葛蘭素史克 (GSK) 2014 Q4 法說會逐字稿

Welcome to the GSK Investor Analyst Call Q4 full-year results.

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 and welcome to the call.

With me is Simon Dingemans, CFO of GSK.

You'll have seen that we've released presentations from both of us on GSK's performance in 2014 and our current strategic focus.

These are available on the website for you to use at your leisure.

The purpose of this call is primarily to answer your questions, but before I open up for questions, just let me make a few brief points.

First, on our performance, as you know 2014 was a challenging year for GSK, particularly in the US primary care market; however, we've responded to this.

In financial terms, core earnings per share for 2014 for 95.4p, down 1% on turnover of GBP23 billion down 3%, reflecting costs and financial efficiencies.

Revenues grew positively in emerging markets up 5%, Japan up 1%, in HIV ViiV up 15%.

These helped to partly offset declines in our established product portfolio down 16% in the US business down 10%, where primary care contracting and pricing dynamics continued to present a very difficult trading environment.

These headwinds, particularly in the respiratory market, will continue to impact performance during 2015; however, we're starting to see some encouraging early indications of how increased formulary coverage for Advair and our new portfolio Relvar, Breo, and Anoro, can help us regain market share and deliver improved respiratory performance.

As we've consistently said, our strategy is to develop a diversified portfolio of respiratory products and that progression continues with several key milestones expected this year, including the launch of Incruse and Arnuity in the United States, FDA decisions for Breo for the use in asthma, and IL5 monoclonal antibody mepolizumab for severe asthma and readout of the Breo SUMMIT study for mortality and morbidity in COPD.

Outside of respiratory, new product performance in HIV was exceptional in 2014; combined sales of Tivicay and Triumeq achieving GBP340 million.

In Consumer Healthcare sales for the year were down 1%, but up 2% in the fourth quarter, as the business started to recover from recent manufacturing supply issues.

These issues have now been resolved and we expect increasing benefit from the resumption of supply going forward.

You will also see today that we have announced two important events for this year.

Following completion of the proposed three-part transaction with Novartis, we will hold an Investor Day, at which we will provide 2015 earnings guidance for the enlarged group and profile the medium and long-term shape and opportunities for GSK.

Closure of this transaction is a critical priority for us this year and we're making good progress and expect to close within half one of 2015.

This deal will transform the shape of the Company, significantly bolstering our Consumer Healthcare and vaccine operations and will be a major step toward fulfilling the Company strategy of creating a simpler, stronger, and more balanced platform for long-term growth.

The other event we've announced today is our intention to hold an R&D Investor Day in October to give greater visibility to shareholders on our pharmaceutical and vaccine pipelines.

In our advanced pipeline, we see significant potential for our vaccine to prevent shingles, the close triple combination product in COPD, sirukumab in rheumatoid arthritis, cabotegravir in HIV, losmapimod for acute coronary syndrome, and 863, our prolyl hydroxylase inhibitor for anaemia.

At our R&D day, we also intend to provide greater visibility on multiple early-stage assets in therapeutic areas where we see significant opportunity.

These include immuno-inflammation, immuno-oncology, and cardiovascular disease, as well as a number of prophylactic and therapeutic vaccine candidates.

Finally, I'll just note that 2015 represents a significant year in terms of our plans for returns to shareholders, with a combination of an ordinary dividend of 80p expected and the return of GBP4 billion from the Novartis transaction.

For the last year, you'll have seen that we've declared a 2014 dividend of 80p per share, which is up 3%.

With that, I'll open up to questions and remind you that I have Simon with me as well, in the event you want to enter more detail on any of the numbers, which he described in his presentation on the website.

We'll go to questions, please.

(Operator Instructions)

James Gordon from JPMorgan.

Hello, thanks for taking my questions.

Three questions on the pipeline, please; one question was on the 10 Phase III starts.

Can you say how many of those could be NCEs versus essentially line extensions and whether this includes vaccines?

The second pipeline question was on immuno-oncology and I saw the three assets that you flagged.

Are these assets that are already in the clinic?

Then the third question was just on the gene therapy asset, which I see you're filing.

When I look for the incidence or the prevalence of the disease, it looks quite rare.

It looks like it could be maybe only 5 or 10 people a year in the US get this, but is that an underestimate?

Could this be a meaningful commercial opportunity or is this quite a niche indication?

Thanks very much, James.

On the last question, it is a rare disease, but it's been -- I suspect the numbers will be a little bit higher than you've described.

I certainly wouldn't guide you to think it's going to be a big product.

It's a rare disease.

We've got extremely encouraging data.

We see this as part of a platform of four or five further diseases, which you'll see more of in October.

You should see this really as the first proof of concept of an approach we're taking for a portfolio of diseases, which are increasingly common.

So as you go through the next disease, two, three, four, you see every increase in numbers and we think overall, there's quite an interest and opportunity for that.

As you know, our rare disease portfolio, although we're not famous for being a rare disease business, you saw good performance this year, about GBP400 million of business there in the portfolio of rare disease products.

As far as immuno-oncology is concerned, it was of a variety of programs there, so if you look at things like the OX-40, that goes into the clinic this year.

When you look through the overall portfolio of immuno-oncology assets, some are in, some are about to go in.

We'll give you a lot more detail of that in October.

