葛蘭素史克 (GSK) 2016 Q2 法說會逐字稿

Welcome to GSK's analyst and investor call. My name is Grant, and I'll be your event manager.

And now I'd like to turn the call over to Mr. Andrew Witty, CEO.

Thank you very much. Good afternoon, and welcome to this Q2 call. With me is our CFO, Simon Dingemans, as usual.

As you can see from the results we've just published, we've delivered a strong second quarter with group sales up 4% CER to GBP6.5 billion. Sales growth was generated across all three businesses in the Company, and was particularly driven by new pharmaceutical and vaccine products, which for the first time had sales of GBP1 billion in the quarter. In the same quarter last year, this portfolio had sales of GBP446 million, so clearly a doubling over the year.

The growth delivered, and demand for these new products, is one of the reasons why we have today announced GBP275 million worth of capital investments to increase our manufacturing capacity in the UK. I'm also very pleased with the continued progress we're making on cost control, and the delivery of integration and restructured benefits, which are tracking ahead of schedule. Taken together, for the quarter, we've delivered core earnings per share of GBP24.5, up 16% on constant-currency basis. For the half year, core EPS growth was 12% at CER.

Given the momentum we've seen so far this year, we now expect to deliver core EPS at the upper end of the guidance we gave to investors in the first quarter, with 2016 core EPS percentage growth now expected to be 11% to 12% in constant-currency terms. Clearly, currency has had a significant impact on our results for the quarter, both in total and core reporting, and Simon will talk you through these in more detail in a second.

Moving to cash flow, net cash inflow from operating activities for the first half of the year was GBP1.7 billion, that compares to half-one 2015 at GBP587 million. This significant improvement reflects growth in operating profits across all three businesses, as well as a currency benefit of approximately GBP340 million. For Q2, the Board have set a dividend of 19p a share, and expect to pay 80p a share for 2016 and 2017.

Turning to the sales line, new pharmaceutical products now account for 23% of total pharma sales. Sales of new HIV products, Tivicay and Triumeq, continue to be the major contributors to this growth. Overall in the quarter, sales of these HIV products were GBP865 million, up 44%. In respiratory, sales growth of our new respiratory portfolio, Relvar, Breo, Incruse, Anoro, Arnuity, and Nucala, more than offset declines in Advair/Seretide for the first time.

In the quarter, we announced that we will accelerate the filing for our closed triple therapy for COPD in the US to the end of the year, two years earlier than scheduled. In addition, as we said previously, we also expect to file the same medicine in Europe this year. We continue to strengthen our respiratory pipeline, with recent new data supporting the progression of danirixin into Phase IIb development, and with the end license announced today of a novel monoclonal antibody for severe asthma from Janssen.

Our vaccine business had another good quarter, with sales up 11%, driven by strong demand for our new meningitis vaccine, Bexsero. We are very pleased with the continuing progress in this business, although clearly vaccine sales are subject to some quarter-to-quarter volatility.

Consumer healthcare sales grew 7% in the quarter. This was driven by Flonase OTC in America, continued to perform well, and new innovations such as Sensodyne True White and a gel-tab formulation for Excedrin.

Turning to R&D, I was delighted to see approval in Europe for Strimvelis, our first-in-class gene therapy treatment for the rare disease ADA-SCID. In oncology, our pipeline is progressing very well. We've been granted FDA breakthrough therapy designation for our T-cell therapy targeting NY-ESO in synovial sarcoma. Yesterday, this asset also received orphan drug status from European authorities.

We've also received preliminary Phase I/II data to support continued development of our BET inhibitor in NUT midline carcinoma and other tumor types. During the quarter, our ICOS agonist antibody became the first asset in its class to enter human clinical trials, and altogether we now have 10 oncology assets in Phase I/II trials.

Looking ahead to the end of the year, we have up to six significant Phase III starts, including three in HIV, which are dolutegravir plus lamivudine, a two-drug regimen; cabotegravir for treatment; and the same asset for prevention of the disease. Finally, we expect to make several key filings by the end of the year. In addition to the closed triple I've mentioned already, this includes our shingles vaccine, Shingrix; Benlysta subcutaneous for lupus; and sirukumab for rheumatoid arthritis.

