葛蘭素史克 (GSK) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to GlaxoSmithKline's Q2 results investor analyst call.

The format of the call will be some opening remarks from GSK CEO, Sir Andrew Witty, followed by a short Q&A session.

I will now hand you over to Sir Andrew Witty to begin the call.

Thank you, and good afternoon.

Welcome to today's call to everybody.

GSK's performance in the second quarter provides evidence of the very significant changes that are taking place in the Group's portfolio.

As you know, our strategy over the last six years has been to fundamentally reshape the Group, in our R&D operations in particular, so that we can replace the significant sales being lost to generics and ensure that the Company can succeed in an environment where our biggest product, Advair, faces increasing competition.

It's clear we are now in that period of transition.

And this is a critical moment to ensure we make the right strategic choices, particularly around investment for the long-term health of GSK, in the new products.

This is reflected in some of the decisions we've taken during the quarter.

Group sales for the quarter declined 4% to GBP5.6 billion, largely driven by lower sales in the US, where we have seen earlier and more significant generic competition to Lovaza than expected.

And continued pricing and contracting pressure in the respiratory market, including for Advair.

However, while Advair's sales are now likely to continue to decline, we expect new respiratory products, Breo, Anoro, and Incruse, to generate new sales growth.

Already, we are seeing some recovery in our overall respiratory volume share as new launches progress.

Albeit at lower price points.

These assets, together with the six other respiratory products in development, will diversify and strengthen our respiratory portfolio.

And we remain confident we can maintain our leadership position in this therapy area well into the next decade.

Outside the US, performance is more positive, with emerging market sales up 11%, driven by a very strong vaccine performance in the quarter, up 26%.

Europe, with flat sales, also performed strongly in a tough trading environment with continued negative price pressure.

Japan was down 7% in the quarter, reflecting their destocking following a consumption tax increase.

And sales for the year-to-date are up 5%.

I was particularly pleased by the performance of our HIV business, ViiV Healthcare, where sales grew 13%.

This has been driven by the extremely strong launch of Tivicay, our new integrase inhibitor, which is on course to be one of our best launches so far.

As flagged in the last quarter, our consumer healthcare business has been affected by some supply interruptions to several brands, particularly in the US and Europe.

This led to sales declining 4% in the quarter.

The supply situation is beginning to improve, and for the year, we expect total consumer sales to be broadly flat.

Strategically, we have decided to maintain support for investment in our substantial portfolio of new product launches, as this is essential for the future health of the Company.

Ongoing investment behind these launches, combined with lower sales, lead to earnings per share down 12% in CER terms.

Taking all factors into account, it is unlikely we will now deliver sales growth for the year.

And we now expect full-year core EPS on a constant exchange rate basis to be broadly similar to last year.

The dividend is up 6% this quarter to 19p.

Though we're clearly in the part of our long-term investment cycle where we're seeing the delivery of significant new product flow from R&D, what's critical is for us to continue to stay focused on ensuring the launches of the first six products are successful.

Looking ahead, I believe this existing trend will be supplemented both by further delivery from the pharmaceutical pipeline and the anticipated completion in the first half of 2015 of the three-part transaction week with Novartis that we announced in April.

Opportunities in the pipeline for our core therapy areas remain extensive.

In respiratory, we filed Breo for asthma this quarter and expect to file our first respiratory biologic, the anti IL-5 monoclonal mepolizumab, in the second half of the year.

We expect to be first in class, in that particular case.

We also began Phase III studies for the first triple combination product for COPD in the quarter.

In HIV, we received a positive CHMP opinion for our combination HIV product, Triumeq.

And we expect an FDA decision on this asset in the second half of the year.

Overall, we have over 40 new molecular entities in late-stage development.

And across the R&D pipeline, we believe there are a total of 30 drugs with the potential to be first in class in areas such as immuno-inflammation, epigenetics, and cardiovascular disease.

This should lead to a regular flow of new product introduction over the next few years.

The three-part transaction with Novartis provides the opportunity to reshape the Group and strengthen our positions in the long-term growth businesses of vaccine and consumer healthcare.

Post completion, these businesses will represent around half of Group revenues, over the coming years, and should be capable of generating mid-single-digit sales growth on a consistent basis.

To give you more details on the quarter, I'd now like to hand over to Simon Dingemans, the CFO.

Thanks, Andrew.

This has clearly been a challenging quarter, but one that has made us even more convinced that our strategy to build a more balanced set of growth drivers across the Group is both the right one.

But also one that is showing visible progress, despite the significant headwinds we're currently facing.

Clearly, the most significant step forward in the quarter was the agreement with Novartis of a major, three-part transaction, which we believe accelerates our strategy significantly and strengthens the long-term durability of our key franchises.

We continue to expect the transaction to complete in the first half of 2015, subject to regulatory and shareholder approval.

More immediately, our core results in the second quarter were particularly impacted by the shift in US pricing and contracting that we've been discussing with you for some time.

This has especially affected Advair, which has now seen a step change in its outlook, exacerbated now that the transition to our new respiratory portfolio is underway.

Reported sales for the quarter were also impacted by a number of other factors, including supply interruptions impacting several parts of our consumer business, which we now believe will take somewhat longer to fully resolve than we originally anticipated, and earlier and sharper generic competition to Lovaza.

The impact of these issues on the quarter masked important momentum in other parts of the business.

We continue to deliver strong growth in several strategic areas where we've been investing.

Emerging markets, the vaccines, especially in the emerging markets, and our oncology portfolio also delivered further progress.

We've continued to see greater stability from the business in Europe.

And our portfolio of new products is starting to make a material contribution, with Tivicay, Mekinist, and Tafinlar doing particularly well, and Breo and Anoro beginning to build.

While other respiratory launches are clearly developing more slowly, we've always expected that it would take time and investment to build them to their full potential, compared to the relatively rapid uptake of our more specialty launches.

In the meantime, look at the second half of 2014.