The majority of these assets are first in class or certainly at the front of their class and we're obviously excited about those.

I think I've covered your questions.

So next question, please.

Nicolas Guyon from Morgan Stanley.

Good afternoon.

Thanks for taking my question.

I have three respiratory questions, actually.

The first one is for the US respiratory franchise.

While the overall decline remains [unchanged], the volume erosion seems to abate for the detriment of pricing.

Do expect to [see] a pattern for this year and is there any upside to your [minus 20% to 25%] guidance?

Second, as a follow-up, could you discuss the price pressure that you are seeing on the rest of your respiratory portfolio in the US ex-Advair?

Thirdly, on Anoro, how would you expect [incoming] new entrants like [quthropam or olodeterol or QV8] to impact the market?

Thank you.

Thanks very much, Nicolas.

So in terms of the decline, what you'll see -- what you need to understand is the pricing effect will flow through into 2015.

What you need to recognize is, in 2014, we had a shift in the external environment, obviously, with the willingness of plans to go to class limits.

That affected us initially through the ESI contract, but then clearly the risk existed elsewhere.

The response we made was obviously to adjust our price point.

The endpoint of all of that is good news for GSK in the sense that we now have higher access for all of our respiratory products in the US; Advair higher than it's ever been, Breo higher than it's ever been, Anoro higher than it's ever been, Advair right in the high [80%s], the other two in the [70%/75%] territory, very good for new products.

Compared to where we were a year ago, rather than us being excluded, we're actually the beneficiary of being included in a number of class limiting contracts with big payers.

In fact, compared to our biggest competitor in this marketplace, we have about 20 percentage point advantage of access compared to where they are today, which is quite a big flip around from last year.

But to achieve that, the way in which the price adjustments took place, and it's the reason why last year was so difficult for us to call exactly right at the beginning of the year and we obviously got it wrong, but the reason why it was so difficult to call was first of all, we had to make some price adjustments on the lead contracts, not knowing how wide a phenomena this would be.

Those initial price adjustments, obviously, reduce your revenue on those contracts, but they also trigger best price.

So what that means is the federal government, then, automatically gets the benefit of that reduced price.

That was an effect which essentially flows through, let's say, from the first quarter through last year, some of which you'll see in the first quarter this year.

And then as we essentially repositioned our price on a broader basis, while it didn't further reduce best price, it obviously further suppresses the potential revenue because you're now giving that price to a much broader part of the marketplace.

That phenomena had a little bit of an impact during last year, but largely comes into play on January 1 because a lot of the key contracts which we were negotiating critically for 2015 and very importantly, running into 2016, those contracts only kick into gear essentially November, December, January.

So what you then have is the effect of that price layer flowing through.

So even though we are seeing market shares go up, we're seeing share volumes go up in what looks like a reasonably encouraging market in terms of market dynamic.

There's no doubt you will see more price pressure during this year.

I think it's a reasonable expectation -- I don't want to get carried away here.

I think it's a reasonable expectation for you at this point in time to assume that fairly conservative view that carries on like last year.

Obviously, what would really change that for the better is if we see the volumes and the shares continue to grow more than you would necessarily anticipate and that's possible and that's obviously, what we're focused on but I don't want to get ahead of my skis here.

I'm simply signaling to you early days, shares look very encouraging.

New product access looks terrific.

Price contracts are all locked in, but we know that price effect will flow through.

The big variable is how quickly the big volume comes back.

I think you'll kind of just carry on for another quarter before we really call this makes sense to me.

In terms of general price pressure elsewhere, nothing massive beyond what I've just talked about.

So we continue to see a good business for Flovent, a good business for Ventolin, obviously, in the US.

So I wouldn't say there was anything massive.

There is price pressure in those spaces but obviously, the main story has been around Advair, Breo, and Anoro.

I'd say, it's done, really, in terms of what had to happen to us, but the ripples, the consequence of the price flow-through, but on the bright side, the consequences of the volume opportunity are also flowing through.

As far as the inbound competitors, we'll see how they come in, but right now, it looks like everybody's going to be twice a day.

We feel like the Ellipta device is getting more and more traction.

It's very interesting to watch physician reaction now because they initially saw Ellipta just with Breo.

They've now seen it with Anoro.

They've now seen it very recently with Incruse and Arnuity.

It's beginning to become obvious to physicians that they can go through monotherapy's different combinations without having to switch devices.

I think that's increasingly going to become a key advantage for us, as well as obviously the once a day nature.

Then as we move forward into this year, particularly for Breo with the asthma indication and the SUMMIT results, we've got a lot of new news coming as well.

So don't get me wrong, it's a super competitive space, both in Europe and in America, but we increasingly are feeling confident that after a slow start, we're beginning to get these new products entrenched.

We think every piece of new product portfolio we bring to the marketplace strengthens our overall position and we're beginning -- we certainly have got access nailed on this portfolio in the US and that's obviously the basis on which we go into 2015.

Next question.

Alexandra Hauber from UBS.

Good afternoon.

Thank you for taking my questions.

First question is a couple of moving parts on Advair in the US, it looks like to me that the fourth quarter figure included about a 15% stocking effect, the same as last year, so about GBP80 million to GBP100 million stocking in the fourth quarter.

