葛蘭素史克 (GSK) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to GSK's analyst and investor call.

My name is Grant, and I'm your event manager.

(Operator Instructions)

And now we would like to hand the call over to Sir Andrew Witty, CEO.

Thank you very much.

Good afternoon, and welcome to this Q1 call.

As you can see from the results we've just published, we've had a strong first quarter, demonstrating continued momentum across the group.

Reported sales grew 8% in the quarter and at GBP0.198, core earnings per share also grew 8%, both at constant currency.

This provides further evidence that our strategy has delivered, and although early in the year, gives us increased confidence in our ability to deliver against both short and medium-term targets.

We now expect core EPS percentage growth to be 10% to 12% for 2016 at CER.

We've set a dividend of GBP0.19 for this quarter and continue to expect to pay GBP0.80 for the full year.

I'm pleased to say that all three businesses have contributed well to performance through Q1, demonstrating our focus on executing the strategy and our ability to allocate capital flexibly to generate the best return.

Group sales were GBP6.2 billion, up 6% on a pro forma basis.

Importantly, we saw continued momentum from our portfolio of new pharma and vaccine products, with sales of GBP821 million.

HIV products, Tivicay and Triumeq continue to grow strongly, with combined sales of GBP516 million.

Sales of our new respiratory portfolio offset 70% of the decline we saw in Seretide/Advair.

It's worth noting that in the US alone, sales of Tivicay and Triumeq equalled the sales of Advair and I think just demonstrates the pace at which the new products are beginning to now rotate in and in place of the older, more established products.

Also just want to call out one other statistics that clearly demonstrates this progress.

Sales of new pharma products now represent 20% of our total pharma sales, and that's up from 16.5% in Q4.

In our other businesses, vaccines grew 14% pro forma, benefiting from good growth in meningitis vaccines, which I think clearly demonstrate the value that GSK has brought as the owner of this portfolio.

Consumer healthcare grew 4%, again pro forma, with continued very strong performance from the sales of Flonase OTC in America, but alongside other brands such as Sensodyne and Theraflu.

Improved sales momentum combined with our continued focus on costs has led to an improvement in the margins of all three businesses, and we remain on track to reach the targets we set out last year.

Turning to R&D, we continue to see good progress in our core therapy areas of respiratory, HIV, immuno-inflammation, oncology and rare disease.

In vaccines we are on track to file Shingrix, our candidate vaccine for shingles in the second half of this year.

During the quarter, I was very pleased to see Strimvelis, our potential product for ultra rare disease ADA-SCID receive a positive opinion in Europe.

This is an important milestone and if ultimately approved will be the first corrective gene therapy treatment for children with this devastating disease.

I'm also pleased with the progress we're making in our oncology asset with FDA breakthrough therapy designation awarded for NY-ESO in synovial sarcoma and positive data for our [BEC] inhibitor.

We now have 11 oncology assets currently in Phase I or II.

In conclusion, what we've seen in Q1 demonstrates the strategy we've been pursuing is capable of delivering both sales and earnings growth from a set of balanced businesses, underpinned by a productive R&D organization.

That's important as the trading and pricing environment remains as challenging as ever over the next couple of years.

With that, I'll hand over to Simon to talk you through the detail of the financials.

Thank you, Andrew.

Our results for the first quarter show a strong start to the year, and while it's still early days of 2016, we're encouraged by the breadth of momentum we're seeing across the group, even after factoring in the benefits of the quarter of some phasing gains, particularly in vaccines.

New products in pharmaceuticals and vaccines continue to build and contributed 820 million -- GBP821 million in the quarter, up over GBP500 million from Q1 last year.

The new meningitis portfolio is driving strong growth for vaccines, and consumer continues to deliver innovation-led progress.

This more balanced and consistent growth, together with continued tight control of our ongoing costs, and the significant progress we made in the quarter in executing on our restructuring and integration plans helped deliver better operating leverage and improved margins in all three businesses.

The quarter also highlights how much better placed we are post the Novartis transaction to deliver on our financial architecture and drive earnings per share growth ahead of sales, while also providing the flexibility we need to invest in the business and continuing to support the dividend expectations we've laid out.

Inevitably, there's going to be some quarterly volatility as we execute on our plans, particularly in operating margin.

But as we've said a number of times, we need to maintain flexibility across the P&L if we're to develop and deliver on the financial objectives we've set.

Our earnings release provides an extensive amount of detail about the results for the quarter, so my comments will primarily focus on the major points, my expectations for the remainder of 2016, as well as any comparative points you might want to take note of in your modeling.

As usual, comments will be focused on CER growth and core results.

In the first quarter, we saw a positive tail wind of 3% on sales and 6% on core EPS as a result of currency swings, particularly the recent weakness of Sterling against most of our major trading currencies.

Taking the quarter end rates as constant for the rest of the year would indicate a tail wind to earnings in the full year of around 8%.

Turning to the headline results, group sales up 8% on a reported basis, 6% pro forma.

The group's core EPS grew 8% to GBP0.198 despite the tough comparison with Q1 last year, which included the higher margin oncology business in the base for two months.

Total EPS for the quarter was GBP0.058, down significantly compared to Q1 last year, which, remember, benefited from a GBP9.3 billion gain on the disposal of the oncology business.

Total results also reflect the accelerated pace of restructuring charges that we told you would continue to be a major factor in 2016, before falling away in 2017 as the restructuring and integration programs start to come to an end.

The other major factor impacting total results are non-cash transaction-related charges as we unwind the discount on the consumer puts and the contingent consideration we have due for ViiV and the Novartis vaccine acquisitions and about GBP200 million of the GBP460 million that's been charged this quarter is unwind, and you should expect similar amounts going forward each quarter until the puts become due.