As you can see, we have a lot of momentum across the Group, driving our current performance and setting us up well for the second half of the year. And with that, I'll now ask Simon to take you through the financials.

Thank you, Andrew.

The Group has had a strong first half, with another quarter of good performance across all three businesses, driven by a sustained focus on execution. And our trading performance reflects the continued momentum of our new products, helped by the investments we're making to support the launches, as well as tight cost control, and consistent delivery of benefits from the transaction and restructuring savings.

In line with our financial architecture, we grew earnings ahead of our sales growth. And excluding the investments that we've said we are funding with divestment proceeds, we have also started to see a meaningful improvement in the Group's free cash flow.

After this strong start to the year, we now expect growth for the two halves of the year to be more evenly balanced than we'd previously thought. And with the additional visibility we now have, we tightened up the range for our guidance to the higher end of the range previously provided. And so, while there is still a lot to do, we now expect core EPS growth for the full year in the 11% to 12% range on a constant-currency basis. Our earnings release provides an extensive amount of detail about our performance, and you can find further detail on the slides that we posted today on our website.

As normal, many of the comments today will be focused on CER growth and core results; but as currencies had such a significant impact on our results for the quarter, both total and core, I want to take a bit of time to explain where the greatest impact has been. Sterling was relatively stable last year, with an average rate of [$1.53] to the dollar. And while concerns about the Brexit referendum were an issue in Q1, rates didn't really move significantly until the second quarter, most sharply in, obviously, post June 23, with the US dollar finishing the quarter at $1.33.

We've seen similar declines against most of our major trading currencies. This has resulted in a tailwind over the quarter of 7% to sales and 26% to core EPS. Although this also reflects the benefit to the quarter of no exchange losses on intercompany transactions, which in Q2 last year cost us GBP61 million. This is about 7% of the EPS tailwind.

Free cash flow has also benefited from a weaker pound by about GBP340 million in the first half. If exchange rates hold at the June month-end rates for the remainder of the year, we'd expect a positive full-year impact on turnover of about 9%, and we estimate a positive benefit to core EPS of approximately 19%. Free cash flow would also see additional benefit.

A weaker pound benefits our core earnings not just through a stronger top line, but also in the operating leverage across the Business, as we continue to have a higher proportion of our costs in the UK than revenues. And so while this hurts us while sterling is stronger, it helps us when it declines. And you can see in the quarter that currency contributed approximately 2.6% in operating margin uplift in the quarter, on top of the 2.5% improvement we delivered operationally at constant exchange rates.

These currency tailwinds apply to all of our businesses to varying degrees, but importantly, also to our majority-owned consumer and HIV businesses. The decline in sterling has substantially increased the value of those businesses to GSK, given the larger sterling earnings and cash flows we would expect to receive from both if FX rates remain at current levels.

However, as well as increasing the overall value of the businesses to us, what the decline in sterling has also done has increased the liability we have for the potential exercise of the put Novartis has to us for its share of the consumer business, and the liability for the puts and associated preference shares Shionogi and Pfizer have in relation to their equity interests in our HIV business. The increase in the sterling value of ViiV also drives an increase in the value of the future contingent consideration payable to Shionogi, given that all of the puts, preference shares, and the contingent consideration are valued and would be settled in sterling.

With the significant shift in exchange rates we've seen this quarter being clearly more than a short-term disruption, we've updated the currency assumptions we use to value these various liabilities to rates consistent with current market. This has given rise to a charge in the quarter of GBP1.8 billion, reflecting the increase in the value of the puts and contingent consideration, as well as the unwind of the discount applied given that these are future liabilities. The unwind element was approximately GBP200 million of that total in the quarter, similar to Q1.