I guess that means we will see a corresponding de-stock in the first quarter 2015, just like in the first quarter 2014.

The question I actually have is such this de-stock, which would contribute about 4% to 5% decline assuming it's not recurring, is this de-stock part of your guidance for the Advair 20% decline, which you issued previously?

I know that it is too early to call the exact Advair decline based on the answer you just described on a previous question, but that number of 20% is in the room.

I just would like to know whether that includes a 5% de-stock in the first quarter and therefore volume price is 15% or if the volume price based on the old number was 20%?

Second question is -- I've asked this question many times before it's on the consumer supply situation.

I just would like to get some idea which areas are still affected and what are the timelines for final resolution?

That would be great.

Certainly sorry to ask a boring tax question, but just would like to ask whether the good tax rate you had in the fourth quarter, is that just a one-time thing or is this the resulting full-year tax rate?

Is that the outlook, the guidance inside outlook for 2015 or third option is the tax rate going to be for the reset for the new [co] anyway and therefore, it's too early to give any guideline here?

Great.

Thanks, Alexandra.

So in terms of US Advair and the year-end stock movements, yes, that is included in our view of Advair and I would reiterate, we'd expect Q1 to be particularly challenged because it has a kind of concentration of price effect, de-stock, all of those things.

But yes, it's within the frame of reference that you'd previously heard.

As far as consumer manufacture, all of the issues in the two or three product lines that we dealt with last year are dealt with, all of the factories are running manufacturing shipping.

The last ones to get back to absolutely full stock cover, which is different to supply but full stock cover is the smoking cessation product line, but the factories are running and everything's going fine there.

Then, on the pharmaceutical side, the only area where we've got any -- and it's tiny, we're talking like GBP10 million of disruption, is in the dermatology.

We have one or two dermatology lines which have had some supply disruption as well, but you're talking tiny numbers.

As of today, to all intents and purposes, that issue is behind us.

I would expect consumer supply to be a tailwind for this year.

I think it will be more pronounced in Q2, Q3, Q4, only because the negative effect was largely toward the end of Q1 and then Q2/Q3.

So it will be a tailwind and as we sit here today, all the plants are running very well and very busily, I have to say.

Simon, do you want to talk about tax?

On tax rate, Alexandra, the fourth quarter number reflects the fact that a number of the settlements we reached during the course of the year arrived in the fourth quarter.

So you should look at the full-year rate as more of a guide.

For the business as it is today, looking forward around 20% is probably a reasonable estimate, although we then need to have a look at the combined business when we close on the Novartis transaction and we'll give you specific guidance around the enlarged groups tax rate when we get there.

Great.

Thanks, Simon.

Next question.

Graham Parry from Bank of America.

Firstly, I understand you don't want to give 2015 guidance including the Novartis deals until they're closed, but could you quantify what your expected sales, not pricing, profit growth would be without the Novartis deals?

Secondly, you previously talked about a significant reset of margins in 2015, due to the headwinds from declining Advair and the Novartis deals.

Would that still be an appropriate phrase to use?

Thirdly, in your slides, you give the latest coverage of Breo and Anoro in Medicare plans, but how much of that is that in Tier 2 and what is the commercial coverage?

Finally, on the Advair declines, can you break down the expectations of volume and price components?

Back of the envelope, it seems winning back the key contracts would leave your volumes, if anything, flattish so the 20% to 25% decline in sales would all be price and that's a greater price impact then overall in 2014, hence arguably more margin impact from that as well.

Thank you.

For obvious reasons, Graham, we don't break down the tiering of our access, but what we tend to look is favorable position through all the various different contracts and types of encouragement or penalty.

As I described earlier, if you look, for example, at Advair in Part D, you'd look at something like 85%, 86% favorable.

If you look at Advair in commercial, you're looking at something very high 70%s, up into the 80%s.

In fact, right now, we're probably running somewhere like 85% to 87% favorable for commercial access of Advair.

If you look at Breo, Part D, you're probably looking at, right now, somewhere around 75%, 76% and something around 68%, 70% for commercial.

If you look at Anoro, Part D, we're now that just a tad under 70% and on commercial, we're just a tad under 80%.

I think a very strong position there and as I said earlier, for Advair, in commercial, we're about 20 points ahead of our next biggest competitor in terms of commercial access.

We're not going to get -- the whole point of not giving you guidance until after the transaction is we're not going to give you guidance until after the transaction, so I'll refrain from getting into any details there.

It is absolutely fair to expect that we do expect the margin to come down a bit this year, partly due to the transaction and partly due to some of the price pressures in the system.

But we'll obviously give you more details of that and Simon's previously given you at least a shape and a feel of that in the past.

We'll firm that up as we get there because clearly -- and the reason why we're doing this, everybody, is, I think, pretty obvious.

We're pretty close to this transaction closing.

First of all, we don't want to give you a set of numbers, which we then, essentially, it all has to change or very quickly afterwards is the first point.

The second point is everything to do with the Novartis transaction for both companies is based on 2013 pro forma data.

Now particularly in the case of the vaccine business but also partially in the case of the consumer business, you know that's a very dynamic business at Novartis.

You also will now that, although we're in the process of putting these two businesses together, we are officially still competitors and by regulation, we're not allowed to share all the detail of what's been going on in the companies.