And as always, there are a number of variables that introduce a degree of uncertainty quarter to quarter, including stocking patterns and securing and delivering on large tenders.

And at the same time, we expect Advair in the US, the consumer supply issues, and Lovaza to continue to impact our reported growth.

As a result, and given where we are year to date, we no longer expect to grow sales this year.

We continue to manage our cost base tightly and still expect to deliver at least GBP400 million of incremental restructuring savings during 2014, including the benefit of the structural savings of GBP200 million I've previously highlighted.

It looks likely these will now fall into Q3.

As we've discussed in the past, our plan has always been for most of these savings and other cost control measures to be reinvested behind our new launches and other growth opportunities, as well as in new capacity and technology for our manufacturing operations.

Continuing with these investments is key to delivering the full potential of our pipeline and securing the future growth drivers for our key pharma vaccines and consumer businesses.

As a result, given our revised sales expectations, we now expect full-year core EPS to be broadly similar to 2013 on a constant currency basis and ex-divestments.

Before commenting on the detail of the Q2 core performance, I should point out that the sustained strength of sterling against most currencies is negatively impacting our reported top line growth.

And given that a large proportion of our manufacturing and R&D cost base is located in the UK, the negative impact of currency is even more pronounced on our earnings.

It's also impacting our sterling cash flows.

We currently estimate the full-year adverse of impact of currency if rates remain at their current levels to be around 7% on the top line and around 12% at core EPS level.

This is a bit lower than the first half negative currency impact, in part because in the second half of last year, we had exchange losses of around GBP63 million.

Turning to the core.

So group sales, down 4%, reflecting the challenges we've already discussed.

In particular, in the US, US pharma and vaccine sales were down 10% in the quarter.

And this primarily reflects a 21% reduction in the underlying performance of Advair.

Price pressure remained significant, with price impacting Advair sales in the quarter by 7%.

Volume reductions of 14% reflected the contracting changes we discussed that Q1 but also the early impact of our new launches, which together, have adjusted Advair onto a new trend line that would likely see it continue to decline over the next 2 to 3 years, while we transition to our new respiratory portfolio.

Oncology sales in the US continues to do very well, growing 42% in the quarter.

In Europe, pharma and vaccine sales were flat on last year, despite increasing competition, in the respiratory market particularly.

Growth from oncology products, Avodart, Benlysta, Volibris, all helped to offset lower Seretide sales, which were down 4%, mainly due to price reductions.

Vaccines down 5%, due in part to a number of shipments to several products that are now expected in the second half.

In emerging markets, total sales of our pharma and vaccine business grew 11%, or 15% excluding the China effect.

Sales in China were down 25%, including the established products, showing further stability in the quarter-on-quarter trend that we've reported on over the last several quarters.

Growth in the region was led by 26% growth in vaccines, with significant tender wins for Synflorix and pediatric vaccines.

In Japan, sales were down 7% as a result of wholesalers destocking following their Q1 stock build ahead of the tax increase.

And year to date, Japan was up 5%, despite a weaker allergy season.

Turning to ViiV.

ViiV Healthcare sales grew 13% in Q2, in large part, due to the very successful launch of Tivicay in the US.

The launch of Tivicay is now just getting started in Europe and Japan.

And the business is also waiting regulatory decisions in the US and Europe for its new [3-in-1 SGR] Triumeq.

If all goes will, these could be launched in some markets during the second half of the year.

For consumer, the business was down 4% in Q2.

And reported terms of sales in all three of its regions were impacted by supply disruptions, particularly for smoking cessation products.

We now have in place remediation plans for these issues, and the supply position is beginning to improve.

Overall, we expect the consumer business to be broadly flat at the top line for the year.

Looking at our operating cost, the operating margin, excluding currency effects, was down 3.2 percentage points.

The margin decline partly reflects the impact on cost of goods and an adverse shift in mix, particularly given the US decline in respiratory sales.

But the primary driver the was increase in the quarter in SG&A, as we reinvest cost savings to support our new launches, particularly in the US, Japan, and Europe.

We delivered further financial efficiencies in the bottom half of the P&L, with interest down from GBP183 million in Q2 last year to GBP156 million this quarter, reflecting the improved funding profile of the Group.

And our effective tax rate was also down 2 percentage points from Q2 last year, to 22% of the quarter, in line with our expectations for the full year.

Turning to cash flow.

Fundamentally, our business remain strongly cash generative.

And we continue to focus on improving the conversion of earnings into cash.

Cash flow in the first half has, however, been impacted significantly by currency, with the strength of sterling costing us around GBP500 million of the GBP1 billion decline in cash flow, relative to the first half of 2013.

The remainder reflects the disposals we made last year and the decline in operating profit, reflecting the impact of trading, particularly in the US.

First-half cash flows, generally, are a bit lower than the second half, looking at historic patterns, with working capital a negative factor, given seasonal and other requirements, particularly in vaccines.

New launches have added to the pressure this year, and inventory is the main driver of the increase in approximately 14 days in working capital, compared to Q2 last year.

Inventory days, in particular, are likely to remain higher over the balance of the year and leave working capital at the end of 2014 slightly higher overall than last year, in day terms, as we ensure supply behind the rollout of new products and launches.

Our focus on longer-term improvements in inventory and other working capital efficiencies is unchanged.

Net debt at the end of the quarter was GBP14.4 billion, GBP1.3 billion lower than a year ago, but GBP1.8 billion higher than the year-end number.

This increase since the year end is due to GBP0.7 billion spent on increasing our share holding in our Indian pharmaceutical company and cash returns to shareholders, mainly dividends.

We continue to prioritize the dividend in our returns to shareholders.

And a 6% increase on the dividend to 19p for the quarter reflects our confidence in the momentum across the business, despite the near-term challenges we are addressing.

We've repurchased GBP238 million of our own shares during the first half.

We will keep our share repurchase program in place, but given the net impact of currency on our cash flows, share repurchases over the balance of the year are likely to be immaterial.