The charges from these valuation adjustments have impacted our total results for the quarter materially, and push our total results to a loss for the quarter of 9p in EPS terms. However, as the adjustments do not relate to the Group's trading performance, and are primarily driven by currency movements and their impact on estimates of future transaction consideration that may be payable to our minority partners, we exclude them from core results.

Moving to our trading performance for the quarter, in constant-currency terms, Group sales up 4%, core EPS grew 16%. Good momentum across all three businesses. In pharmaceuticals, including HIV, up 2%. Strong growth from new products more than offsetting lower sales of Seretide/Advair.

HIV sales were up 44%, Triumeq and Tivicay growing strongly in all regions. And we continue to expect strong momentum from both products during the second half. Remember, however, Epzicom also goes generic in the US in Q3, and we continue to expect to see some generic activity in Europe in the second half.

US Pharma sales down 1% in the quarter, as generic pressure on Avodart continued, but newer products in the US grew total respiratory sales 6%, as they more than offset a 7% reported decline for Advair, which did benefit from an increase in wholesaler and retailer inventory levels in the quarter, compared to a decrease we saw at this time last year, and there was a small favorable payer rate rebate adjustment. As we've said in the past, the various pricing dynamics we are now seeing in the category are likely to lead to a bit more volatility in RAR adjustments quarter to quarter.

The underlying decline for Advair was more in line with what we saw in the first quarter, around 15% to 20%, and we continue to expect US Advair sales to be down around 20% for the full year, in part because of the tougher comparator we have with Q4 last year. Also in the US, Benlysta grew 29% to GBP71 million, and Tanzeum more than doubled to GBP28 million.

In Europe, Pharma sales were down 7%, reflecting a 25% reduction in Seretide due to the impact of generics, but also the ongoing transition to our new Ellipta products. For the full year, partly as a result of accelerating the pace of our transition to the Ellipta portfolio, I continue to expect Seretide to be down a little more than 20%.

Within international, sales in emerging markets were down 9%, with further declines in our China business as we continue the reshaping of that business. Outside of China, emerging market sales declined 8%, but this is primarily due to the sale of Prolia back to Amgen, and the winding down of the trading in Venezuela.

In Japan, sales were down 3%, primarily due to a 5% -- 5 percentage point price cut. And on the positive side, respiratory sales grew 6%, led by particularly strong growth of Relvar Ellipta.

For Vaccines, the business reported 11% growth, reflecting a strong performance from our new meningitis portfolio, and growing shares for several products in the US and Europe, as well as the benefit of some phasing of international tenders for Synflorix and Rotarix, and some improvements in Bexsero supply in the US, which came through somewhat earlier than expected.

Consumer Healthcare sales were up 7% in Q2, with double-digit growth of Sensodyne in every region. The US saw continued strong performance in oral care. New innovations helped Flonase to grow, despite increasing competition from private label. The Consumer business in Europe was up 1%. This was expected, with many integration activities proceeding during the quarter and some phasing impact as a result, but many power brands also continue to grow share. International grew 9%, with Sensodyne, Voltaren, Otrivin all delivering strong growth.

Moving to operating profit, excluding currency, the operating margin improved 250 basis points. We have delivered margin improvement in all three businesses, while funding new product launches and investments. The improved margin reflects leverage from the sales growth and mix, including the benefit of the continued momentum we are seeing in HIV and the substantial incremental benefits delivered from our restructuring and integration programs, as well as ongoing cost controls, which more than offset the continued pricing pressures we're seeing.

Restructuring and integration continue to progress well in all three businesses, with incremental savings in the quarter of approximately GBP300 million, and a total of around GBP700 million for the first half. Our plans across the Business are on track or ahead, but remember, while there are still many initiatives under way as we move towards the later stages of the integration and restructuring programs, the pace of incremental savings should be expected to slow, particularly when compared against the significant step-ups we saw in the second half of last year.