The rest reflects remeasurement of the liabilities as the value of the businesses concerned are updated each quarter.

Turning then to our three divisions, pharmaceuticals, which now includes HIV sales; was up 5% pro forma with strong growth from new products, more than offsetting lower sales of Seretide/Advair and Avodart.

HIV sales grew 57% in the quarter, as Triumeq and Tivicay continued to grow strongly, and I expect the HIV portfolio to continue to build during the course of the year, although the rate of growth should be expected to slow as we move through the 2016, given the higher comparisons we're up against, particularly as we move into the second half.

Also, remember that [Eppscon] goes generic in the US in Q3, and we may also see some generic activity in Europe in the second half.

US pharma sales were down 4% pro forma, primarily driven by the decline in Avodart following generic competition that began in Q4 last year.

Total respiratory sales in the US grew 2% as growth from our new products more than offset a 19% decline for Advair.

We continue to expect US Advair sales to be down around 20% for the full year.

In Europe, pharma sales were down 6% pro forma, mainly reflecting a 24% reduction in Seretide due to the growing impact of generics, but more importantly, the ongoing transition to our new Ellipta products.

More of Seretide's volume decline went to Relvar than the generics.

We continue to expect Seretide to decline around 20% in the region this year, while that may be a little high depending on the pace of transition to the new products.

Within international, sales in emerging markets were down 1% pro forma overall, impacted by the continued pressure on our China business from healthcare sector reforms, including significant price reductions and the continued reshaping of our business.

Beyond China, other emerging market sales grew 5% pro forma, benefiting from some improved supply and despite a drag of around 4% from businesses that we've exited.

In Japan, sales down 8% pro forma, despite good growth in the respiratory portfolio, where we continue to see strength up 4%, with the decline really reflecting the biannual price cuts and some short-term supply disruptions.

Overall, I continue to expect pharma sales to return to growth in 2016 with contributions in new products offsetting the declines in Seretide/Advair, established products and Avodart.

On vaccines a particularly strong quarter, sales up 14% pro forma, benefiting from some earlier than expected phasing of international tenders and some additional purchases from the CDC in the US.

A significant part of this phasing is likely to reverse in Q2 and Q3.

In the US, in addition to the CDC order, several products continue to grow market share strongly, including Bexsero but also Boostrix and Pediarix, although Pediarix also benefited from a competitor shortage.

In Europe, vaccines had a particularly strong performance, up 33% pro forma, and the business continues to develop its portfolio while particularly in meningitis in both private and public markets.

International vaccines grew 3% pro forma, helped by the phasing of tenders for Synflorix which grew 53% and strong meningitis sales.

These growth contributions were significantly offset by the impact of some of the supply constraints we've talked about before and that we're working on to deal with.

We're continuing to invest in our supply chain and particularly to improve our supply capacity for Bexsero given the rapid growth in its demand.

This will take some time, but we're optimistic that we will see improved Bexsero supply in the second half.

And we continue to expect that overall, the vaccines business will achieve mid single-digit pro forma growth this year.

Consumer healthcare sales up 26% and 4% on a pro forma basis, with business delivering another strong quarter for Flonase in the US, which benefited from launching a number of innovative line extensions.

Competitor activity in the category increased during the quarter, particularly private label, and is expected to be tougher in Q2.

Oral care sales in the US were also strong with Sensodyne delivering double-digit growth, again following a number of new product introductions.

In Europe, Voltaren and Otravin both delivered strong growth benefiting from the enhanced distribution of the combined business.

Oral care faced somewhat tougher competition, which reduced the growth rates we saw on Sensodyne and denture care in the region.

In international, good growth across most categories and sub regions was partly offset by lower sales of Horlicks in India, which reflected a significant slowdown in rural markets and some wholesaler destocking.

Significant innovation is planned for this brand during the course of the year.

Overall for 2016, we continue to expect pro forma top line growth in the consumer business to be in the mid single-digit range.

Moving to core operating profit, excluding currency, the reported core operating margin of 25% was up 110 basis points in constant currency terms, and on a pro forma basis, up 430 basis points.

The significant move in the group margin demonstrates the improved operating leverage we built into all three businesses on the back of our restructuring and integration programs and in particular, the increased flexibility we now have in the cost base to reallocate resources and capital to where we see the most attractive returns.

This has allowed us to step up investment behind new product launches in HIV, respiratory vaccines and consumer, as well as advancing our R&D pipeline and improvements to our supply chain, all of which we've been doing while releasing significant restructuring and integration savings to offset margin drag we're seeing from the decline of our older products.

Restructuring and integration had a strong start to the year with incremental savings compared to the first quarter last year of nearly GBP400 million, and we saw good execution in all three businesses.

The level of incremental savings going forward will be up against tougher comparators, but we're still on track to deliver incremental savings for the year as a whole of GBP800 million in total, in line with our objectives to accelerate the overall program.

These savings are inevitably going to be unevenly phased through the year, equally the need for investments in the business is also likely to vary quarter to quarter, and this is really what's driving our expectation of some quarterly volatility in margins, as we execute on our plans.

Moving down the P&L, it's also worth flagging that the royalty income for Q1 included a positive catch-up from last year.

[Bollia] royalties are expected to be around GBP250 to GBP300 million pounds.

On the bottom half of the P&L core financing costs broadly flat.

I continue to expect a modest increase for the year as a whole, and the core effective tax rate was 21% versus 20% in Q1 last year.

Here, we still expect a core rate of 20% to 21% for the year as a whole as a result of the mix of profits being more weighted to the US.

Our cash flow, excluding legal settlements of GBP73 million and adjusting for the tax payments on the Novartis transaction, restructuring charges and the cost of the BMS acquisition, all of which were funded in the quarter from retained disposal proceeds, the underlying free cash flow was GBP456 million, an increase of over GBP100 million.