Any proceeds from disposals, including any from our established products portfolio, will be retained in the short-term to ensure our flexibility to invest behind the new launches, our manufacturing enhancements, as well as the continued restructuring of our cost base.

But longer-term, we will continue to consider share buybacks alongside the dividend where those repurchases offer an attractive return.

And with that, I'll turn it back to Andrew for questions.

Thanks, Simon.

And if I could ask the operator to start the Q&A session, please.

Thank you.

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

(Operator Instructions)

Graham Parry, Bank of America Merrill Lynch.

Great.

Thanks for taking my question.

Firstly, kicking off with questions on Breo and Anoro.

Can you give us an update there on what sense your product is not being picked up in the RX data.

How much sampling is still there, and what are the pharmacy rejection rates for each product?

And secondly, on Advair -- the negative price of 7% year-on-year in the US has been fairly consistent across first and second quarter.

Is this a one-off step down?

Your release today seems to indicate that you expect further pricing pressures.

So should we read that to be that second-half pricing impact would be greater than 7%?

And to what extent do you think we can expect this to annualize as we enter 2015?

Thirdly, on the shape of the margins in 2015 -- this year, it's clear there's no margin recovery.

But next year, how do we think about margin dilution from the asset swaps along with cost savings and margin leverage from the new portfolio playing into higher margins -- might progress into 2015?

Thank you.

Thanks very much, Graham.

Just on the first question -- the initial launches -- what we're seeing is less rejection of Anoro than we saw with Breo.

So in the first month -- and this is -- I'm talking really about Medicare Part D, which is the key part for the COPD market.

If you look at the initial month of launch of Breo, we were seeing about between 55% and 60% of scripts being rejected.

And then another 20% been reversed.

So that's a patient who could've had the opportunity, but at a very high co-pay, chose not to go forward.

We are seeing the rejection rate for Anoro more like the 40%, 45%.

But again, we're only in the first four to six weeks.

So very early data, but it looks significantly better.

We also have substantially more coverage on Anoro, at this point of the launch.

In the case of Breo, at this point, we had basically 3%, I think, of Medicare Part D. As of today, we've got about 27% coverage of Medicare Part D for Anoro, that kicked in, July 1. We've seen a much more rapid pickup on Anoro, in terms of access.

In terms of sampling, both continue to be very heavily sampled.

Substantially more samples being put into the marketplace than are being prescribed.

And we also, as you know, have various voucher schemes, which are also offering patients the opportunity to start the medicine.

So quite a bit of product still not within the audits.

Having said all that, if you look Breo in particular for the US, we've seen some very encouraging trends over this quarter, actually.

So one of the leading indicators that we use is NBRX -- that's new to brand prescriptions.

This is not NRX, PRX data that you're used to, but more NBRX.

This looks at they really dynamic part of the marketplace.

In COPD, about 12% of the market is dynamic, where you've got people changing drugs.

That's a relatively small proportion, compared to some other categories, particularly in specialty.

But that's what it is for COPD.

We already have a 12% market share of pulmonologists in that NBRX section.

So if you look at the behavior of specialists in the dynamic section, we've seen very good uptake.

In fact, one in two pulmonologists in the US have now prescribed the drug.

About 14,000 physicians all together have prescribed the drug.

So we're seeing quite good movement there, first of all.

Secondly, we're seeing continued upward trajectory of the NBRX performance.

That's important because typically, when you look at primary care launches, after the first 10 weeks, 15 weeks, you tend to see the performance begin to plateau.

We have not seen that with Breo.

We continue to see an upward trajectory.

That's a very encouraging sign.

If you look at all products launched during 2013, Breo now, is looking like, maybe, the first fifth or sixth best performer so far continuing to improve.

Whereas the vast majority of launches have either not performed as well as Breo or are flattened out.

And that may surprise all of you, but I think it's very reflective of the change in the marketplace in US primary care launches.

The bit difference between specialty and primary care.

But the signals for Breo look encouraging.

We're now up to -- I think, when we last spoke, we had something like 1,000 prescriptions a week.

We're now well over 5,000 prescriptions a week, in terms of NRX.

Looking encouraging.

And we're seeing similar encouraging signs on Anoro.

But as I said, it's extremely early days.

But if you were going to characterize it, you'd say that Anoro was tracking at a better trajectory than Breo was.

And we feel okay about Breo.

In terms of the price effect -- what you're seeing, essentially, on price, is the effects of increasing discount rates playing through and, obviously, neutralizing any list pricing increases.

And you're quite right -- the effect is broadly similar across the two quarters.

My expectation is that you'll probably see a broadly similar trend, going forward.

Whether or not there are further steps down in that really depends on the various contracting cycles.

But clearly, what you would want to see is, as you start to step down -- if you, indeed, start to step down -- that should re-acquire volume market share.

So you should be seeing some offset in the volumes, whereas this phase we've just been through has been a little bit more of an adjustment to competitive dynamics.

As you look forward, I think you should start to expect us to see more puts and takes around price and volumes swinging back and forth.

And we've certainly been winning a number of contracts over last few weeks, which give us quite good confidence, overall, for our respiratory volume position, going forward.

And [I'd make] a final point.

If you look at volume market shares, Advair plus Breo, what you see is, over the last three months, actually, we've stabilized and been growing the total GSK volume market share.

Everybody else is, essentially, under pressure for share.

And while that's very early days, that's exactly what we want to see.

Because what we want to see is a volume level that we can build off the existing Advair volumes.

And that's where, obviously, the sustainable business sits.

Clearly, that is at a different price point to the prices we were achieving two-, three-, four years ago.

But that's the adjustment we're going to go through, over this period.

And what's encouraging is that, although there is a price adjustment, we are seeing the acquisition of incremental volume into the marketplace.

And actually, there are, I think, very encouraging signs.

As you think about Anoro and then Incruse and then rest of the products being loaded into that portfolio, the opportunity for us to grow sure back is very substantial.

That's where our confidence sits for long-term leadership in the respiratory marketplace.

Next question.

Tim Anderson, Sanford Bernstein.