In the bottom half of the P&L, core financing costs were down GBP15 to GBP163 million, reflecting the maturing of some debt with higher interest costs last year. I continue to expect a modest increase in interest costs for the year as a whole at constant exchange rates. The core effective tax rate was 21.3% in the quarter versus 20% last year, with the increase due in part to the higher level of profits being made in the US. And for the full year, I continue to expect a tax rate between 20% and 21%, although the mix of trading and currency may create some upward pressure towards the top end of that range.

On cash flow for the first half of the year, excluding legal settlements of GBP104 million, and adjusting for the tax payments on the Novartis transaction, restructuring, and the costs of the BMS acquisition, all of which are being funded from retained disposal proceeds, the underlying free cash flow nearly doubled to GBP1.1 billion. This significant improvement reflects the growth in operating profits across all three businesses, as well as a currency benefit of approximately GBP340 million. This is despite higher working capital needs in the first half, as we invested behind new launches and seasonal products.

Net debt at the end of June was GBP14.9 billion compared to GBP10.7 billion at the year end. We are moving through the peak period of net debt this year, as I have described for you before. And excluding the impact of translation, net debt is in line with our expectations. The increase mainly reflects the GBP3 billion of cash we've returned to shareholders in the first half through dividend payments, including the special dividend of GBP1 billion, and roughly GBP1.3 billion of translation effects.

In summary, we are pleased with the progress and momentum of all three businesses. We've tightened up our guidance to 11% to 12% on a comparable exchange rate basis, and the Board has approved a dividend of 19p for the quarter, and we continue to expect 80p for the full year.

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

Thanks very much, Simon, and we will open up the call to Q&A, please. So operator, maybe if you could take everybody through the protocol and we will start.

(Operator Instructions)

Graham Parry, Bank of America.

Thank you for taking the questions. So the first one is on the vaccines. Obviously you had a very strong first half in vaccines; first half running at around 12% constant exchange rate. Your guidance for the year is around mid-single digit. Could you help us understand how you expect phasing to run through in the second half of the year, particularly how the Bexsero outlook is likely to progress, given you've got better manufacturing there?

And also on the margin there at 28%, how sustainable is that? Or is that just related to the amount of phasing benefit you're going to have there?

Second point is on the FX guidance of 19% benefit for the full year. You had a 26% benefit in the second quarter before most of the Brexit FX benefit happened. So I'm just wondering why that may not even be more as you go through the rest of the year?

And then thirdly, question on Gilead's preclinical data on GS-9883, which came out of the ASM meeting in June in Boston. They had some resistance profile data there. I just wondered if you had time to look at that and had any kind of view on the possible advantages for that product over Tivicay/Triumeq from a resistance perspective? Thank you.

Great. Thanks very much, Graham. Let me take the first question, and then I'll ask Simon to address the currency effect, then I'll come back to HIV.

Vaccines -- very good quarter -- good shipments of Bexsero. We got quite a bit of Bexsero away in the last few weeks of the quarter.

I would expect the rest of the year to be pretty robust for the vaccine business. But as we keep reminding you, there is some volatility around quarter to quarter. So, for example, in this quarter, we got a tender away to Mexico, which we originally expected to be in Q3 -- actually came in Q2.

It happens all the time. Sometimes those things net-net well for a quarter; sometimes they net-net less well for a quarter. Year end is also always a bit strange because a number of governments manage their financial year across literally the end of the calendar year.

But having given you that caveat, we feel pretty robust around the next six-month position for us. Bexsero growth continues very strongly across the world. We've seen a more rapid -- we're at the kind of front edge of the timing of expansion of our supplies than we anticipated when we first talked to you at the beginning of the year, which is very good.

We've already, as you may have seen last week, had release for flu -- Quadrivalent flu in America. We are the first company to get release by [SIBA] and we're about six weeks earlier than we normally are in the flu cycle. That should bode well for us in the flu season. Obviously, that is just beginning, but if that goes well, then I would continue to expect a solid performance for vaccines the rest of the year.

As far as margin's concerned, I think -- we said we'd get this business back up into close to 30% margin over the next several years. We're up in the high 20%s, very close to 30%. I think we're going to bounce around that.

