billion and GBP2 billion.

As usual though, where we finally end up on buy-backs will depend on how cash flow develops during the year, including the impact from currencies; but also where we think the best returns lie, given the attractive investment opportunities we see behind our ongoing restructuring programs, and our growing number of new product launches.

With that, I will turn it back to Andrew for your questions.

Thanks very much, Simon.

Now I would like to open up the call.

If the operator could perhaps read out the instructions, then we will start the Q&A session.

Thank you.

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

(Operator Instructions)

Our first question is from the line of James Gordon from JPMorgan.

Please go ahead.

Hello.

Thanks for taking my questions.

James Gordon from JPMorgan.

One question I had was about Darapladib.

When I looked at the press release, I can see that the primary end point for the solid study has changed, so it's just correlating events rather than an overall MACE end point.

On that, particularly if that's been discussed with the regulator, if you did have positive results on that amended study end point, and they were in a similar level of efficacy as we saw in the stability study, would that potentially be enough for approval, do you think?

Or do you think you would still need another Phase III study?

Also, one question on respiratory, which was for Breo.

For the prescriptions you've seen so far, where are patients predominantly coming from?

Are they coming from Advair or Simbigor?

Are they new LABA ICS patients?

Thanks very much, James.

On the second question, they're coming from a variety of sources, but certainly a healthy mix coming from new starts to ICS LABA.

As far as Darapladib's concerned, you're quite right.

We have a different end point.

Obviously, that's informed by what we saw in the first study.

You'll have seen from the first study that if you -- that the effect in stroke essentially was the outlying effect compared to the other elements of the MACE calculation.

Of course, we've informed the regulators on that issue.

In the event that this second study were positive on that end point, it would clearly be a conversation to have with the regulator.

But you would essentially then have two very large studies, one least of which would be highly supportive to the second, although recognizing that they had originally pre-defined different end points.

I think it is a scenario where you could see your way through, but it all depends on the results, and we have not too long to wait.

Next question?

Thank you.

The next question is from the line of Andrew Baum from Citi.

Please go ahead.

On Darapladib, what is the statistical penalty you are going to have to pay for changing the end point, given there's already been, I think, a couple of interim analysis?

Second on Anoro, I think we're just waiting for approval in Europe.

I know (inaudible) has been approved.

I just wondered if you would give us an update on the approval for Anoro, what's holding up?

Finally on the consumer, firstly is the smoking-cessation product damaged by the e-cigarette?

Is there anything to do with the weakness, or does it go to the phase in (inaudible) -- supply issues, rather?

Secondly, perhaps you would like to give some sense of where you think you can take consumer margins over the long term, given their -- or this quarter, at least -- around the 15% level?

Okay, thanks very much, Andrew.

Nothing more to add on Darapladib.

We're not going to give any further details on that.

Sorry to frustrate you.

Anoro, we've got the positive opinion in Europe.

We're obviously just waiting for the time to go through and the process to happen.

Again, no drama there.

Consumer, it's basically a temporary supply disruption.

Again, nothing particularly to report.

There's no doubt that the e-cigarettes have some effect in this market place.

But I wouldn't say that that has so far been dramatic.

In terms of margin, in the context of the conversations we had last week following the announcement with Novartis, clearly as we, if everything's approved and we bring those two businesses together, we've historically trended at the sort of upper teens.

They were very much at the upper teens before they had the Nebraska issue.

They're clearly planning to rebuild.

My expectation is that over time we can build towards upper teens, and that would be our initial kind of goal.

We will see how we can go from there.

I think that's entirely reasonable.

Obviously, a little bit hurt in the first quarter because of the supply issues on the smoking products.

Actually, remember the first-quarter consumer was growing on underlying rate of 5%.

Clearly by losing some of that supply, that's affected the margin a little bit.

Nothing super dramatic there.

Certainly we've got a goal to be in the upper teens pretty quickly once we combine the businesses.

Next question.

Thank you.

Our next question is from the line of Graham Parry from Bank of America Merrill Lynch.

Please go ahead.