I have a few questions.

On respiratory -- if we're seeing price competition with Advair, why won't we end up seeing the same thing over time with newer products like Anoro, where in that case, the LABA/LAMA category will become more crowded?

Second question is on your GLP-1 Albiglutide.

At least on a list price basis, you seem to have entered the US market at a very big price discount, relative to the competition, which is something that you really don't ever see drug companies do -- especially with new drug launches.

Any comments behind your decision on that would be appreciated.

And then, last question.

On the basket of products you're considering for sale, does that represent an opportunity for tax inversion for the acquirer?

And also, why not sell off more than just the GBP1 billion that you reference?

Let me just nail the EPP thing, first of all.

GBP1 billion -- that's mostly Europe, US.

As I described previously, we've separated into the separate reporting category -- the EPP.

Give you clarity of what is going on in the business, but also to give us focus, in terms of how we can streamline that business and take complexity out.

And there is a huge program going on in GSK to strip out SKUs and brands -- something like 200 brands being deleted.

So the smallest products around the world.

Just to take out complexity as we bring in the new products.

Obviously, we want to make space, if you will, within the Organization for that.

But as we've also said, there are opportunities for disposal.

But those opportunities, practically speaking, are resident in Europe and America.

This represents something between one-third and one-half of the Europe and American tail business, or EPP business.

So it's a substantial part of that business.

We are not close-minded to doing more.

But the reality is, finding those clusters of brands and businesses which are reasonably straightforward to disconnect from GSK -- not everything is reasonably straightforward.

And therefore, as I've guided repeatedly, the idea of an on-block sale for the whole thing, I think, is not, frankly, practical.

I do think, though, where you can get this sensible [ring fence], and it's relatively straightforward to disconnect, then you can generate decent reward.

I don't know whether or not somebody will look at this as an inversion opportunity.

It's certainly not our -- we're not particularly interested in that or have a priority on it.

But of course, in this current environment, there are plenty of potential buyers for these sorts of blocks of business.

Some of whom might have that in their mind.

Others have very different agendas.

And I'm pleased with the level of interest we've got there.

And we'll pursue that.

I'd remind you, also, Tim -- remember, we've divested a number of tails over the last four years.

We divested our consumer tail.

We divested our drinks business.

And we divested Fraxiparine and Arixtra.

We divested Treximet.

We exited Prolia in Europe.

This is another on a long journey.

And if you look back at the amount of tails that we've taken out, it's very substantial.

But we've done it, I think, in a practical way.

I know there's an awful lot of talk around that divesting tail.

But it's quite illusive to create that magic bullet, on-block transaction.

I think, what we've done is actually execute.

We delivered it.

We'll continue to deliver it.

Anoro price competition?

Yes, there's going to be Anoro price competition.

We priced Anoro at discount to the marketplace.

And there is going to be a significant negotiation, I think, in that space, just like any other primary care space.

And I think that, whether you look at the long-acting -- the LABA steroid combination, or you look at the LAMA marketplace, there are going to be degrees more competition than we've had, historically.

I would anticipate we may get some of that with Anoro.

And I think you'll see it across the board in primary care.

And you're certainly seeing it in diabetes.

You've seen a significant amount of price pressure build up in the diabetes marketplace in the last six or nine months.

Frankly, the pricing strategy for Tanzeum, our GLP-1, we think, is exactly resident with what's going on in the US marketplace.

And we've had a tremendous response and level of interest from payers, not surprisingly, when you're offering something so substantially more value-based than, perhaps, they've seen.

So it will be very interesting to see how that shakes things up.

And I don't think it's strictly sensible of us to sit on coals and tell you there's more price competition and then not think about using price as part of our own competitive set.

And that's exactly what we're doing, and you'll see more of that from GSK.

Next question?

Alexandra Hauber, UBS.

Thank you for taking my questions.

I've got three, please.

Firstly, if you are selling GBP1 billion worth of product, that would be about 4% to 5% of your gross profit.

Conceptionally, how should we think about your corporate cost and your R&D budget?

Is this going to decline, or will you compensate the impact from the lower gross profit through cuts elsewhere?

And secondly, your increase in SG&A -- can you give us a bit more color on exactly which franchises and which geographies are benefiting most from that?

And also, in what form are the increases SG&As coming from?

It's probably not sales force, so what is it?

Finally, just a follow-up on the Advair pricing question.

The 7% decline increasing discount -- is that a uniform 7% increase in the discount?

Or is it more something like, maybe, 14% decreasing the discount on 50% of the contract?

Is this going to be uniform, or very discrete?

I will deal with the last question.

And I'll touch on the first.

But I'm going to let Simon really cover the first and the second.

On the first -- I think, let's see whether we sell this business or not.

We've made it very clear that we will only sell it if we achieve the value that's commensurate with profitability of that business.

So first of all, I want to reinforce that caveat.

If we do -- remember as well next year, that if all goes well, then the proposed transaction with Novartis will also take place next year.

That will have a much more significant effect, in terms of the margin structure of the Group.

And, therefore, the right time to really describe to you all of the -- where the ongoing margin structure of the Group will be is after those events.

Or when those events are real, and we can give you that detail.

I would say -- I'd also remind you that, obviously, when you look at, for example, pharma R&D, with the proposed transfer of the oncology business to Novartis, there's a significant proportion of GSK R&D cost embedded around oncology, which goes with that business.

I want to make to make the point that you're going to see a lot of puts and takes through the portfolio -- not just EPP.

Actually, much more so around the Novartis transaction.

And I'll ask Simon to cover more of that when he gets on to those first two questions.

As far as the Advair pricing is concerned, it's not a uniform phenomena.

But there are different movements going on in the different classes of customers, depending on the competitive situation.

A lot of this has been driven by provider consolidation over the last 24 months -- I'm sorry -- payer consolidation.

A lot of it around provider control levels -- those sorts of things.

And some of it driven by competitive dynamics.