This improvement reflects higher operating profits primarily across all of the businesses, with some currency benefit, which more than offset the increase we saw in the quarter behind seasonal working capital and working capital backing for new launches.

We expect this to reverse during the balance of the year.

Net debt at the end of the quarter was GBP12.5 billion compared to GBP10.7 billion at the year end.

After factoring in a drag of about GBP0.5 billion in translation, this was in line with our expectations, as we accelerate the investments to complete the restructuring and integration programs.

As we pay out the fourth quarter dividend and the special distribution from Novartis this month, net debt will again increase in Q2, but is still expected to be below pre-Novartis levels and then should start to benefit from improved cash flows, as the transaction and new product launches contribute more meaningfully and the integration and restructuring programs begin to come to an end.

We continue to expect a significant step-down in restructuring spend as we go into 2017.

So in summary, Q1 has been an encouraging start to the year, and we're pleased with the momentum across the business.

Restructuring and integration is progressing well, and the strong start to the year has provided us with the ability to give a more specific outlook for the rest of the year, even though we're likely to still see some volatility as we move through it.

Overall, we now expect core EPS growth in 2016 of 10% to 12% on a CER basis.

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

Great.

Thanks, Simon.

Operator, maybe we could open up for Q&A, please.

Thank you.

(Operator Instructions)

Your first question comes from the line of Andrew Baum from Citi.

Thank you.

A couple of questions.

The inflection rate in the US that Incruse Breo is fairly clear now.

What is less clear is the dynamics underlying that market.

Perhaps you could share with us information about how much is each brand switches and whether there are any particular changes in the marketing message that have contributed to the improved performance.

And then second, on China, where the pace of decline seems to be accelerating, not stabilizing, how long do you think it will be before GSK can stabilize that business and turn it around?

Could you share with us the absolute level of sales within China now?

And what would it take for you to reconsider whether at least part of your book portfolio, especially the respiratory franchise, will be better monetized in a third party's hands?

And then finally, maybe just a few words on the clinical hold on the Ionis amyloid CARDIO TTR program, whether it's safety-related and which organ, if so.

Thanks very much, Andrew.

So in terms of Incruse Breo the changes there are firstly better access in terms of coverage, particularly for Incruse as we went through the year, Breo also to some degree.

The asthma indication for Breo, very important.

The head-to-head data of Incruse versus Spiriva, very, very important and then DTC to some degree on Breo.

Those have been the kind of elements which have really moved things along.

And we're seeing continued strong momentum here.

I think over the last 12 months, Breo has picked up 6 points of TRX share, Anoro 10 points, and Incruse 6 points.

So very good solid progression.

If you look at weekly prescription volume, we're doing about 250,000 scripts a week of Advair.

Actually, the Ellipta portfolio, so Breo plus Incruse plus Anoro is doing about 80,000 plus, so getting close to a third of the equivalent of the volume of Advair.

So that looks set well.

Nucala's launched well.

US respiratory portfolio continuing to look good.

You continue to see some further price pressure on the Advair business, particularly in the first quarter, as some of the contracts roll forward.

As you know, we sometimes sign two-year contracts, with some of that price effective playing forward.

We a very good contracting position for 2016.

In fact, we've got some contracts that run into 2017, and we're right now signing further contracts for 2017.

I think now after a difficult 2014, we're into a much more stable environment with a good progression.

In terms of China, actually, the acceleration of what you're seeing in China, as Simon said, is partly to do with price cuts that we've taken.

But it's a lot to do with some disposals of products and businesses, which we decided were non-core and have been backed out.

I fully expect China to come back to growth in the second half led by the respiratory business.

So as we move through this year, I think we'll see the underlying improvements.

We've seen good improvement on an underlying basis, but it's hard for you to see because we've done some disposals and you've got some price effect.

As you'll also know, the entire market has slowed down dramatically and rapidly moving toward the no-growth marketplace, at least at the moment.

And so actually when you look at the performance of our underlying business, you can see the recovery actually isn't too bad compared to what's going on in the macro environment.

In terms of the clinical, as you know, there is a safety observation in a different trial, a non-GSK trial and I think through the purposes of caution, everybody regulates and everybody else wants to take it one step at a time.

So nothing new to add there, but it's not -- there's not an observation that we've seen in GSK.

It's been something which came from a separate trial outside of the Company.

Thanks for the question.

Good to hear from you, Andrew.

I'm glad your phone is working okay.

Next question?

Thank you.

Next question comes from the line of James Gordon from JPMorgan.

Please go ahead.

Hello.

Thanks for taking my questions.

One bigger picture question and a couple of detailed ones.

The bigger picture one was just, Andrew, in light of your decision to start planning for your retirement, could you make a comment about what you still hope to achieve before you retire from GSK and what you think the key challenges would be for GSK's next CEO?

I also had one respiratory question, which was just the pace of the Advair volume decline, which is referred to in the release, was 2%.

But when we look at Bloomberg or IMS we see more like an 8% volume decline.

Is that volume different than prescription decline in some way?

The final question was on Consumer, very strong margins this quarter, just over 17%.

Is that something that you can build on as we move through the year, or is there something quite exceptional there, and so we should be careful about extrapolating from there?

Thanks very much, James.

So on the 17% margin, I don't think we'll see 17% every quarter of the year, but it's clear that 17% is, if you will, a new high water mark on our journey to 20%-plus.

You'll see a bit of volatility as you go through the year.

What you see a little bit this quarter, quite a lot of Flonase sales in the quarter, quite a lot of the Flonase A&P will be in the next quarter.

Little things like that and the margin might move things about a bit.

Half a percentage point of the 17% is FX.

Obviously, we need to see what happens with FX as we go forward.

But we're clearly starting to move into a new level, right?

So we're clearly moving up.