Firstly on guidance, I think you said on the full-year call that you would need Livarta for a good part of the year to reach the upper end of the guidance.

Clearly that hasn't happened.

Avair's looking a bit weaker.

What is the offset you see to retain that upper end of the guidance?

What is your level of confidence of being able to get towards the upper end of this as the lower end?

Secondly, the price swung very negatively on Advair in the quarter.

That's historically been obviously a positive.

Can you quantify whether we should be expecting a similar sort of level of negative price impact on subsequent quarters throughout the year, and clarify comments on your portfolio approach in respiratory?

Are you looking to offer bigger rebates on Advair for volume with a higher Breo price, or vice versa?

Thirdly, R&D, very low quarter on quarter.

You talked about some of the R&D trials falling off.

You've also talked historically about upward pressure there, though, as well, as new trials start.

Can you help us thinking about phasing on that line through the rest of the year?

Finally on COPD and mepolizumab, could you talk us through how you see the market opportunity there?

We understand it's about 30% of the COPD population in (inaudible).

Is that the kind of proportion of the market you're thinking about potentially targeting here?

Thank you.

Okay, thanks very much Graham.

We'll try and cover off as much of that as we can.

I'm going to let Simon talk to guidance in a second.

As far as US is concerned -- what's happening, I think, with Advair pricing is there is clearly more price competition in the market place.

We have historically been among, I would say, the most disciplined around discounts.

We've had a pretty low level of rebate running on Advair.

As we have moved to increase that, to respond to some of the competitive pressures, that does have an initial impact in the way in which the broader discount rate gets calculated.

That's a kind of an initial cost of the new phase, I would say.

You are going to see a pressure on price continue during the year.

Obviously the price came down at the beginning of 2014.

It's down for the whole of the year, most likely.

You are going to see that flow through, at least partly through the rest of the year.

As far as the contracting strategy for Anoro, Advair, and Breo, we're obviously not getting into the detail of that.

But what is very encouraging is that while we have had to absorb some price pressure on Advair, simultaneously we have now achieved -- really, we have gone from being very uncovered on Breo to really exceptionally covered -- 70% coverage in the Part D book after seven, eight months on the market is an extraordinary achievement.

Even the most established products don't get much beyond 90%.

I think we're in a very -- I think actually that's worked very well.

As I said, the Anoro coverage has already started to happen very quickly and effectively.

I am feeling pretty good about that.

It is a shame that we have to obviously go through the trade, if I can put it that way, between the business which had Advair and the business which moves to the new product.

But that is inevitable as Advair matures.

As we start to see now the new products move, I think we will see quite a promising picture play out there.

R&D, obviously we're benefiting from some big oncology, and [DARA] trials coming to an end.

We've previously talked about upward pressure on that, basically driven by whether we were going to start a much bigger set of trials around the MACE 3 programs.

Obviously that's not going to happen in the short run until we've got to the bottom of what's really going on in the trials, which one is finished, and the other one which runs through.

That's taking some of the short-term pressure off there.

Secondly, Darapladib again, we have to wait and see what happens in the study when it reports in the next few weeks what the future is there.

Nothing at the moment which gives you strong upward pressure, and those potential upward pressures have probably retreated a bit, verses come forward.

COPD, mepolizumab, about 30% of the patients would have a high (inaudible) count.

Not everyone would qualify.

Obviously it's about patient selection.

Remember for the asthma, severe asthma indication, given the nature of mepolizumab compared to Xolair, we would expect a significantly larger number of patients to be potentially candidates for mepo compared to the Xolair market.

I think this is also a quite interesting way to think about the market opportunity.

On that, I'll ask Simon to comment on guidance.

Thanks, Graham.

As you pointed out, when we talked about guidance originally there were a number of moving parts at the top line.

I think you'll see from the statement today that remains the case.

Where we end up, particularly in relation to the existing US respiratory portfolio versus the new portfolio and the pace of launches will be a driver.

Ultimate top-line performance will be a significant factor in where we end up on the bottom-line range.

But then you also can see in the quarter how much more flexibility we are building into the Company's cost base, which shows through in the leverage in the first quarter.