As I just talked to Tim about what we're doing with the GLP-1s, we all know some companies who have been aggressive discounters in the respiratory market.

These things come around.

That's really the dynamic world we're dealing with.

The good news is we've got a lot of new products coming into these markets.

And I think that's what you want.

When you've got this kind of noise, having a new product where you're able to position your pricing where you want to be for the medium-term is a great place to be.

But clearly, the transition isn't painless, and I think that's obvious to everybody.

I'm going to ask Simon to cover the detail on the margin and comment more on the ongoing structure.

Yes.

Thanks, Alexandra.

On EPP, as we've talked about before, these are relatively high-margin products.

One of the reasons we separated them out was to really focus the business on running them for profit and cash.

So when we think about the disposal, we're really looking at the value we released from those and the cash contributions that we might expect over the next several years from those products, rather than, necessarily, the profitability, or the PNL impact.

I think, almost by definition, as you sell these product, they're likely to be diluted in the short term.

But it does free up resources for us to be able to invest in growth drivers for the Company, going forward.

And that's really what you're already seeing in some of the shift in SG&A that you touched on in your second question.

Where is that investment going?

It's going -- some in sales force, but it's also been going in marketing support and promotional spend, evidence generation, R&D support, and making sure we got all the tools at our disposal to be able to optimize those launches.

We have put a lot of flexibility into the system.

So, given the discussion we've had before, we don't see a significant step up in SG&A.

But we are going to see, quarter-to-quarter, some pressure as we invest in the US, Japan, and Europe, in particular, where the launches are first advanced.

That's probably keeping SG&A at broadly similar levels to where we are today, rather than a big move upward, as you've challenged us on in the past.

And that's really the benefit of the flexibility we built into the cost base over the last several years.

That's the overall profile.

But, I think, from a margin perspective -- and I [asked Graham] on this question earlier.

I think, at this point, we need to get this to the stage of closing the transaction.

And at that point, we can give you a much more comprehensive view of the significant shifts in the margin mix trends that we're going to see in profitability as you bring in, obviously, significant larger consumer and vaccines businesses, which tend to be lower-margin, relative to the total.

We'll be taking out EPP projects, which are higher-margin, relative to the total, plus oncology, which is, obviously, also a significant profit contributor, reflected in the valuation that we achieved for that business when we agreed terms with Novartis.

We'll give you that one the transaction closes.

Thanks, Simon.

Just while Simon was talking, I was just reflecting a little bit on how things have changed in the Group.

If you think back to the creation of GSK in 2001, over the last 13 years or 14 years, in the pharma business, you've really had three big brands, which have been built during that period -- obviously Advair; Avandia, which had its own destiny; and Avodart, or Avolve.

So you have those three big brands from the peak of the promotional capability of the Company, in terms of cost.

From the peak of our size of sales force in America and Europe, we have about 50% less sales force than we had at that peak, when those three brands were the story of the Company.

As you know, a lot of that SG&A cost was invested in building up the emerging market business, which has become a very substantial business -- grew 11% in this quarter, 15% excluding China.

And now, we're sat in a very interesting situation where, after over 13 years, we essentially had three big brands to build.

In the last 12 months alone, we've launched six brands, which have very substantial potential.

And looking forward, we can see -- I don't know -- maybe three on average a year, every year, going forward.

It won't be every year the same, but something like that.

And so the ability of the Company to be able to support that, whether Simon says, broadly, similar SG&A spend really reflects the structural changes of the Company.

Because when you look at what we're now doing, even in the launch of Breo -- just to contrast for you.

When Advair was launched at the end of the 1990s, it took seven years to get from the first European launch to the Japanese launch.

It's now taking seven months to get Europe, Japan, and America launched.

And the same true with Anoro, and the same true with all other products, more or less.

What you're seeing is a much more successful globalization.

So you've got more countries coming on-stream simultaneously than we've ever had in the history of the Group.

You've got more products coming on-stream simultaneously.

And we're, more or less, holding that with an SG&A base, which is essentially, the base after the significant downsizing following A, the genericization of the portfolio and the loss of Avandia, and B, the investment in the emerging markets.

But it's inevitable, on a quarter-to-quarter basis, there may occasionally be the need for us to invest a bit more here and there to make sure that we've got it absolutely right.

And that's really the pattern you'll see.

I think, actually, when you contrast that to various alternative ways of dealing with the big cyclical moves of pharmaceutical pipelines, this approach is the right strategic approach.

We've stuck to for the last six or seven years.

It put us in good shape for going forward with this pipeline.

Next question.

Andrew Baum, Citigroup.

Yes.

Three questions, if I may.

Firstly, regarding China.

Given the pressures on your infrastructure in China, is GSK the right company to directly distribute its products within that territory?

Or is some kind of licensing an alternative here, that you would consider?

Second, with regard to your latitude trial with Losmapimod.

Could you talk us through it because, obviously, you've just had two negative, expensive, sizable Phase III trials in cardiovascular -- not necessarily a core area for GSK in the past, which we've read out negatively.

And you've just initiated another 25,000 patient trial here with another mechanism.

Perhaps you could talk us through the rationale, the confidence, behind this significant commitment.

And then finally, on the consumer business.

You cite the manufacturing issues regarding the toothpaste as being partly responsible for the posted sales.

Certainly, it seems to me, that your competitors within the toothpaste space seems to have stepped up their promotion of rival premium brands.

So perhaps you could comment for us on the relative market shares within the toothpaste segments to help us understand how much is manufacturing, versus market share issues.

Thank you.

Thank you very much.

On China -- we remain very committed to China as a business for us, both in our consumer and pharma vaccine business.

As you have seen in the quarter, you're seeing the continued stabilization of the business there.

Obviously, we want to work with the authorities to resolve the issues that we've got there.

Nothing more to say on that subject.

As far as the ACS program as Losmapimod, basically, we're moving this forward into Phase III, as you know.

Clinical evidence shows that the drug reduces systemic and vascular inflammation, improves vascular blood flow, and has the potential to reduce major adverse cardiovascular events in patients who've suffered a heart attack.