Remember when we put this business [in] we began to make progress last year into the kind of 12%, 13% territory for the year.

I think we've clearly made a step-up.

Why?

Because we've got more concentration on the power brands, and we're seeing the benefits of the integration really start to flow through.

80% of the site closures are done.

90% of the people decisions are done.

So all of that kind of benefit, the cost benefit is flowing through into the business.

Will it bounce up and down a little bit?

Yes.

Are we on a good curve towards the 20% plus?

Absolutely.

Might we get there a little bit earlier than we anticipated?

It's possible.

So, so, you know, on that one.

As far as respiratory is concerned, if you look at the US respiratory business, what you see is that overall actually, Advair TRx share -- when you look at Advair plus Breo TRx share we're broadly holding flat year-on-year.

So if you look at the overall share and the market is growing around 4.8% for ICS/LABA marketplace.

Breo has picked up, as I said earlier on the call, significant amount of share.

Advair has lost a little bit of share.

Net-net, we're more or less -- we are actually holding our share.

If you look at NBRx, what you see there, is actually we're increasing our share of NBRx.

That would imply to you as we go forward, all else equal, we should start to see our TRx shares start to move into a more positive dimension.

You always get a bit of volatility around our reported volumes and the script volumes depending on things like script sizes, those sorts of things.

There's always a bit of a dynamic in there.

But if you look at the shares, then you'll see that, that gives you quite a good picture of what's really going on there.

It's important I think to look at Advair plus Breo, not just one or the other.

Clearly the two play in exactly the same portfolio.

In terms of my -- first of all, I'm very focused on executing this year.

We've laid out a clear set of ambitions.

We've just tipped up a little bit our guidance for the year, so we want to make sure that we deliver a strong performance for the business this year.

How do we do that?

Really completing the successful integration of the Consumer vaccine businesses.

Remember, it's only just a year since we closed that transaction, so there's still -- it's important we get all of that done.

Very important to me that we continue the momentum of our new products to have 20% of our pharma business now coming from new products is very key.

I want to keep those new products moving forward.

And obviously reload from R&D, with a significant number of R&D progressions expected this year.

In fact, in 2016-2017, we have something like 30 Phase II starts and another 20 Phase III starts scheduled.

So there's an awful lot of that, that needs to be moved forward.

And I think we can really, we can really lay the foundations for that in 2016.

In terms of what my successor has to do with, probably that's up to whatever she or he chooses to focus on and partly set by the world.

As we know, the world is focused on pricing.

The world is focused on more regulatory pressure and the volatility of global economics.

I'm sure that's going to be what drives the external agenda.

It will be up to them individually to set their own priorities.

Next question.

Thank you.

Your next question comes from the line of Graham Parry from Bank of America.

Please go ahead.

Thanks for taking my questions.

So firstly, on Nucala just any feedback you have on the launch experience so far and any areas of pushback you're getting and any reimbursement hurdles?

Secondly, on the vaccines margins, how sustainable would they be to your remaining quarters?

And could you quantify the phasing benefits on sales, but also on the margin, if possible?

And then thirdly, now we've got some generic Advair PDUFA dates in 2017.

As you think about the world with generic Advair potentially, to what extent do you think that could impact on Breo and especially the potential for mandatory switching by payers.

And how important do you think the Salford lung study midyear, will be in potentially being able to prevent this?

Thank you.

Thanks very much, Graham.

I think on the last point, I'm not sure the Salford study is going to be super-critical to the point you raise.

I think it can bring to life -- I hope -- it's a very unusual study.

It's a unique study.

It can actually bring to life the real world benefits of compliance, but I don't think it's going to have a huge impact in the US.

It's not I think likely to be -- it's certainly not going to be promotable in the timeframe of the US potential generics, if they come at the front end of that window.

So that's -- so I don't think that's so important.

I think what's key is we are building up now a significant market position on Breo.

We're getting great feedback from customers and actually it's clear the payers want to have Breo on the list.

We need to keep that momentum going through this year.

And then the question's going to be whether or not the generic comes; how much of the generic comes; how switchable it is or isn't, and what volume they have.

And I think all of that remains extremely up in the air.

And the difference between 3, 4, 5, 6, 12-month delays, or whether or not there is full or not full volume, whether or not it's perceived to be truly switchable -- all of those things can have enormous implications.

I'll remind you that about 300 million, 400 million of the US number is MDI, not dry powder, and therefore not in the target zone for switchability, and also within -- we know that within the Diskus Advair business, we have an awful lot of people who it will take a lot of persuading for them to switch products.

And also true to say the prices have come down a lot over the last three years.

The reality is we've already absorbed a big chunk of the genericization effect through price reduction.

The upside of that is we started to move our products into a price range which are potentially maybe not going to be such a straightforward genericization proposition.

So I remain -- obviously it's true that there is a window that potentially opens sometime a year from now maybe, if everything goes according to plan.

I think that window has great uncertainty still in it.

I think we have a number of defenses to be able to maintain our portfolio, which we're, obviously very much focused on.

And on top of that, we have a substantial amount of product not in the respiratory area, which allows us to be confident around our overall growth profile.

So when you look at our overall contribution of new products versus the overall decline of Seretide/Advair, it's a very, very positive picture and obviously that's one we want to continue.

As far as the vaccine margin is concerned, we made it clear that we're aiming for a vaccine margin north of 30%.

We had that before the Novartis transaction.

Obviously the Novartis business had a very much lower loss making position actually.

We're working our way quickly to that.

I fully expect us to be above 30%.

Again, you will see quarter-to-quarter volatility, just depending on the kind of tender flow and those sorts of things.

But this margin, just like the Consumer one, is signaling to you where we're headed and our goal is to be there as many quarters as possible, but we're not yet in a position where we're going to say to you, every quarter.