That will become an increasingly larger part of the drive and delivery against the range at the end of the year.

With that, a little bit more operating leverage versus financial efficiency.

We'll have to see how that plays out during the course of the year and what the right investment decisions are, recognizing the number of launches we've got ongoing through the business.

But that's really how the mix is going to deliver ultimately between 4% and 8%.

Thank, Simon.

Next question.

Tim Anderson, Sanford Bernstein.

Please go ahead.

Thank you, a few questions.

In your view, what's been the catalyst for the suddenly intensified price competition in the US in respiratory.

There's been more than one competitor for a while.

Historically, you have not really seen much price competition in the US.

What suddenly seemed to change here?

How can this not be a harbinger of pressures to come in the US in other therapeutic areas?

Second question is, I think investors would love to get your view of big pharma mergers, especially because theoretically at least, Glaxo could represent yet another tax conversion play, if a US company wanted to do what Pfizer's trying to do with Astra.

What does the future hold for Glaxo on this front?

Then on established products, is any sort of disposal more likely to be a block trade or kind of smaller one-off disposals?

Thanks very much, Tim.

I think on the price dynamic there are two.

Listen, I don't think these things are going to restrain themselves to the respiratory market.

Some of the elements I'm going to touch on now, at least one of them, we're already seeing play out in the diabetes market and other segments.

Partly, you've got the phenomenon of the consolidation of the payors, and some of the competition -- if I can put it that way -- between various classes of payors, which are leading payors to think about how they can structure different propositions, whether it's high choice, higher price, or whether it's low choice, lower price.

But a very simplistic kind of two ends of the continuum.

Clearly products like Advair as market leader, but not alone.

If we look at other categories you can see other market leaders being tackled in that way.

Clearly some of that is going to go on.

There are relatively limited number of examples where you might anticipate that happening in the future, but it is clearly a phenomenon of the new market place.

That, I think, what has really driven that step-down in market share, which we saw January 1 this year.

I am pleased to see that things have stabilized substantially since then.

The second part of the price dynamic is much more of a GSK-stimulated issue.

I'll tell you what it is.

It's because we've shown up with a bunch of new products.

There are companies who are very keen to see us not succeed with those new products.

Of course they look for ways in which they can legitimately compete with us.

The good news is, we're breaking through that.

We've been able to find a way.

As I've just proven to you on Breo, and I think you'll see absolutely on Anoro, we've been able to get these products covered -- not quite as quickly as everyone would have liked, not day one, not week three, but certainly now in the case of Breo we've got terrific coverage.

We've seen since that coverage really started to ramp up and the introduction, for example of DTC, which of course makes sense now that we have the coverage, we see much better performance.

I think in the first three weeks of April scripts were up 36% compared to the first three weeks of March.

We have seen a very nice, essentially straight-line performance now, with the product actually performing better than you would expect at this point -- albeit off a lower level, because we've had the delay.

But I think actually now we're in the right phase for Breo.

I think Anoro, given its level of unique differentiation, first in class, I think gives us a tremendous chance there.

As far as M&A is concerned, I don't know what particularly kicked off all of this.

I hesitate to essentially sign up to a particular narrative, because it seems to me that each of the transactions which have been announced in the last two or three weeks are all quite different.

If I think about the Allergan-Valeant transaction, if I think about the Pfizer-AZ transaction, and if you think about the Novartis Glaxo transaction, they are all very different, very limited commonality between them.

I would slightly err on the side of coincidence than some enormous narrative.

However, if there is a narrative, then it must be that companies are starting to think about their long-term positioning.

Clearly that is what drove us.

All I can really speak to with any real confidence is the decision-making we took at GSK.

That was we wanted to find a way to strengthen our consumer and vaccine businesses without weakening or distracting our core R&D activity.

We felt that a surgical approach in the shape of the transaction with Novartis was a very audacious thing to dream of, very difficult thing to do, never done before.

But we thought that was the right solution, and we're pleased we could execute it.

The others will have their own rationale for why they do it.