I don't see this dramatically changing. It is quite sensitive to the sales level, so if you have a quarter where a couple of big tenders slip out, then you can see the margin affected that way and vice versa. But broadly speaking, on a multi-quarter basis, I think we're now getting up into the territory we'd expect to be with the inevitable quarter-to-quarter volatility.

And I'll hand it back to Simon on the exchange rate point.

Yes, I think just on vaccines, to add, remember also we've quite a lot of investments going through to make sure we can deliver against the top-line opportunity that you can see opening up for us. So, that obviously factors into the margin.

On currency, Q1 we obviously had a lot less tailwind. So as you look at the year as a whole, you have to factor that in. We've also assumed in that calculation that we end up with the year having the same level of exchange gains and losses as we had in 2015, as we have to make an assumption around that. Clearly, we're working hard to make sure that isn't the case.

And then when you look at the mix of costs over the balance of the year, that does also pull the amount of currency leverage, if you like, coming into the P&L over the second half, given the mix that you've got going on there. So that's the three main reasons why it's a bit lower than what we saw in Q2.

Thanks, Simon.

And on the HIV, I think it is way too early for us to try and draw any conclusion based on the tiny amount of data we've seen. I think there were four patients in each arm of the study that we saw the poster on. Structurally, the medicine looks very similar to dolutegravir. I think, really, realistically we would need to see more clinical data to really understand what, if any, differences there might be there.

I think more importantly, by the time it comes along, when you look at what's happening in terms of share, particularly in the United States and elsewhere, you're seeing a lot of dynamism within the Gilead population of drugs. So, intra-switching within Gilead, but the dolutegravir share take in naive is rock solid post the recent introductions of Gilead.

With another couple of years of that performance, GSK and dolutegravir-based regimens are going to be in a very, very strong position. It's not clear to me that this molecule, if it has any benefit, whether it's likely to be material. It seems relatively unlikely; and we will be well advanced, at least if all goes according to plan, on our dual regimen.

And it's quite interesting, when you look in Europe, already about 20% of patients in Europe are on dual regimens. So I think that -- I think the game is beginning to move on again, and clearly our agenda is very much around, first and foremost, fully established dolutegravir-based regimens. We're doing that. We're well on with that, and we've got more time to do it, which is excellent. Secondly, to then explore the dual strategy, and thirdly to develop the long-acting, and then to go into future mechanisms with the BMS products.

So I think that that's really what we are focused on, Graham. Obviously, we're going to keep a close eye on it as more data gets produced on this potential product. But I think as of today, it is just too early to be definitive. Frankly, if I owned it, I wouldn't be being very definitive; and if I'm going to compete against it, I'm certainly not going to be definitive about it.

Next question.

James Gordon, JPMorgan.

Hello, thanks for taking my questions. A couple more in HIV and one on the triple. On HIV, also on bictegravir, but actually not asking about the efficacy profile, but just in terms of the mixes that it would be with, and whether Gilead might be able to have a cleaner combo by avoiding abacavir, which your triple contains -- whether that could be a significant differentiator? Are you finding feedback from doctors that abacavir is a deterrent using the triple therapy?

The second HIV question would be about -- I know you're working a doublet with (riprefrebine), and with that doublet, though, I think the ingredient is J&J's ingredient. Does that mean that you'd only have half the economics per patient that you do have for Triumeq?

And then the third one would be just Epzicom generics. Does that put any pricing pressure on Triumeq, as two of the three ingredients go generic?

And then one question -- (multiple speakers) -- actually, just a quick one on triple, which was just -- a lot of patients are already using triple therapy. How widespread is that as a free combo?

Great, thanks very much. In terms of the HIV questions, let me try and do it in reverse order. So the -- when you look at the risk to pricing, there is some risk to pricing, but generally speaking, at least up until now, that has been more talked about than been a reality. And so, I don't think we should be overly anxious about that.

There will be many, many genericizations of molecules within the HIV market, which are themselves within more modern combinations, and we haven't seen a dramatic impact. At the margin, perhaps, but not a very dramatic impact. I wouldn't necessarily anticipate a huge effect there.