You also know that, in the case of Novartis, they don't publish and breakout the vaccine business in exactly the way we're acquiring it because we're not buying the flu business and they don't break out the consumer business, historically, in exactly the way we're acquiring it because of the animal health inclusion in that sector.

So as a result of all of that, it would be wrong to give you guesses or even to extrapolate the 2013 pro formas when life has moved on 15, 18 months, first of all, and the businesses which are coming across are not reflective of what you see in their publish numbers.

We really want to take the time to get that right for you and then we'll publish that at the guidance as soon as we possibly can.

Next question.

Keyur Parekh from Goldman Sachs.

Two questions, please.

Andrew, apologies if I missed this, but I did not see an update on the press release regarding the IRR on your R&D spend, which you've historically provided for us, given the launches for the respiratory products would be very helpful.

If you can help us think about how you've adjusted those numbers kind of for 2014 and where do you think the outlook for that is, given your state or your assessment of the pipeline today.

Secondly, just would be great to hear some context around how do you see the margin outlook for this business longer-term?

I realize 2015 as a transitional year, but as we think about the transaction closing, kind of 2016, 2017, 2018, any flavor of that would be very helpful.

Thank you.

Thanks very much.

So as far as the rate of return assessment, we do that every couple of years, so that will be done next year.

We did it last year, we'll do it next year.

I haven't got an update for you, simply because we haven't run the numbers again.

There will obviously be quite a few puts and takes in it next year so as you look at it, there'll be one or two bigger late stage assets which failed last year so [daraplidib in phase III] of course.

There was a portfolio of new products which are moving forward.

There's a shift in pricing assumption.

So there will be a lot of dynamics, on top of which there's been -- and you'll see as we run through this year, pretty substantial reduction in the amount spend in R&D.

So as all of that obviously needs to feed into really calculate the number, I would say specifically to your point on respiratory, my overall expectations on respiratory haven't moved a heck of a lot over the last year.

Remember this is a business which, thanks largely to A, obviously, intellectual property, but B, manufacturing hurdles device protection, all the rest of it, this is a business which we expect to have a very, very long life attached to it.

Clearly, the take off of these products is running a bit slower than we've historically seen.

Not massively slower than we'd expected, a bit slower than we'd expected.

I know a lot slower than you'd expected, a bit slower than we'd expected.

We're increasingly or I have no reason to feel that the ultimate peak opportunity of these products has changed very much at all.

Actually, when I think mepolizumab and the way it's coming forward in the pipeline and the proximity of being able to get that to the market, actually I think our respiratory business, provided we can continue to convert these market share growths that we're beginning to see, not just in America, but also in Japan, and also in some of the lead European markets, if we can continue to keep that momentum going, then I actually think our goal of delivering a respiratory business post-Advair decline, which is bigger than Advair was before we started, which is essentially what I've always tried to do, I think the probability of us achieving that is still absolutely game on.

That's very much what we're focused to drive toward.

As far as the margin outlook is concerned, we are definitely going to talk to that when we have the Investor Day, so I would just ask your patience for a little bit longer until the transaction is done, at which point, you'll get guidance not just for 2015, but over the next several years.

We're very conscious, almost for the buy side in particular, we think it's probably more important almost to give you a sense of the shape of the evolution of the Company over the next three years than it is to absolutely focus on the short run EPS.

Now, we're going to talk to you about both of those things, but you're going to see all of that at the Investor Day, so I'd just ask you to bear with us on that.

Next question, please.

Dani Saurymper from Barclays.

Good afternoon.

I just wanted to ask two questions.

One, regarding your aspiration to grow the respiratory business again in 2016, can you update us on terms of your line of sight on your generic competitor risk?

Secondarily, I believe you do a triennial review of your R&D and I think it's meant to have taken place at the end of 2014 or beginning of this year.

In that context, can you just maybe just a little bit about any potential pruning of R&D areas, particularly in the context of where you spend close to [$4 billion] on pharmaceutical R&D?

Then I just also wondered if last year maybe Simon, given the decision you took last year to not sell some of the established product portfolio, how you're thinking about that going forward in terms of is there maybe some more piecemeal divestments that you're anticipating in the coming years?

Okay, great.

Let me ask Simon to answer the last thing first.

Yes, so I think, as we said at the time, we are now going to retain the business and we'll manage the products in-house, but there will be likely to be some trimming of that portfolio as part of that process.

I think, over the year, the portfolio steadily improved its margin across the quarters, demonstrating our ability to manage that portfolio.

So it's very much an internal focus, but some small-scale disposal is probably in the mix over the next couple of years.

As far as generics are concerned, it's a different picture around the world.

So in Europe now, as we predicted three or four years ago, we've got a kind of variety of different copies.

I'm not going to call them generics, because in many situations, they're not viewed to be substitutable.

So we've got branded copies in a number of markets.

With the exception of one or two Eastern European markets, the penetration of these products is very, very low.

It is driving a bit of price pressure, so what you see in the European number is actually volumes are more or less the same, maybe a little down, a little down in the fourth quarter, but very marginal.

There's a bit more of the decline is due to price and actually so far, we've done very well holding our volumes in our share of market, but we've had to give on price a little bit in one or two places.

So Europe is still a very fragmented situation.

Actually, the most recent information we're picking up is that I'm of the more classic generic threats have been delayed in Europe.