As far as EPP is concerned, I think it's highly likely you'll see us divest individual products, and it's possible we will do block sales, but more likely you will see individual products, and we're open-minded to block sales that create value.

Thanks Tim, next question.

Next question is from the line of Danny Saurymper from Barclays.

Good afternoon.

I wanted to clarify a little bit further on the Advair price mix situation.

I think this is at least for the last 12 quarters, first time we've seen negative price mix.

I just wondered if there's any nuance between price and mix, as you describe it?

Is it more mix, is it less price, or just a little bit of flavor around that?

Also in relation to Anoro, and your expectations for coverage levels, you said 70% Part D coverage for Breo after seven, eight months from launch.

Where would you expect Anoro to be in that time frame?

Lastly on Tanzeum, the launch of that product I think in Europe and US in the second half of the year.

Can you maybe talk through your pricing strategy and your general thoughts around positioning, as you launch into that market place?

Sure.

Thanks, Danny.

Basically, the Advair price mix is mostly price.

There's some mix, but it's mostly price, the first part.

In terms of Anoro coverage, we're off to a very good start.

I'm not going to tempt fate by giving you precise predictions, but that looks very encouraging -- not just the coverage we're achieving, but also the position which we're achieving and the formularies we've already secured.

I'm pleased with that.

And the last one is -- oh, Tanzeum.

No, we're not going to get into describing our positioning and pricing structure for Tanzeum.

As I touched on in the answer to Tim, US, Europe, different pricing environment.

We've been market leaders and been on the receiving end of some competitive activity.

It may be that with Tanzeum we have the chance for a bit of role reversal.

Next question, please.

Thank you.

Our next question is from the line of Alexandra Hauber from UBS.

Thank you for taking my questions.

Three questions, please.

Firstly, on the consumer supply issue, at the full-year results you commented that these were essentially resolved.

Now they continue.

Are these similar, the same issues or new issues?

If it's the latter, are you reviewing generally what the quality standards are, and how confident are you in the time lines that this is not turning into a bigger problem?

Second question on the Breo coverage.

Is there any lag -- if you have 70% coverage from the first of May, is there any lag until we actually see the impact from that in the market place?

I'm asking that because at the full-year call you said as of the beginning of February you had 50% coverage.

In light of your comment at that time, until that point, 70% of all scripts are rejected.

I would expected some de-bottlenecking to happen at the script level, which we haven't seen.

We have seen growth, but it's been pretty -- no change in the trajectory.

Can you describe any additional potential things this has to work through for us to see this change in the script trend?

The third question is just on Tivicay.

Could you -- do you have any intelligence on the sources of patients here?

Is the majority of patients using this actually already in combination with Epzicom, or is that other combinations?

Just on the last point, Tivicay's source of patients is very mixed between Epzicom and Gilead co- prescription.

Actually a very nice balance, not at all segmented to one or the other.

Just on that one.

On Breo, actually you're -- unusually Alexandra, your recollection is wrong.

What I said at the full year was that we had 25% coverage at February, and we aspire to have 50% by the mid-year.

We've actually achieved 70% by May 1.

There is a bit of a lag, because it takes a while sometimes for the systems to turn up and turn on.

We have seen one or two of the plans who actually came on stream in February took a month or so before their systems actually all switched across.

It doesn't all happen instantaneously, first thing to say.

Second thing to say of course it's important that we go back to the physicians and now tell them that they're covered.

There is a cycle of making sure folks are aware, because maybe they tried, they couldn't get coverage.

We need to remind them that it's now time to try again.

Most recent data I saw said that we were about -- 45% of scripts were being rejected, and that was as of two or three weeks ago.

It's still a very substantial amount of scripts being rejected.

But as I said, there's a big jump up in coverage starting from today, and we hope that will start to free up.

Just in terms of you're right, the shape of the curve hasn't changed much, but that is positive.

Because normally the shape of the curve starts to plateau out at this stage.

While it's on a low base and clearly we all wish this had gone a bit quicker a bit sooner, while it's on a low base, the shape of the curve being sustained is an important point, and gives us quite strong optimism.