I think as far as abacavir is concerned, I mean, this has been -- for years and years has been the debate around the safety of abacavir. The FDA came out almost 10 years ago, now, it must be, with their review. And since then I'd say that, in reality, it hasn't been an issue in the marketplace.

It certainly hasn't held back the performance of dolutegravir in any way, whatsoever. And I think equally, when you look at the alternatives, you look at the [tafcontanin] regimens, as people live to much longer age on these medicines, some of the potential risks of those medicines become more relevant.

So I think in all of these situations, there are some puts and takes. I don't think there's anything particularly important here in terms of a dynamic for dolutegravir. It's had absolutely no inhibition.

And as you saw in the launch of dolutegravir, it has been by far and away the most successful launch in recent -- in many, many years in terms of really shaking up the market and moving share. And I think that is really reflected in peoples' confidence, not just in the monotherapy but of the combination as well. And as you saw in this quarter, Triumeq has really taken up the charge in terms of the growth of the dolutegravir-based regimen.

In terms of the double, I mean really the focus -- you're quite right, we're looking at the combination with [rilifipine]. It would be a shared set of economics, but obviously our core focus is on the dolutegravir-lamivudine program, which is a different situation altogether.

As far as triple's concerned, about a third of the patients are already on an open-triple regimen, James, as far as we can tell.

Next question.

Richard Parkes, Deutsche Bank.

Thanks for taking my questions. I've just got a couple on pricing in respiratory. Just looking into 2017, if possible, Advair generics-- I just wondered if you could update us on how contracting is going for Advair in terms of pricing?

And then, with the planning for the filing of the triple being brought forward, I'm wondering what you're thinking about how pricing might play out there? I think in the past you've said that your net price for Breo's been lower than Advair, and obviously that's been to ensure full reimbursement access. I'm wondering if the clinical benefits of the triple can help break that cycle, or if it's really going to be a volume gained and sort of defending, gaining your current position there?

Then third question is just on the pharma margin going into 2017. You've obviously seen benefits from the cost savings programs coming through, but pharma margin is also seeing an improvement this year, and I think helped by ViiV. I'm just wondering if those positives can continue to offset maybe the possible impact of Advair generics and mix effects from your lower margin, new respiratory portfolio into 2017? So, how should we think about pharma margin in 2017?

Thanks a lot, Richard. I think, like everybody else, nobody knows when there's going to be, and if there is going to be, a generic. And if there is a generic, what shape is the generic and how complete or not the supply is going to be.

So we have to wait and see what happens. We've given guidance through to 2020 assuming a pretty fundamental generic competition sometime between now and 2020, but I don't think any of us really know when it could happen.

There's obviously a front edge to the window, based on potential fastest possible approvals, and then there's an open-ended close to the window in terms of how long things might really take. And of course, exactly how much supply is out there, and whether or not all of the generics make it, and whether they are all substitutable are huge questions.

That's just as preamble to say to you that we're in a good position for contracting for 2017. And while not everything is finished yet, it feels as if we are going to have just as good, if not slightly better, access for all of our respiratory products in the US in 2017 than we currently have in 2016. And roughly, roughly, we haven't had to give too much more price, which -- partly because we've given a lot in the last three years, and we certainly wouldn't want to be giving a lot more price at this point in time.

So overall, we feel good. Of course, whenever a generic comes along, that is bound to create a kind of disturbance in the system, but it all depends exactly what it is. And I remain -- this is probably -- well, this is definitely going to happen after I finish as CEO of GSK, and I will, therefore, have spent my entire career as CEO of GSK saying the same thing, which is the genericization of Advair is not going to be normal. It hasn't been normal so far, and it won't be normal when and if it actually gets into the marketplace.

And I think we're going to have to take a little bit step by step to see exactly what comes to market and how it compares in terms of substitutability, and exactly how much Advair's left by that point, because obviously our goal is to try and generate a very substantial alternate new respiratory business. We're now growing our respiratory products faster than we're losing Seretide, which is a key step. The triple gives us another key step.