And that's more or less where we stand on that.

And Nucala has started very well.

It started well in every country that we've launched.

We've seen very good pickup in Germany, for example, very good patient exposure already quicker than we would have expected.

US, similarly, we've seen significant number; more or less all the physicians we need to get to have now been seen.

We've seen good initial throughput, about 3500 patient enrollment through our corporate hub, which is a mechanism to get people to understand their insurance position.

We're seeing good translation now of that population into patients on prescription and feedback so far good.

I would say at this early stage, launch is going better than planned, and we're very positive about that.

Obviously, a long way to go, but we feel good.

And we feel good about the profile of the drug versus the up and coming competition.

We think the dosage and the specific claims we have stand us in very good Stead, and obviously the six-month head start doesn't hurt either.

So -- and from a reimbursement point of view we're not seeing any major issues there at all.

Next question?

Thank you.

Your next question comes from the line of Richard Parkes from Deutsche Bank.

Please go ahead.

Hi.

Thanks for taking my questions.

Firstly, on the meningitis portfolio, I think you had guided to some near-term capacity constraints.

But that doesn't seem to have affected pretty strong performance in the first quarter.

Could you just guide us how limiting that is going to be in the near term, and whether the first quarter performance is sustainable on the quarter-on-quarter basis for the rest of the year?

And secondly, on just as you progress with plans to the management's succession next year, I'm just wondering how much of a focus there is on internal versus external candidates?

And are there any particular characteristics that the board is maybe looking for in terms of someone to take the Company forward?

And then third question was on the cost savings.

I think you said you delivered GBP400 million in the first quarter.

That's making the GBP800 million that you're targeting for the full year starting to look conservative.

I'm just wondering whether any of the savings in terms of manufacturing efficiencies that were planned for 2017 could be brought forward.

Thanks.

Okay.

I'll let Simon take that last question in a couple of minutes.

As far as management succession is concerned, as the board have said, they are looking both inside and outside.

As you would expect, they did that when I was appointed.

They are going through that process again.

Obviously, they are going to be looking for somebody who punches a lot of tickets in terms of ideal candidates.

One of those tickets is understanding of the environment, the various businesses we're in, and, of course, the Company itself.

Outside candidates will score strongly in some areas.

Inside candidates will score strongly in other areas.

I'm very pleased that we have some very, very good and qualified internal candidates, and I'm absolutely sure there are also good candidates on the outside.

So the board is going to take the right amount of time to do that in a very thoughtful way.

I think what's very clear is we're very aligned as a board around what the strategy of the Company is.

That makes it very -- that's one very key dimension of this equation because when you know what the strategy of the Company is for the foreseeable future, then you can essentially look for somebody to execute that strategy and to build on it.

That's the process they are going through.

In terms of meningitis capacity, we had some tightness at the end of last year.

We will continue to see tightness on and off.

There will be occasional quarters where you see capacity tight.

It is a -- we're still dealing with the capital base that we inherited from Novartis.

We're going through the process of expanding that.

As we go through this year, our volumes start to step up quite quickly.

We have got very substantial global demand for this vaccine, and I'm absolutely sure we're going to sell every single dose we can make.

But the pace at which we can expand comes in -- it's a slightly lumpy process, so as we go through the year, we'll see those lumps play through.

By the end of the year, we should be in a better position now.

But I have to say even as you project forward to the end of the year, while we might very well be manufacturing the supply in three or four times more volume than we had last year, my guess is that the demand is still going to be outstripping that.

Going to be an area where we need to continue to invest to build up our capital base from what we took over.

Simon, do you want to comment on whether you're low balling the full year in restructuring savings.

Thanks, Andrew.

As I commented in my remarks, the first quarter was always likely to see the biggest step-up in terms of incremental demand, given the low base that we were coming from this time last year when we had only just acquired the businesses.

As we go forward, the increment is up against tougher comparators, so we still feel very good about the GBP800 million.

We've always said we're trying to accelerate the program, so one quarter at a time, but a good start to the year.

If you look at where those savings have come from, most of them have fallen in the SG&A or R&D lines.

And we've always said we expect manufacturing to take a lot longer.

We are working as hard as we can to try and bring some of that forward and maintain the momentum.

But it's a bit early to comment more specifically on that because there are external parties, regulators, and other parties involved in any change you make to the supply chains, particularly vaccines, but across the Company.

So far, so good, but very good momentum in all three businesses.

Okay.

Next question.

Thank you.

Your next question comes from the line of Tim Anderson from Bernstein.

Please go ahead.

Thank you.

Couple of questions.

On the dolutegravir franchise, consensus has sales across Tivicay and Triumeq reaching about GBP4.5 billion by 2020.

I'm wondering if you can give us some idea whether you think that's a doable number or too high or too low, just some directional commentary would be helpful.

And then a longer-term modeling question unrelated to the quarter, you've talked about tax rate creep in the past over time.

Can you at all quantify this for us?

Are we looking, for example, at a few percentage points increase over a five-year period, or what exactly?

Thanks, Tim.

I'll ask Simon to comment on tax in a second.

I mean, I'm not going to give you a specific, an endorsement of a specific number, but obviously it sold GBP560 million in the quarter, we're clearly annualizing a run rate north of GBP2 billion already.

It's going to be a very -- provided we can continue this kind of momentum, we've seen no real change in the growth profile since competition has intensified at the turn of the year.

That's very, very encouraging.

We continue to feel very good about the competitiveness of this molecule and its combinations.

We obviously have more in the works.

So, yes.

I think we feel like this is going to be a very substantial product.

As I've just mentioned on the introductory comments, it's already neck and neck with Advair as our biggest US product, and it's only been two, two and a half years in the marketplace.

So I think we're set well for this.

We've got to execute it well.