The last thing I'd say to you is that we've -- most recent data we've seen we have a 6% share, a dynamic share, in the pulmonologist market.

Remember, this product's only indicated for COPD, so on a total market basis that would be more like 11%.

That is a very good performance, and we're seeing shares of a dynamic segment rise across the board for Breo.

I think actually we're moving into a different phase with this product quite promising.

With Anoro now coming in, of course the physician gets a second opportunity to think about using the [Ilipta] device for a different sort of patient, of course.

But nonetheless, it starts to really emphasize to the physician where we see the portfolio of opportunity going from a GSK perspective.

As far as the consumer supply, these are two completely different sets of issues.

There was an issue in our oral care toothpaste business -- completely different factory, completely different part of the supply chain, which was the issue last year, which was resolved.

We're back in full supply on those products.

That was to do with the introduction of a new formulation.

The issue which we have described today is around smoking control -- completely different factory, completely different issue -- all treated with the same seriousness, of course, but totally unrelated in I think every way in which you could imagine.

Next question, please.

It's from the line of Kerry Holford with Credit Suisse.

Thank you.

Three questions, please.

Firstly on Advair in the US.

Just backing out from the gross figures, it looks like there was a 10% negative stocking impact, which follow the positive stocking impact in Q4 last year.

I wonder if you can just comment on whether the Advair stock levels are now considered normal, or whether we should see any more impact on this item going forward through the course of this year.

Secondly, you've talked at length about the coverage for Breo Medicare Part D now being 70%.

I wonder if you are able to discuss with us what proportion of that is at tier two versus three?

Lastly, could you just run through the reasoning behind the decision not to file Fluticisone for your rate in Europe.

What is now giving you greater confidence to move ahead with the Breo asthma filing in the US?

Thank you.

The Breo asthma filing is essentially based on the data we saw from the study, which reported out not too long ago.

As far stocking levels in the US, Kerry, we are seeing stock levels for the whole portfolio essentially at almost all-time lows.

Certainly going back to the beginning of 2011, we haven't seen inventory levels as low as they are now.

Our portfolio level in Advair is no particular exception to this.

We're seeing about a week and a half, almost two weeks less inventory in the market place than we saw back at the beginning of 2011.

We've certainly seen that come down by three quarters of a week, maybe, in the last 12 to 18 months.

I would say very hard to tell you whether it's at normal levels, because everything looks abnormally low.

But it's certainly low, and we would be a little bit surprised if it went a lot lower.

But as I've said, we've seen a kind of sustained de-stock over the last three or four years.

As far as the Fluticasone point is concerned, this is really to do with European requirements to do additional pediatric work, which we think are practically impossible to do.

It's not a strategic decision.

It's more a kind of inability to -- we just can't see a way to do the kind of work people are asking us for.

Hopefully that might change, but we have to see.

Next question, please.

Thank you.

Our next question is from the line of Florent Cespedes from Exane BNP.

Good afternoon gentlemen, thank you very much for taking my questions.

Three quick ones, respiratory-related questions.

First on Breo asthma, could you give us some element on the timing for this new indication, in terms of size of phase and duration?

Second question on Advair Europe.

How do you see Europe environment and trends for Advair, given the entry of the new (inaudible) drugs on the ICS LABA space?

The last question on Anoro.

Have you learned from Breo launch to prepare the launch of Anoro what sort of leading indicators?

Could you give us more color on what you called the extremely good feedback from the recent launch?

Thank you.

On the Anoro launch, it's very early days, Florent.

We've been out there about ten days, so we have no hard data yet.

But we can see, and I'm not going to share it with you, but we can see the pick-up of things like free trial offers and that kind of thing, which we get a real time.

Those are very encouraging signals, but until we start seeing prescription data in the next three or four weeks, difficult to say.

We have a very good position in the commercial book of business.

We've already started to win Part D book, all of which is quite different to where we were when we started Breo, although we fixed most of that.

But it's very different to where we were when we started.

All of that very encouraging.