In terms of triple price, I'm not going to -- I don't want to front-run that conversation, not least because we're going to be talking about that pricing situation middle, end of next year in the US, depending on the regulatory timeline. An awful lot can happen in the next 12 months. I don't think it's wise for us to really front-run that conversation.

I do believe that triple is a really exciting opportunity for GSK. And I think that when, as we look at more of the data, we have seen some very, very exciting exacerbation data from the triple program now.

I think this is potentially a product which could really bring together our entire portfolio in the US. And as we've built up this Ellipta device-based portfolio, we're gradually building greater and greater momentum in all of the categories that we operate in, and I think the triple really brings all that together, and I think could give us a tremendous opportunity.

Let me ask Simon to comment on the pharma margin for next year.

I mean, clearly, given the profitability of Advair, and at this stage in its life cycle, there are relatively few support costs that we have around a product like that. And we've also optimized the cost of goods that contribute -- so, very significant margin.

If it goes quickly, then we're going to cushion the downside, but we are obviously not going to be able to offset it. If it's spread over a long period of time, then we'll stand a better chance. I think, depending on what your scenario is for 2017, you should expect a downdraft on the margin as Advair goes generic, as and when it does.

But every quarter that goes by, in terms of the new products, their momentum, their development, and also their improving margin as we mature those products and we get to optimize again in the same way as we did with Advair a decade ago, then yes, the net-net effect is going to reduce. But I think short term, there is still going to be a significant impact.

Next question.

Tim Anderson, Bernstein.

Thank you. I have some questions on emerging markets. So performance still struggling. When would we expect to see your overall emerging market business return to positive growth territory?

In China, I think you'd talked about returning to growth in second half. Is that still on track? And is your emerging market business now, between the contraction of sales and the remedying of certain problems, is that a profitable business for you at the moment?

And then second question is just high level on Brexit. Not near-term impact on things like foreign exchange, but really looking for what structural disruption might occur over the intermediate term? Whether supply or hiring or anything else to do with it that you could comment on, that would be helpful.

Thanks a lot, Tim. So, EM's actually are improving under line, but we've had a number of disposals this year and the Venezuela situation and continued reshaping of China. So I'd expect, as we come through this year, you're going to start to see much better underlying, getting us into the mid-single-digit type territory as we move into next year.

China, likewise. We continue to expect China to move back into growth as we come through the second half, now, of this year. We've just seen Cervarix approved in China. We've just had Viread put onto the pricing list. We're seeing some very significant positives as a result of that.

We were already seeing some stabilization. You've got to remember, a number of -- we decided to divest ourselves of a number of products in China in the last six months or so. So an awful lot of the suppression that you're seeing is structural reshaping of the Company rather than anything else.

So I actually think most of that is on course. Absolutely still a profitable business for us. It's a very good business for us, and I think we're coming through back into something where it will be a reported contributor to growth in a way that it hasn't been in the last year or so because of the China issue and because of the restructuring or the divestment of various businesses, plus, of course, Venezuela.

As far as Brexit is concerned, I mean I think the things to keep an eye on -- and they're all -- at a global level, they're all slightly at the margin, but probably worth having at least on page 14 of your radar. Whether or not the UK stays in the European Medicine Agency is going to be a big deal. Why? Because if UK leaves, you could articulate a whole bunch of negatives, but you could articulate that the reason why Britain leaves to create its own agency is to create the best agency in the world with the fastest, most innovative way to assess value for money, right?

I'm making it up, but just imagine that that were the scenario. That could create a very interesting competitive dynamic in the way in which innovation is assessed globally, and would create a new voice in that system. There are clearly lots of downside risks of separating the UK out, but there are possible upsides. So I think where UK regulatory decisions go will be a very important issue, number one.