We've got to keep being very vigilant.

We're up against a very tough, aggressive competitor.

We need to make sure that we don't have any complacency.

And as I think about the overall portfolio, because I do think, Tim, over the next few years, the view has to broaden a bit from purely dolutegravir to the dolutegavir/cabotegravir and then the BMS programs.

And I think we've given ourselves several angles to really drive this business forward, continuing delivering what we have now in the marketplace; further combinations here obviously, potentially the long-acting strategy through cabotegravir combination, potentially moving to dual regimen; very important opportunity And then playing in the BMS portfolio both in monotherapy and potentially ultimately in combinations.

So I think from an overall portfolio point of view, we feel very, very optimistic about the HIV business and clearly the dolutegravir components look like they are going to be very substantial products and could certainly be one of the largest products we've ever had in the Company.

Simon, do you want to talk about tax?

Yes, thanks Tim, I think as you put it, it's something on the order of a few percentage points over the next three or four or five years.

The rate at which it moves is partly driven by our own mix of business and the other, as we flagged before, is the constantly changing regulatory environment we're dealing with, with many governments including the US changing their own particular tax codes and we're having to react to that.

So depending on how that evolves, I think that's a reasonable set of assumptions for you to build in.

Thanks, Simon.

Next question.

Thank you.

Your next question comes from the line of Jo Walton from Credit Suisse.

Please go ahead.

Thank you.

Three questions, please.

I was intrigued at your comments that you are looking at some contracts out to 2017 for Advair in the US.

I wonder if you could tell us how that might work, as you've also alluded to the fact that there could be generics around.

Whilst on the subject of Advair and generics, I wonder if you could tell us a little bit more about what the practical impact of generics in the UK has been.

Have you had to cut prices in the UK?

Have you lost volume?

How have generics been accepted in the UK market?

My second question is just a simple one.

The corporate and other expenses was GBP150 million in the quarter.

It was only GBP170 million odd for the whole of last year.

So is there anything unusual in that?

Or can you give us some help on what that might be for the rest of the year?

And my final question is a broader one.

You are looking at 10% to 12% local currency growth this year.

And within that, you've got a very big slug of incremental cost savings coming through.

I wonder if you could give us some sort of sense as to what you think the underlying, rather than cost-cutting-driven growth rate will be, because that's probably the guide that we need to look to as we go into start modeling 2017.

Thanks, Jo.

I'm not going to give you any insight into the 2017 contract shape, I think for obvious reasons.

Sorry to frustrate you about that.

In terms of UK generics, basically impact on price, but volume relatively, relatively benign.

If you look at the whole of Europe, all of Europe Seretide generics has about a 4% market share, and Relvar/Breo has a 5% market share, just to put that all into context for you.

When you think about the overall European it is inclusive of the UK.

Then that's more or less what's happening.

So from a volume perspective, the generics are pretty low, frankly.

But it has a price effect because the negotiators clearly use the generic as an angle to try and pressurize price, and that's essentially the dynamic that's playing out.

In terms of the corporate expenses and the effect of the cost reductions, maybe Simon, do you want to comment on that?

Yes, we're a bit higher than trend in the quarter.

Probably about GBP50 million to GBP70 million higher.

So if you were taking sort of GBP70 million or GBP80 million as a quarterly run rate, that's probably more normalized.

It's a little bit part of the quarterly volatility point we were just flagging in our earlier remarks.

And the underlying cost reductions versus --

I'm not sure, Jo, that's kind of a meaningful breakout really.

The cost reductions are a key part of developing a sustainable cost base going forward.

So were you after some -- were you trying to identify some element of that in particular, or was it ultimately it's whether they are sustainable or not, which we believe they are.

And I think the key driver really on an ongoing basis is the top line sales growth.

The biggest driver of leverage in the Company like ours is top line, and I think the most important thing about this quarter and what we saw -- if it's been there all the way through last year, the underlying pro forma sales growth rate has been picking up across all the different businesses, and you see that really shine through in this quarter.

That's going to be by far and away the biggest driver of earnings growth of the Company.

And obviously on an ongoing basis, continued pressure on cost remains a kicker to that.

Without the top line sales growth -- .

I mean, a particular example might be the SG&A.

We were down 1.7 percentage points in reported terms as a percent of sales.

And yet, we are backing all of these different launches and new products and the promotions across each of the businesses, which plays to the flexibility we've talked about for a while now; where we're moving sales force around, we're moving A&P around, we're moving logistics costs around, to put behind the newer products rather than the older products.

That's why I think there's sustainability of the cost base rather than the different elements of it that's important.

Okay.

Next question.

Thank you.

Your next question comes from the line of Kerry Hoford from Exane BNP Paribas.

Please go ahead.

Thank you.

Yes, three questions, please.

Firstly on the full-year guidance, I wonder if you could give us the key driver of the upgrade has been, given it's so early in the year.

I wonder what within the business has changed or indeed surprised you in such a short period of time from that upgrade at Q1.

Secondly, on vaccine, going back to Graham's earlier question, could you please quantify the impacts of the tenders in international regions and the CDC orders and give us some guidance to the impact on margins in Q1?

And then finally, on the triple combo, could you also just run us through the rationale behind the decision to start a Phase II study in asthma.

I'm not aware that LAMAs are widely used in asthma.

I may be wrong.

But could you just run us through the reasons for your decision to start that study?

Thank you.

Sure.

I mean, in terms of guidance, I mean, basically we've seen top line a bit ahead of where we expected at the beginning of the year, and we've seen an acceleration of savings.

I mean, essentially those two things.

And I think if you look, if you look -- you probably haven't had a chance to look at it completely yet.

But if you look at the pro forma operating profit numbers within the P&Ls that you're able to see, I think that gives you a sense of where -- because it's quite important.