But again, I'm not going to particularly bet on any of those things because they're not within my control.

But just as we've seen many times before, generics kind of come and then recede before they reach the market.

As far as the US is concerned, I think our view remains very similar.

We don't see generic risk in the short run.

Obviously, we see other companies talk up what they think they're going to be able to achieve, but it's also interesting to see that they all acknowledge the very significant manufacturing challenges that they have and how difficult it is to do and therefore, just as I've always said, this is way beyond IP.

It's really about whether people can manufacture to the standard and we have to wait and see what comes along.

Now, the reality is that, as we go through the next few years, Advair will become, in the US, a smaller and smaller proportion of the group, obviously, for the reasons we saw last year and we've talked about.

The new product should start to take up that strain and it's never been our goal to grow a product.

The success for us is not to simply to grow a product which is going to replace Advair with the new product, it's been to grow a portfolio to replace Advair.

I think we're absolutely on track for that.

Our statements about being able to grow in 2016 are all built on what I've just said, which is we don't particularly expect to see a substitutable generic in 2016 and I'm not sure too many other people do either.

In terms of R&D pruning, in fact, we did a review of our discovery portfolio in the middle of last year and the pruning is taking place within the restructuring of our R&D operations, as we speak.

There are a number of DPUs which have been brought to close and there are others which have been accelerated.

Actually, when you look at the overall performance of the DPUs over the six or seven years we've been running this approach, I think it's looking extremely exciting.

First of all, the number of programs 80% of our programs, as we move forward now, are first in class or best in class, we believe, but most are first in class, so a very significant degree of innovation.

There's a very broad diversity across that portfolio, but just as we always said, there will be a few which wouldn't make it and we continued to trim those as we go along.

That was essentially done and it was decided and has essentially been executed as we speak and is part of the restructuring of R&D that we announced at Q3 last year.

Next question.

Kerry Holford from Exane.

Thank you.

Three questions, please.

Firstly, on the return of the GBP4 billion to shareholders after the Novartis deal closure, previously you've spoken in a little more detail about the B share scheme, but I saw nothing explicit in the press release today.

So I wondered is that still your preferred option or are you considering an alternative return of cash, such as a special dividend or the like?

Secondly, on respiratory, you've spoken before about the return to growth in 2016.

Given you now know where you are positioned for 2015, I wonder if you can comment on the outlook for the franchise growth this year?

Then lastly, going back to a question earlier, you've highlighted up to 10 phase III starts in 2015, can you tell us how many of those our NMEs versus line extensions?

Thank you.

Great.

Thanks, Kerry.

The majority of the phase III starts this year in pharma are line extensions to existing NMEs.

As you look into phase II, they are -- majority of the phase II starts are NMEs and obviously, I'm just talking about pharma here.

In terms of return to growth, I would expect, as we've said in the release today, that global Seretide/Advair revenues I would expect to be down this year.

Exactly where that lands is all around the volume responsiveness to the price shifts that we've seen in the US, so exactly where that looks, we have to wait and see.

It's going to be worse at the front end of the year than the back end of the year.

So I would guide you it's going to be more challenging -- we're going to see a bigger impact in the first quarter or two.

We would then expect to see that to ameliorate.

Why?

Because a lot of the price effect starts to annualize out and because you'd expect the newer products to start to take up more of the strain.

But exactly what that does at the franchise level, there's a lot of moving parts around that.

We're obviously executing to try to get to the best performance we can get to this year to then, obviously, drive things forward into 2016.

Our assumption on 2016 is based on the assumption that we don't have a USAB generic in the marketplace and also, given that we've already signed a whole series of contracts on pricing which carry us further forward into 2016.

So those are the assumptions that underpin that judgment.

Obviously, if one of those things massively changed, we talk to you about it, but as of today, actually, when I look at our US NRx share and I know you guys hate NBRx, but I told you a few months ago, the NBRx is moving the right way, NRx is following.

You all know why, because the dynamic sector of this marketplace is only about 10% or 12%.

So it takes eight or nine months for NBRx trends to reflect into NRx.

NRx is moving.

You can see that in the US and in Japan that we're now starting to see improvements in America of Advair and additionally Breo driving up our total share.

In Japan, you're seeing that Relvar is taking not just a cannibalization opportunity from Advair, but significant share from Symbicort, net-net GSK share going up.

Obviously, it's early days, but if we can maintain that and drive that kind of shift in and if we can do it in more countries and I have no reason to believe we shouldn't try to do that, then gradually that phenomena is going to counter the price phenomena and that's why I believe we can grow next year, subject to the couple of caveats I've just explained to you.

The return of the GBP4 billion, Simon, do you want to comment on that?

We announced, when we originally agreed the transaction, a B share scheme, as you recall, the government change the rules in the autumn statement.

We're still trying to work through how best to deliver that GBP4 billion to the shareholders.

We'll give you an update when we close the transaction so still work in progress.

Thanks, Kerry, and next question.

Matthew Weston from Credit Suisse.

Thank you very much.

Three questions if I can.

You highlight in the statement that 2015 will be the trough year for respiratory revenue.

Given the increased royalties on new products and also the launch costs, can you give us an idea when you expect the trough year in profits from the respiratory business?

Also, I see recently in Germany, GBA declared that Anoro had no incremental benefit over existing therapies.