That is the basic belief.

The drug's been designed as an acute, short-term, 90-day treatment.

We're looking at a very different kind of approach to this treatment area than we've seen in other approaches to ACS.

And as result, targeting the high right of inflammation that occurs following an initial cardiovascular event, which is the period we think the patient is most at risk of a further event.

Very differently to the Darapladib studies, this is specifically focused on a short -- we're looking to try and demonstrate the effectiveness in a short-term period.

Now obviously, it has to have a high number of patients to get the power, but it's a short-term treatment program.

We feel good about it.

We think the profile looks good.

But again, like all major R&D, particularly when you're looking at first in class opportunities, there is, obviously, going to be risk.

As far as the consumer business is concerned -- you're quite right.

We're seeing a good recovery from the various supply issues in a number of the areas where we've had some disruption, particularly in the toothpaste business.

We see that recovery continuing through the rest of this year.

We see the overall consumer business being flat for the year.

In terms of the performance of our consumer business -- sorry -- toothpaste business, continues to be very strong.

But it needs to be divided in two.

You've got to think about our consumer oral care business in two parts, Andrew.

The first is the premium business.

This is the Sensodyne, peridontic, denture, dry mouth business.

This is the high-margin business.

That represents 76% of our portfolio.

The rest is -- more the Aquafresh business.

It's more the businesses that we compete with -- the general toothpaste market.

That has continually shrunk as a fraction of our business.

Our priority is that premium, Sensodyne-lead business.

The CAGR for that business over the last 4 years or 5 years has been 13% -- has outgrown, basically, all our competitors.

It's clear that we've created the category.

And actually, as we look at other entries, our market share has remained very robust.

Continue to see good, underlying growth.

Occasionally, disrupted by supply issues, but actually, Sensodyne -- not too bad.

And overall, we feel very robust about that.

It's important -- over time, that business will become, really, very much that premium, Sensodyne-lead business.

It started the other way around, with Aquafresh being the bulk and Sensodyne the new idea.

But now, it's all about the Sensodyne, peridontics, denture, dry mouth business.

And I'm very proud of the performance of that business.

We've seen continued good consumption numbers in the US, over the last six, eight weeks.

Looks fine.

Next question.

Mark Clark, Deutsche Bank.

Yes.

Good afternoon, gentlemen.

I just wanted to ask a little bit about the dividend.

If we assume the second quarter growth rate of 6% is as good a guess as any for the full-year outlook, and we take your guidance on earnings and currency, then it does imply that payout ratio is pushing 90% -- in the high 80s%, at least.

Can you talk to us about whether you have some kind of a ceiling?

Or is there a point to which you would it seek to hold the dividend?

I'm not suggesting you would ever cut it, but certainly, hold it rather than continue growing in the mid-single-digit growth rate that we have seen -- or the mid-upper-single-digit growth rate, rather -- that we've seen in recent years.

Thank you.

Okay.

Thanks, Mark.

I think, as I said in my comments, the dividend remains our priority, in terms of shareholder distributions.

There's no change to the policy.

Over the last couple of years, we've been paying a relatively high amounts as we go through this transition period.

And clearly, decisions for the future for the Board at the time.

But I think we've laid out our store on that front, and there's no change in the policy.

Thanks Simon.

Next question.

James Gordon, JPMorgan.

Hello.

Thanks for taking my question.

Two questions left, please.

One was on R&D, which was that, presumably, R&D on respiratory is now reducing.

And R&D has fallen every year for the last few years.

It was down about 10% year-on-year today.

Can we think that you are actually going to be able to get some leverage over R&D because you will have to cut that quite a bit further?

And if you're more focused on vaccines and consumer which don't require as much R&D, is GSK just going to be less focused on innovation now?

The second question was to clarify on consumer and the oral care issues and Aquafresh.

Because sales are down quite a lot to-date.

But I think, Q1 -- it sounded like the manufacturing issues had been fixed for toothpaste.

What was the actual issue?

And why did it seem to be fixed and now isn't fixed?

On that, the oral care manufacturing issues are, essentially, fixed.

And they were at the end of Q1.

What you've seen is, it takes time to refill the supply chains.

That's, basically, the difference.

As you progress further and further through the year, then the ripples, if you will, from the disruption diminish.

Obviously, it takes time to refill pipelines and the like.

So nothing dramatic there at all, James.

In terms of respiratory -- actually, our spend on respiratory will not go down, I suspect, in the next few years.

Why?

A, we've got a whole number of more products coming through the R&D pipeline.

I'm talking about the pre-approval pipeline.

You've got the triples.

You've got some of the very earlier, novel mechanisms coming through.

Some very cool things coming out of the DPUs, which you'll start to hear about in the next two or three years, I think.

We continue to be very active in the traditional R&D space, if I can call it that.

But then, of course, as we've taken one, two, three -- hopefully, four, five, six into the market, you're now going to see more Phase III-B, Phase IV work going on.

And that's quite a shift, in terms of our R&D spend in that direction.

So I don't think you should look for respiratory to be a source of reduced R&D cost.

Now, assuming the Novartis transaction goes through, as I've said already on this call, the transition of oncology from GSK to Novartis will have a significant impact, in terms of reducing R&D cost.

And the second area, which we've been, I think, a leader on over the last six or seven years is, as we develop new technologies, as we develop new approaches, our utilization of a lot of the traditional costs of R&D have diminished.

So if you look at, for example, our efficiency in pre-clinical use of animals, we're remarkably more efficient today than we were four or five years ago.

It's up something like 30% more drugs in development all the way through the system, using more or less the same resources we were using six years ago.

You're going to see more and more of that, over the next two or three years.

I think you will see continued harvest of efficiency from R&D.

You will see some of the bigger landmark studies -- obviously, our [force] Darapladib didn't make it.

That's been a big piece of the cost base.

You'll see that drop out.

You'll see oncology transfer out -- subject to the transaction.