You've got to remember, as Simon rightly said, this first quarter has the drag of the oncology high margin business in it.

When you back that out and you look at the pro forma numbers, you can see why, I think it makes a bit of sense for us to just indicate to you we think we're tracking a bit better than we anticipated originally.

Now, I don't want to get carried away either.

It's early days.

It's the first quarter.

We're just signaling it to you it's a little bit better than the 10% we'd originally anticipated.

Obviously, as we go through the year, as we get firmer view, we'll continue to communicate with you about it.

But it's really driven by that insight of the pro forma numbers, which of course you can see.

I'm not going to go into the breakout of the detail of the tenders and the CDC order, other than to say the overall effect is relatively marginal.

You're talking a few tens of millions.

You're not talking gigantic numbers.

But it is definitely a bit of an acceleration from Q2 to Q1.

As far as triple combo is concerned, actually anti-cholinergics, if you go back to the old days, Atrovent was widely used in asthma.

It's been superseded a bit over the years, but there remains at least a theoretical basis for it.

It still is a significant amount of use in asthma, so that really explains it, and that's that.

Next question.

Thank you.

Your next question comes from the line of Steve Scala from Cowen.

Please go ahead.

(technical difficulty) -- and note that the business has a lot of momentum.

You suggested Advair is stabilizing.

You continue to have skepticism around Advair generics.

The oncology drag is behind you.

You've now exceeded earnings estimates for a handful of quarters.

Why shouldn't we be more optimistic than 10% to 12% earnings growth this year and look for something similar in 2017?

That's the first question.

Second, how does the failure of AstraZeneca's benralizumab change your thinking around Nucala and COPD, if you are still confident, then why?

And is the confidence molecule-specific or study design or something else?

And then lastly, how are you thinking about your development of OX40 versus the competition, how are you prioritizing tumor types, and why did you decide to combine it with a PD 1 as opposed to a PDL1?

Thank you.

Okay.

So if we look at, if we look at the momentum of the business, again, you can see for yourselves.

You look at that pro forma operating profit number, you can see that there is some real strength in the underlying business.

Now, again, as Simon said a couple of times, you're going to see a lot of -- not a lot.

You're going to see volatility quarter-to-quarter.

It's a bit early I think for us to be too definitive about where that lies.

Part of signaling the increase in expectations for this year, Steve, is really to acknowledge that.

We think it's a bit early to get too carried away, but it's important to signal to you and others that we do feel more optimistic about the year than we saw originally.

That's an important thing to keep an eye on.

I would ask you to just kind of indulge us or be with us dynamically on this, because it is early, and it would be wrong to get too carried away, is the first one.

As we look at next year, while -- there's no doubt that if you didn't have a generic Advair in next year at all, then obviously next year's earnings are going to be a lot better than if you do have generic in next year -- just to be -- state the obvious.

And it's just too early for us to know one way or the other.

There are -- you can make a case to say there will be a generic Advair.

You can make a case to say there won't be one.

And you can make a case to say there will be something in the middle, a kind of partial genericization.

That's just a question of time before those facts become true.

Now the reality from a value of the Company point of view it doesn't really -- in a way whether not the generics come three months early, six months later, if they are going to come, it doesn't really matter.

What really matters is what is the ongoing survival of Advair post the generics or what's the quantum of Advair prescriptions beyond the generic, and we're working hard to try and maximize that number.

And also, how strong is the non-Advair respiratory business, which of course is what we're very much focused on right now?

Those things are really the drivers of the long-term value of the Company.

In the year you get generic if there is going to be a generic, of course there's going to be a dent to earnings.

The reality though is, it's going to be a lot less in 2017 than you would have thought there would have been three or four years ago because we've probably taken half of the effect already through price.

We can't take the price cut twice.

So you've seen that very significant effect.

It hurts us a lot in 2014.

It held us back a bit in 2015.

But the reality is, it's behind us.

I think for the GSK now, we're not so fixated and preoccupied with what may or may not happen with the generic, because of all of that dynamic.

As far as the Nucala competitor -- AZ competitor obviously a different mechanism.

Aisle13, we think there's a difference there.

I'm not going to say that we're sat here banking on the COPD data either though, Steve.

We're not sat here thinking this is a home run, absolutely no question about it.

We think it's worth the exploration.

And that's exactly what we're doing.

But I don't want you or anybody else to sit here and think, well GSK thinks that's an absolutely home-run trial.

It's not in that situation.

We think it's well worthwhile exploring.

We think there is a rationale for it, but we also accept it's a high-risk trial.

So I would just put that into that context.

But specifically between Nucala and AZ there is clearly a mechanistic difference.

So in terms of the OX40, the reason we went with the PD1, we've had very good animal data, which allowed us to go more quickly.

As you know, our OX40 is humanized.

We've done some good work.

We felt confident about going into PD1 first.

You'll probably also know we have other combinations in development.

Phase I has already started in eight different tumors.

We're -- this is clearly going to be an area where we're going to be loading up a wide variety of potential combination strategies and we see it as one of the back bones coming forward.

As you know, we have others including ICOS.

Next question.

Thank you.

Your next question comes from the line of Jeff Holford from Jefferies.

Hi.

Jeff Holford here.

Thank you for taking my questions.

There are many views from different stakeholders out there on what could and should be done with the Consumer business in the future.

I'm wondering if you're willing to provide more details on what you thought the levels of dis-synergy are in terms of operating profit margins that you think would occur, if Consumer were separated to help the market evaluate that better, as this is considered going forwards.

Thank you.

Thanks, Jeff.

So we've looked at this pretty extensively one way or another.

I'll make a few general questions.

First of all, as you can see, I think we're delivering good integration benefits, delivering good prioritization focus into this business, and that's why we're driving this margin up.