Can you tell us your strategy in that market?

Will you follow other companies and withdraw the product in Germany?

Finally, Andrew, I see your comments at the press conference that you wouldn't commit to a 2016 dividend.

Should we expect that you will make comments around the 2016 and medium-term dividend policy at the Q2 Investor Day after the Novartis transaction is closed?

Thanks, Matthew.

So no plans to withdraw Anoro from Germany and I think we will engage to try and reverse that decision, obviously.

I think we already have a medium long-term dividend policy.

It's in the release and it says we're committed to long-term growth of dividend.

I think it's highly unlikely that we're going to change that and it's up to the Board whether we make a commitment in the next few months to 2016.

It's relatively unusual to do that.

We've done it this year, but whether we do it again, let's wait to see when we get there.

But certainly the dividend policy is out.

There's no mystery about what the Company's dividend policy.

We've got a really good track record of delivering dividend.

Obviously, given that we didn't see the growth that we'd originally anticipated last year, we've held back the dividend growth this year because we want to make sure that the cover is rebuilt before we move back to growth.

But at this level of dividend, I think that's an entirely reasonable judgment to make and my guess is there won't be any great fireworks around any future commentary there.

In terms of the future shape of the business, again, we'll give you a sense when we talk to you after the Novartis transaction around all of those aspects, as soon as we can.

Thank you.

Next question.

Mark Clark from Deutsche Bank.

Good afternoon, gentlemen.

Firstly, a question on China.

I wonder if you could just give us an update of what's happening with the organization there?

There's some reports on the wires recently about downsizing fairly significant, so what's happening to the organization there?

Can we look forward to, in your opinion, growth from that business or is it going through a sort of transition period going forward over the next year or two?

Secondly, a question for Simon, you mentioned in your pre-results video that the underlying margin was down about whatever it was 80 or 90 basis points in the year.

You also mentioned that you won't have the benefit of structural gains in 2015, which added a better part of 80-plus basis points to the margin.

So would you encourage us to think that the underlying margin pressure in 2015 that you signal would be significantly more than 100 basis points before the impact of Novartis?

Thank you.

Great.

I'll ask Simon to comment in a second on that, Mark.

So China business was broadly flat in 2014 versus 2013 and has broadly stabilized, which is good.

We have seen an attrition of headcount in China as obviously, through the disruption we had last year, but broadly speaking, where we are today is -- we have the resource base in place for what we anticipate to go forward.

We're going to take it one step at a time.

We have a lot of work to do to rebuild our position there, but actually if I think through over the next two or three years, I am quite optimistic about our opportunity in China.

I think getting stabilization last year is a great first step and we continue to file new products.

I continue -- I personally believe this is going to be an important marketplace for us and we're going to step forward on that basis.

Simon, do you want to comment on the margin?

Yes.

Mark, in terms of specifics on the margin, we'll get to that when we do the Investor Day for the Company post the transaction.

But I flagged in the video that a continuing decline in Advair/Seretide revenues will put some downward pressure on the margin in the year for the existing business and obviously, in the absence of the structural benefits that we've seen over the last three or four years, there's an additional drag in there.

But exactly where we expect that to go I think is something we should cover when the Company comes together, post the close, so we'll pick it up then.

Thanks, Simon.

Next question.

Andy Kocen from Redburn.

Hi, thanks for taking the question.

Another strategic one relating to the shape of the business, because you've sold oncology, which is fast growing, you're talking about the partial IPO of ViiV, which is a growing part of the business, and last year, you tried to sell EPP and Bloomberg's talking about you potentially spinning out consumer and vaccines.

I know nothing should be off the table when you consider your business units, but do you really want Glaxo to look like in five years time?

What's really the core of what you do?

Thanks for the question, Andy.

Where I'm at, in terms of this, first of all, we should take very objective decisions about how to create the best long-term value proposition from the assets that we own.

I came to the very strong conclusion we were not the best owners of the Lucozade business, which is why I sold it.

I think it makes sense to sell the tail businesses of consumer because it allows you to focus on big brands is why I sold it.

I believe that our marketed oncology products, at $16 billion was an extraordinary valuation to be able to achieve versus any retained position, given my view of that marketplace over the next five or six years.

I'll come back to that in a second.

It also allowed me to unlock what I've wanted to do for a long time, which was find a way to take consumer to scale and to absolutely lock in the leadership position of the vaccine business.

What that leaves me with once we close the Novartis transaction is the company I've been trying to create for seven years: a balanced business, consumer 25% of the business, pharmaceuticals 60% of the business, huge vaccine platform, all built on a very substantial global footprint.

If you look at not just the sectoral balance that we've created or will have created, but also the geographic balance, you see a shift from an overdependence on the US, which clearly the US is going through a very multi-year shift in the US marketplace on pricing.

So we've gone from an overdependence on the US to really a very good balance between US, Japan, Europe, and emerging markets.

What that means is that we've got durable businesses in consumer because of brand protection, durable businesses in vaccines, and we've got durable businesses in our pharmaceutical portfolio, not least because of the device technologies in respiratory.

We have durable business in emerging markets because of the nature of those marketplaces compared to the IP-heavy Western markets.

Just to put that last point into crystal clear clarity, the year that Augmentin went off patent, we made 477 tons of Augmentin.