All of those, net-net give us a lot of confidence around how we can manage this R&D number, going forward.

Thanks, James.

Next question.

Steve Scala, Cowen.

Thank you.

I have a few questions.

What can you tell us what turnover in 2014, other than, it won't grow?

At constant exchange, is it more likely to be flat, down modestly, down significantly?

I appreciate there are lots of moving parts, but based on how those parts are lined up now, how would you answer the question?

Second, on Advair.

Simon, you noted a decline over the next two to three years.

Why did you put a qualifier of two to three years on your insight?

Is that because of the 2016 patent, or some other reason?

And is Advair's decline, seen recently -- 12% to 14ish% -- a good metric for extrapolation.

Or would you expect an acceleration?

And then lastly, you called out vaccines up 26% in the quarter in emerging markets.

What tenders drove that, and what is the outlook for the second half?

Thank you.

Okay.

I'll ask Simon, obviously, to answer the questions you directed to him.

What I would say about sales outlook is, we expect it to be broadly similar, which is the guidance that we've given.

Obviously, we're doing everything we can to deliver the best sales result we can.

But given -- as Simon said on the call -- given where we are at this point in the year, this feels like sensible guidance to give you.

As far as the other aspects, Simon?

Yes.

Just on the turnover point -- we said what we said in the comments quite specifically.

There's a lot of moving parts in the top line at the moment.

And that's why we're always focused on guidance being around the bottom line.

And I can remind you of that.

But that's ultimately what we are aiming to deliver for the year.

On Advair -- also to repeat, as I said in my remarks -- I think, a couple of quarters don't necessarily make a trend.

But I think that, certainly, our view is it's much clearer now what the likely rate of decline is, over the next two or three years.

I didn't really call that any further -- just from a visibility point of view, rather than any particular hook related to patent expires or other factors.

That's more just looking as far forward as we can to try and give you some sense of how Advair progresses.

And it's mainly a US comment.

Clearly, the dynamics in Europe and [AMEA market] are somewhat different.

So hopefully, that's helpful.

Next question.

Nicolas Guillen, Morgan Stanley.

Yes.

Hi.

Good afternoon.

Thanks for taking my question.

Actually, I have two.

The first on is on Anoro.

I appreciate its still early days, but can you tell us where the prescriptions come from -- i.e.

whether these are new starts, switches from Spiriva or other [ICS] combinations?

And the second question is a follow-up on OTC.

Could you be a little but more specific on what the supply issues are in smoking cessation and why you are so confident that you will be fixing them by the end of the year?

Especially since your full-year guidance of flat sales for consumer implies 2% growth in [H2].

Thank you.

The confidence is because, in a number of areas -- as I've said already on the call -- really going back over the last couple of months, we've already seen recovery of supply.

And we are making good progress on the smoking control arena.

And our current expectation is that we ought to be able to see further improvement there, which is that, combined with robust underlying demand.

So we're seeing -- if you look at underlying demand in the consumer business -- running at something like 5%.

So we know that there is a really good position there.

And as we go through the next few months, we anticipate being in a better position to supply those things.

I think the bottom line on Anoro -- as I said -- it's very early days.

It's essentially coming from a mix of sources, which is exactly what you would expect.

It's way too early to call a trend on that, I would say, Nicolas.

I think, next quarter and maybe the end of the year will be the right way to look at that.

And I'm sorry to sound a bit like a broken record, but I really am in the place of -- it takes 9 months, 12 months, 15 months to really figure out where these primary care launches are going.

I think we're seeing that with Breo.

I think the absolute fixation with the first few weeks is -- I think the world market has moved on a lot, actually, in terms of the way these products enter the marketplace.

Next question.

Keyer Parekh, Goldman Sachs.

Good afternoon.

I have three questions, please -- first on financial planning, the second on cash, and the third on respiratory.

Just on financial planning -- is there something peculiar about the process that GSK uses at the start of the year when you issue guidance?

Is there more unpredictability about GSK businesses that has led to operating profit guidances being cut three years in a row?

Secondly, as it relates to the cash, there were statements today.

Can you reaffirm that the cash from the Novartis transaction, if it closes, will be distributed as a special dividend?

So is that affording you are given where FX might be and where business cash flows might be?

And thirdly, on respiratory -- your guidance for long-term leadership.

How much of that is dependent on a positive outcome from the SUMMIT study -- so Breo actually showing a mortality benefit?

If that does not work, do you still expect to see a leadership position, come 2017?

Thank you.

Thanks very much for the questions.

Let me just see if I can knock those off.

In terms of the guidance, my recollection, last year, was we delivered our guidance.

And I don't think there is any special phenomenon that goes on at GSK, other than we have a lot of very big moving parts.

There are some very big drug companies who have one or two products.

There are a few drug companies, like ours, where you have a lot of big bits of the business.

Now, you can look at that two ways.

I look at it from the perspective which says, you have lots of big bits of business.

And that gives you a stabilization, a diversification benefit, which gives you a broad confidence in delivering.

If you look at this Company's performance, over the last seven or eight years where we've been able to absorb all the genericizations of the old portfolio.

We've been able to absorb Avandia.

And we've essentially been able to deliver sustained delivery of dividend, of earnings for the Company.

Nothing exciting, obviously, but we've delivered that.

Versus a lot of other companies where they've had one or two big issues.

And they've had to go through corporate-level reductions of 10%, 20%, 30%, 40%, in terms of business size.

I think that really reflects that benefit.

Now, the downside is that if you have an issue in one of those big businesses, it can just knock the varnish off the top of the Company.

If you think about what we are talking about here, we're talking about a year where we hoped we would grow somewhere in the 4% to 8% range.

And we're now saying we're going to be broadly flat, broadly similar year-on-year.

We're talking about a handful of percentage points on a Company of GBP28 billion turnover.

What that is driven by is, you have a phenomenon going on with biggest product, Advair.

You have a phenomenon going on with a big product going generic, Lovaza.

And then you have some friction, if you will, in the consumer business.