It's worth -- there's all this talk about what the margin should or shouldn't be in Consumer.

To my knowledge, there may be one, possibly two companies that have a sustained margin above 17%.

And to my knowledge, there may be one which has a sustained margin above 20%.

So if we're in that territory, we're in a very rarefied atmosphere of where Consumer Healthcare Company profitability is.

When you look at the sustained mid single-digit sales growth we deliver, again, you see a very substantial, successful business.

And you just look at the overall scale of this Company, we're right there in it terms of one or two, in terms of the overall scale of the Company.

So we're doing okay at that, right?

We're delivering decent numbers, and we're moving forward very quickly into a very, very peer-competitive position in terms of the economics of this business.

And that's going to drive up -- it is driving up significant profitability and significant cash flow; first thing to say.

Second thing to say, to my knowledge, there is no pure play Consumer healthcare company of scale in the world.

Every single Consumer Healthcare Company that exists is part of a diversified group.

It's either part of the pharmaceutical company, or it's part of some other company that sells things like household cleaning goods or razors or whatever.

But it's part of a diversified group.

Third, the majority of growth of high margin products of these companies comes from switch products.

90% of the switch products have taken place in the last 10 years have gone from the parent to the child Consumer companies.

Very rare to see switches go outside of family.

When they do, they go from pharma to a Consumer company owned by a pharma company, probably because the pharma companies are doing a different deal on the side, like an RX collaboration or something like that.

So when you look at the fundamentals of the business, actually the position we have, I think, works in the industry.

I think it supports the long-term switch dynamics, which would be a gigantic dis-synergy if you locked yourself out of switches.

It's interesting to note that the companies which are not owned by pharma have had no switches in the last 10 years.

So that is a real dis-synergy.

When we've gone through the analysis of separating out the companies, there is clearly a dis-synergy probably of the order of two, maybe more points of margin for the Consumer business.

And there's probably also dis-synergy for the parent pharma business also.

So you end up with two companies with dis-synergy.

That's not uncommon, when you look at breakups of other companies in other sectors and also in this sector, you almost always see a dis-synergy.

Interesting enough, those dis-synergies are usually compensated over the next three years by a reduction in A&P spend, not by an economy of the thing that's driving the dis-synergy.

Because if the dis-synergy is being driven, for example, by the fact you need a new tax department, well, you can't just get rid of the new tax department.

So to compensate for that extra cost, these companies strip out costs from their A&P budgets.

Doesn't feel like the right thing to do either.

So from our perspective, we see this as industrially sound logic, provided we're competitive, right?

And the reason we did the deal with Novartis was to give us the scale and the opportunity to compete and structure to be competitive.

And I think Q1, and in fact all the way through last year, if you look through the pro forma numbers what you're seeing is a continued progression.

If you look at the success of Flonase OTC, nobody is switching products better than GSK.

And for all of those reasons, that's why the board remains unanimous around the structure of the Company for the foreseeable future.

Next question?

Thank you.

Your next question comes from the line of Nicholas Guyon from Morgan Stanley.

Please go ahead.

Hi, there.

Good afternoon, and thanks for taking my questions.

I have three actually.

The first one is on the OTC but talking about M&A this time and not breakups.

Do you identify any gaps to fill in your portfolio in terms of brand of geographies?

And if so, would you be interested in some pieces or the entire Pfizer OTC portfolio should they decide to divest it?

Second in a row, despite a good quarter for Breo, we still see no particular inflection for Anoro.

You regularly mention challenges with opening up the dual bronchodilator class and positioning Anoro between Spiriva and the open triple?

That would be your entrance in the LABA/LAMA field.

You do -- you are supposed to have Phase III results for your triple combo later on this year.

How committed are you to Anoro?

And to what extent would you consider de-prioritizing it?

Third question, on ViiV, appreciate it's early days and you briefly touched on increased competition, but just curious to hear your thoughts about any potential impact of newly launched Gilead Odefsey product on both Tivicay and Triumeq.

Many thanks.

Thanks very much, Nicolas.

As far as the last question is concerned, no, we're not seeing much impact at all.

We're seeing the same trajectories as we saw previously.

And the vast majority of the Genvoya business for example is coming from within the family.

Clearly, a very dynamic entrant into the market, but it's not affecting the dolutegravir business, first thing to say.

Anoro, no, we remain committed to Anoro, but it is harder build.

There's no question, when you look in all the markets, even where you've got multiple dual bronchodilators in the market already, we're not seeing a very dramatic change.

Position's taking a long time for physicians to change habit.

The good news for GSK, we're got a position not just in that marketplace, we've got position in the mono anti-cholinergic market.

We've got the Breo position of course, we've got the Nucala position.

So -- and then we will have the triple hopefully relatively soon.

That gives us a very, very strong opportunity to keep on developing these markets.

But clearly, we want to see Anoro continue to develop.

We remain very committed to it as such.

As far as OTC M&A is concerned, might we occasionally buy the odd brand?

Maybe.

But I think at the scale we've now created, if we're going to do M&A, it needs to be serious M&A and not little bolt-on things.

And obviously, those things only come around every now and again,, and you need to have a structure which is helpful to create solutions that work.

And actually, I think the business we built with Novartis not only gives us scale, it gives us a very unique platform to potentially strike different sorts of transactions.

But we're more interested in bigger things than smaller things, but we completely recognize those things come around very rarely.

And we're pleased that we were able to pull one off last year and we'll have to wait and see if another one comes along.

With that, I think we're out of questions.

Thanks so very much for all of your attention.

Obviously, if you've got any follow-up, please don't hesitate to contact the IR team at GSK.

Thank you very much.

Thank you.

Ladies and gentlemen, that concludes your conference for today.

You may now disconnect.

Thank you for joining.

Enjoy the rest of your day.