In 2014, with almost no sales in America, we made 894 tons; almost double.

In Ventolin, when Ventolin went off patent in America, we were making 50 million cans a year, now we're making 160 million cans a year because of the emerging markets.

Now, of course, that business comes in at a lower price and a lower margin but it's an enormous incremental opportunity.

As we've gone through the last six or seven years, you haven't seen a lot of this because we've been burning off a lot of the old generic portfolio, the Avandia portfolio, and most recently, dealing with price on Advair.

But as you look forward and you look at that strong consumer platform, you look at that strong vaccine platform, and you look at the pharm business, half of which is respiratory, which is loaded up with new products and HIV, which is loaded up with new products and the rest basically is either emerging market established products I've just touched on or it's going to be supported by a very substantial pipeline.

You start to see how those three businesses can really drive growth going forward; particularly when you then step back and say where is the next big patent expiration for the company?

Now clearly Advair exists as a big patent expiration, but what you're seeing, partly due to price partly due to new products, is quite quickly now Advair is not going to be the absolute be all and end all of the GSK story in the way that it's dominated things for the last 10 years.

As you look through that, the business looks remarkably durable.

Now I come back to the comment I made about oncology.

[$16 billion] allowed me to get the deal done that I needed to get done and a very, very full valuation, very difficult to see how GSK could've beaten that number by retaining that business.

I believe over the next few years, we're going to see in oncology more competition, there'll be price competition, and there's a tremendous intensity, particularly around some of the areas that we've established our business in, so it makes a lot of sense to crystallize our position now.

However, we also recognize that there is great opportunity for more significant innovation in this sector, which is why we've continue to prosecute our early research in epigenetics and immuno-oncology and I think we have every opportunity to come back into that space down the road, either directly or with a partner like Novartis.

But I'd remind you, we have no obligation to partner anything to Novartis.

We have the option to offer it to them, we do not have the obligation to give it to them and we're perfectly at will to take things forward on our own.

So oncology remains and I know some of you this might be freaking you out with the idea that we could sell the current portfolio and still think we're in the space, but the options exist very much for us for oncology to come back.

We clearly have a strong position in ViiV, we clearly have a strong position in respiratory and then, as you look at immuno-inflammation and cardiology, we have some significant bets coming through the system.

So that's the business that we're building.

We think that's a great business.

We think that's a business which has got tremendous operational synergies, a really strong global platform, and engines that can drive all of these business going forward as we move out of a very prolonged period of headwinds on that organization.

But we shouldn't be religious about ignoring the possibility that there is more value to be created with a different corporate construct.

I've demonstrated through the sales, through the ViiV creation, and through the Novartis transaction, I think, an unusual degree of creativity in this sector to try and find ways to unlock assets without using enormous premium-driven transactions to do it and we'll continue to go open-minded about that.

So absolutely the core and central plan is the business that we're creating with the Novartis transaction and the R&D portfolio that we have coming through within GSK.

But we are always going to be thoughtful about optionality and it's obvious, a statement of fact, that the new transaction creates more optionality than we had before and that's, I hope, crafts all of this in a way where you can see the consistency between being committed to what we are trying to build here, but also open-minded to the reality that if there are better options, then we're always going to be thoughtful about them on behalf of our shareholders.

Next question.

Jeff Holford from Jefferies.

Hi, thanks very much for taking my question.

I just have a follow-on on that theme.

I think it's pretty clear that there's a strong valuation case for the Company on a sum of the parts basis, but I just wondered what your view is when you're looking at the new construct?

Are there significant dis-synergies that we can't potentially see for further separation of the businesses beyond just the IPO of ViiV?

Thanks, Jeff.

That is a great question.

It's fundamentally the core question to these sorts of issues.

I want to make just two or three comments.

First of all, I want to remind you all that we haven't made the definitive decision on ViiV yet.

We will make that in the summer, but I want to just highlight, we've talked about a partial IPO of ViiV, at least initially as the case we're testing.

I remind you that we own nearly 80% of that business.

It wouldn't take a rocket scientist to figure out that, even if we did a partial IPO, we would still own more than 50% of that business.

So I think anybody who's thinking ViiV or HIV is not going to be an important part of the GSK equity story if they IPO it, think again, because that's not the scenario that we're planning.

The scenario we're thoughtful about is to potentially IPO a piece of that business to allow a release or to allow the ventilation of that value to shareholders properly to put it into a situation where it can really drive forward as a specialist business.

We don't think there are massive dis-synergies there.

But that's a hypothesis with testing on the ViiV piece, but if we executed on that, at least in the early years, it would be a partial IPO, it would still be a very substantial part of the GSK equity story.

As far as the other three businesses, the question of the dis-synergy, so Jeff, there are really two places that I think you have to be really thoughtful about and it's why this isn't just so simple as to say these three businesses could be cut and pasted any which way you want.

The first is the consumer business and its position in emerging markets compared to the pharmaceutical business and obviously, the interplay between the manufacturing backbones and the R&D backbones of the two companies.

Those backbones -- regulators are pushing consumer companies more and more into a pharmaceutical standard of manufacture.

That's something we're very good at.

Secondly, R&D from time to time will produce assets which can cross the bridge.

In fact, today we're shipping Flonase OTC in America -- big switch come along every now and again.