The three things together add up to something which puts us in a position where we either decide to cut costs on our new product opportunity, or we re-guide.

The totally sensible thing to do is to re-guide.

It makes absolutely no point for us to be making short-term investment decisions, simply to hit a quarter or a guidance, when you've got these three events which are -- two of the three, essentially to do with the older business.

When you've got those three events, which just knock off your potential to get to where you are originally thought you would get to.

Nobody likes to do those sorts of things.

But I think it's the reality of a business like this.

But the plus side of this business is, we haven't said to you, in any time in the last seven years, by the way, Product X is going generic.

Or Product Y has disappeared, and sales are going to be down 25%.

That's a fundamentally different proposition.

We have not seen that kind of volatility of the delivery.

You can argue that those companies, or those stocks, which go through very significant downturns, then have the benefit of significant growth from the bottom.

But the reality is, the shareholders who are in those stocks when they go down are the ones who bear the cost of that.

And we've avoided that.

We continue to believe that's the right approach, even if it make us somewhat less racy than some other companies might appear to be.

That's the first thing I'd say.

The second thing I would say to this whole point on Advair is that for as long as I've been Chief Executive, I've been having to answer the question about when would Advair go generic, and what would we do after Advair.

And when is all that going to happen?

And that's a very big question that everybody's had.

My views on genericization of Advair haven't changed.

They are exactly as they were the last time we spoke.

No change on that.

But what we are seeing is a product which is now 14 years or 15 years old.

It's a very substantial product -- market-leading product -- coming under the inevitable price pressure, competitive pressure, in a world where the environment has changed fundamentally and where there are more products in the marketplace, not least from ourselves.

And so you're inevitably going to see that kind of pressure.

Now, I think what that tells you, finally, is now is the moment to start thinking about what this Group looks like, post Advair.

It's not about the generics and about the patent expiration.

It's about the transition that we're now engaged in, where you're going to see a somewhat gentle -- albeit probably continued -- downward pressure on Advair, driven by this pricing competition, offset by our ability to bring new products into the market.

Your question on Breo, again, gives me the opportunity to restate something I've said on earnings call, I think, for seven years.

Which it has never been, and neither does it remain, our strategy to replace Advair with Breo.

It's our strategy to build on Advair with the five, six, seven new respiratory products we have coming.

And then, to build growth for the Group with all the other products from outside of respiratory.

That strategy is absolutely, clearly active.

The products are now there.

The products have been rolled out.

As a cumulative group of products, we are ahead of business plan, in terms of performance of the new product.

We're seeing a range of extraordinary performance in areas like HIV and cancer, obviously.

And we're seeing the beginnings of good, relentless progress in the respiratory marketplace.

That's exactly what we plan to do, and we will continue to prosecute that strategy.

It's not about one product, and therefore, it's not about one trial like SUMMIT.

SUMMIT's an important study.

If it's successful, it will be an extremely important additive asset to Breo.

But the whole strategy isn't about Breo.

The strategy is about the portfolio of products which we've brought through to market.

Finally, just to confirm -- absolutely.

If the Novartis transaction is blessed by the regulators, as we fully expect in the first half of 2015, then the cash proceeds will be repatriated through a special dividend as we previously announced.

And we have time just for one last question, which I'm sure will be in three parts.

So go ahead.

Seamus Fernandez, Leerink.

Thanks very much for the question.

I will make it one question.

As we're hearing it from US-based physicians, the promotional effort from GSK is, simply, fundamentally different from the competitors.

So not only are the competitors taking advantage of a change in reimbursement strategy, but they're also taking advantage of a difference in promotional effort from GSK.

And the specific point being that, even sampling programs are different.

And that, actually, is limiting the ability to prescribe Breo, on some level, and also to prescribe Anoro, on some level.

Or at least to get patients interested because the availability of the competitors' products is just that much higher and easier to distribute for an initial 30 days or 60 days.

How are you going to respond to that?

Are you working through changes in your current promotional strategy to really step up your efforts in that regard as your reimbursement improves for Breo and for Anoro over the next 6 months to 12 months?

Because it seems like that's going to be the key to reestablishing your -- and further growing those key franchises.

Thanks.

Thanks, Seamus.

I agree with one aspect of what you said.

I'm not sure I agree with the other.

There is no doubt that, as we build access -- 60% of the COPD lives sit within the Medicare Part D marketplace.

As we build access into Medicare Part D, then that creates the opportunity to pull through the product and to build that over time -- bearing in mind that the dynamic sector of this marketplace is not as big as you see in some other categories.

But there's no doubt that as the access opens up, we have to really do everything we can to try and make sure that patients have the appropriate opportunity to try the medicine.

And that's exactly what we're focused on.

Now, all of the evidence we have around share of voice, share of sampling, presence of sampling, having personally ridden with sales reps in the US -- if there are particular physicians you want to send me the name of to make sure that, for whatever reason, we haven't got there and giving them some samples -- I don't believe that is an issue.

But there's no doubt that as we now move into the phase of greater access -- as we saw with Breo where we've seen, in the last quarter, a 53% increase in prescriptions for Breo, as access began to come online.

And remember, at Q1 everybody was saying, you haven't started to see the movement.

Is it ever going to move?

We said, wait for the access to open.

We'll then start to see movement.

We saw access open.

Scripts are up 53%.

As I explained at the beginning of the call, Breo is one of the very few products which is showing an upward trajectory at this stage of launch on the most dynamic sector, which is absolutely the leading indicator for long-term performance.

We feel good about that.

Now, we are constantly looking at how we can do better in our execution of day-to-day promotion.

Of course, we will look at those.

If there are particular customers who you think we need to spend more time with, I'd love to hear.

Let me know off the call, and we will make sure they get a visit from a highly-trained professional GSK representative.

With that, I'd like to thank everybody for their attention on this call.

And the IR team are available at your disposal if you want to have any follow-up conversations.

Thank you very much.

Ladies and gentlemen, that concludes your call for the day.

Thank you for joining.

You may now disconnect.