As far Seretide is concerned in Europe, actually we are seeing good performance -- basically flattish, maybe a notch down on 1% on volume, and 1% on price type of thing.

But nothing very dramatic.

Very minimal impact from copies thus far.

Certainly no change in trend compared to what we saw through last year.

Good quarter actually for Europe, and good quarter for Europe Seretide.

As far as timing on Breo asthma, obviously we'll file.

My expectation is the regulators are obviously going to take their time to think about this.

This is obviously an area which has historically attracted a lot of regulator review.

I've got no really clear view to give you.

I wouldn't guide you to think this is going to be a very rapid review, because obviously it's an area of particular regulatory focus.

But we feel like we've got good data package, and that's why we're going forward.

Last question, please.

Last question is from the line of Damien Conover from Morningstar.

Great.

Thanks for taking the question.

One more follow-up on Advair.

While I appreciate a lot of moving parts with the pricing environment, when we look at AstraZeneca talking about pricing being largely flat in the US for Symbicort, and then we look at the pricing for Advair down close to 7%.

But yet Advair gets excluded from the express scripts formulator.

I was wondering how you might reconcile those different viewpoints?

Thank you.

Thanks Damien.

I think there's two completely different issues at play here.

The ESI piece, which as you know well is not just about Advair, but it affected products in other categories like diabetes.

There's a whole dynamic there about -- which you all have a view on I'm sure -- about what works in that market place.

I think the difference in what you're seeing in pricing is pretty simple to explain, actually.

We -- as I said at the beginning of the call, we've had historically a pretty disciplined, relatively lower level of discount in the market place than we believe most of our competitors.

We of course don't know absolutely, but that's our belief.

When -- and we tend to have run relatively flat discounts across the market, so everything I'm saying here is relative.

When we do move the discount level in the way that we have done, and we've needed to do to respond to some of the pressures we are seeing in the market place -- what that can do for us is not only increase our discount rate for the customer who we are negotiating with, but it also changes our best-price discount rate for the Medicaid book of business with the government.

Therefore in the period when you breach that best-price level, you get an extra discount level.

If -- let's hypothesize.

If my competitor has a very broad range of discount rates already in the market place, and therefore has already set a best price which is relatively low, then they've got a lot of room for maneuvering their discount rate without triggering that extra best price and the extra discount level.

If you have a much more controlled discount environment, as we've historically had, then you're more likely to trigger the kind of double effect, that you essentially end up triggering an extra discount level, which is what's driving this differential, I think, in this situation.

The reality is, the area under the curve by having a more controlled discount strategy over the last four or five years has been extraordinarily productive for GSK shareholders.

It's I think been absolutely appropriate behavior as a market leader.

But clearly as we now move into a more dynamic pricing phase, and as we move our focus to new products, then it's the time for us to review our strategy.

That's exactly what we've been doing over the last several months.

I'm very pleased with the positioning we're achieving on formulary.

I'm very -- for Advair in many places, ESI being the one exception on the high-control formulary.

Very pleased with where we now are on Breo, and I'm very pleased with the early returns on Anoro.

I think actually we should look back at kind of this quarter, next quarter, as a period of some volatility around respiratory pricing.

But the strategic thing to keep your focus on is making sure the new products get established, because that's where the real value creation is for the Company going forward.

I would reiterate finally one point I made earlier on, that most of this call has been fixated on what's happening to Advair in America.

Quite right, it's one of our biggest products, it's a very important product.

Had a challenging quarter because of the things we've talked about on the call.

But the corporation delivered 2% EPS growth despite that.

I think that really starts to point the finger to the anxiety around the domination of Advair is somewhat over-done.

I think this quarter starts to demonstrate that as Advair inevitably reaches maturity, the Company is capable of generating EPS growth despite some of those pressures first.

Second, we've now discharged the majority of the regulatory, and now as I've told you on this call the pricing and formula risks for some of our newer products, that gives us the opportunity to sensibly build those businesses.

The only question is at what rate will that business build versus the rate of maturity of Advair.

Obviously, we feel optimistic about that future.

With that, I'd like to bring the call to a close, and thank you all for your attention.