You know that in Novartis is Voltaren switch in the works, that'd be terrific.

There's a consumer healthcare company that maybe twice within three or four years there are going to be significant US switch opportunities.

That doesn't happen very often, but when they come, they're very big and they drive these businesses forward.

I would also say, when you look at the top performing consumer healthcare companies, the OTC companies, they're almost all the top performers are almost all owned by pharmaceutical companies.

The companies which drive good overall consumer healthcare growth typically, which are not owned by pharma, are driving that growth from their FMCG healthcare portfolios, not from their OTC healthcare portfolios.

That, at a very kind of 80,000 feet perspective, speaks to the fact that there are potential dis-synergies in the business model and I would argue for GSK, you have to be very careful about unraveling your emerging market platform because of the way those markets work.

You've got to watch for that.

I'm not saying that is a killer argument, but that's the kind of analysis you want to carefully look at.

The second area to be thoughtful about is in vaccines.

So vaccines at GSK clearly is a separate R&D, separate manufacturing organization.

Although actually, the manufacturing organizations are beginning at the margin to co-mingle as the pharma business moves more into biologics.

But what's critical to understand is 100% of the distribution is merged together, so on the ground in 100 countries it is a single pharmaceutical vaccine business and there are very substantial synergies around how you operate with governments, how you engage with the marketplace.

So again, you'd have to be very thoughtful about what you're unraveling if you were going to separate it, which again, is why I would reiterate that our core focus is to create this effective global business with the three platforms I've described about, supported by the very strong global geographic balance and we're not close minded to options.

We recognize our options are more than they were, but it's not simplistic in terms of how to make those choices.

I'm not going to make those choices based on a quarter or a year, I'm going to make those choices based on what I think's right for these businesses over a 10 or 20-year timeframe because the lifecycles of their portfolios are obviously 10 or 20 years.

So we need to make those choices on that basis.

I hope that helps.

I know it's a big subject and I'm sorry the answers are long, but I think it's just important to try and ensure you've got a clear view of our philosophy.

We're going to take the last question now.

Florent Cespedes from Societe Generale.

Good afternoon, gentlemen.

Florent Cespedes from Societe Generale, thank you very much for taking my questions.

A few quick products-related questions on the respiratory and cardio.

Let's start with cardiology, losmapimod in ACS, there is a big ongoing clinical trial with a completion date expected in 2018.

Could you give us a little more color on the design and if there will be an interim analysis in the coming month or quarters?

A follow-up on cardio metabolic, could you share with us some projects which are in the early phase pipeline in this area, like you did in immuno-oncology and immuno-inflammation?

Second area, on the respiratory, Breo, this year it will be an important year for Breo with the SUMMIT clinical trial results.

Could you remind us, could you refresh our memory, on the main differences that exist between SUMMIT trial and TORCH.

Also like to double check if this year we should have, during the second half, the final results of the Salford trial?

Thank you.

Florent, could you just say that last piece of the question again?

I just missed the very last thing you said.

The last part of my question on respiratory was on the Salford trial, you know the Salford COPD study, the real life one that you completed the recruitment in November last year, just like to double check with you if you will release -- we should release the results during the second half of this year?

Okay, great.

Thanks very much.

The SUMMIT trial, some differences to the TORCH trial, mostly around risk profile of patients who come into that.

There are some subtle differences and obviously, we hope we've learned some lessons from the TORCH trial.

As far as cardio metabolic is concerned, obviously you know about the ACS program with the P38.

We're going to publish the protocols for that, I think, pretty soon.

So I won't go into the detail of it.

In fact, funny enough, this morning I checked in with Patrick Vallance and everything's going fine on that program but no news, but you will see a little bit more on that in the not-too-distant future.

We have the PHI program looks very exciting for anaemia and then we have a (inaudible) muscle wasting program, an iBAT Type II diabetes program, [trip v4 in heart failure, and then a program in familial amyloid cardiomyopathy, as just an example of some of the early stuff going forward.

As far as Salford is concerned, you're quite right.

One of the Salford studies has completed enrollment and the other is still ongoing.

My expectation at the moment is you probably won't see the first data on that until early 2016.

We'll update you on that as time goes by, but it's event driven and I would just expect -- I would encourage you to think about it a little bit later -- a little bit into 2016 rather than 2015.

Now obviously, on respiratory, we also know that we now have the AdCom for Breo asthma settled and we also have the AdCom for mepolizumab in the diary.

So we feel like we've got a very clear pathway on a whole series of events during this year, as well as obviously the SUMMIT data, which again, I'd remind you is event-driven, so I can't tell you exactly when it's going to come out, but I would anticipate it Q3 somewhere in that kind of window, that's kind of what we're right now expecting.

So I think with asthma, Breo mepolizumab SUMMIT data, obviously the very substantial increase in access that we have, the beginning of turns of market share, not just in the US but outside of the US, that's why we're feeling respiratory is a key year for us this year.

But first couple of quarters is going to be suppressed because of the price flow-through from last year.

So that's kind of the picture on the respiratory story.

With that, I think we, unfortunately, have come to the end the call.

Obviously, Ziba and the IR team are available if you'd like to follow up on anything and thank you very much for your attention.

Ladies and gentlemen, that concludes your call for today.

You may now disconnect.