Number two -- parallel trade. Will there continue to be a free movement of goods between the UK and continental Europe? About a third of GSK product sold in Britain is product which was originally sold in continental Europe and then re-imported to the UK -- sold at lower prices in Europe and re-imported and then sold in the UK. That's a net benefit to the UK -- to GSK if there were no parallel trade. The changing currency has already helped a bit there, but nonetheless, there is still an opportunity there for companies like GSK if parallel trade were to, for whatever reason, to disappear.

There is the potential for increased complexity in the supply chain if Britain were to separate from the European regulator, and there is the potential in the long run, and again now I'm painting the downside scenario of a regulatory separation. You could paint a picture which says that, in the long run, a stand-alone British regulator doesn't have as much influence globally, and you do less clinical research in the UK and that, over time, starts to have an influence on where you might want to do your long-term research, which is a very long-term question, but is clearly a possibility.

I think the reality, Tim, on everything I see and feel here, is as much as it might frustrate everybody, I don't think we'd have any clarity on any of these questions for possibly two or three more years from now. I don't think we should be anticipating that all these answers get issued quickly. I think that this is going to take much longer than people think, and it probably should because it's much better that we get the right answer than we get a quick answer. But we're going to have to live with some uncertainty during this period.

Next question?

Andrew Baum, Citi.

Three questions, please. Number one, [Abbas] highlighted a pending decision that would be made to accelerate some of the high-probability, high-commercial potential compounds in your portfolio. I'm interested on the timing of that.

Have those decisions been made? When we should expect [expansion of] some of the clinical trials, for example, [for your] OX40 or (inaudible) or some of the potentially more promising compounds? And conversely, a culling of some of the lower priority compounds?

Number two, I noted that you described the bictegravir, the Gilead molecule integrated inhibitor is structurally similar. Do you believe there's any infringement of your dolutegravir into that sort of property and related compounds that you have?

And then finally on China, just picking up from the last question, taking out the reshaping that you have reference, in terms of the underlying growth of the Chinese business that you have, can you give us some sense of how that is progressing? Are the declines ameliorating and bottoming out? And also, if you could give us a sense, as a percentage, what fraction of the Chinese business have you divested as part of that reshaping process? Thank you.

Thanks very much. So I think on the last point, yes, our underlying growth is improving quite quickly, and we've probably divested around about 25%, a third of where we were beforehand, in terms of -- divested or reshaped about a third of what we had before.

As far as the dolutegravir Gilead competitor concern, I don't know whether or not there's an issue there, but clearly this is a class where you can see there are some similarities.

As far as the prioritization is concerned, just to be clear, Andrew, we do prioritization all the time. So, as soon as we see a program -- as you saw, we're -- ICOS is in the clinic, OX40 is now in several trials, collaborative trials with other companies with PD1 partners. So I just want to disabuse you of the notion that there's -- nothing happens until some committee meets and makes a decision, and then everything happens.

Everything is moved as fast as it can move once it achieves its evidence points, whatever they are, whether they are safety or efficacy or quality. And similarly, as the programs that start to move start to move, then we would start to rein back on the programs which we have less interest in. And we run a very -- I think a very comprehensive and very thoughtful analysis of every single asset with every single experiment in R&D, force-ranked against each other in terms of its potential economic value to the Company. Of course, with the risk rating attached to it, in the way that you do that. And that's what, if you will, drives our decision making.

Now, of course, it has to be alive to the fact that, on Monday, you get some amazing news on a drug you weren't sure about that suddenly moves it up the schedule, and then you have to be able to react to that very quickly. A real example of that is the triple for America. I mean we were on a schedule to file the triple two years from now. We got some information which gave us confidence that we could potentially move much more quickly, and we reprioritized everything in the Company to take two years out of the filing timeline, and we told you we could file before the end of this year. That's a real example of exactly the way the Company operates.

What Abbas was referring to is our -- we do have an annual snapshot review, which is a good chance for everybody in the Company to see everything that's going on and gone on, the kind of state. And if there are, at that point, kind of collections of products which look like they are really going to fly, then you might make a decision to say -- okay, we're now going to take a choice on the following three or four or five assets in a much later part of the development portfolio. And we do that every year.

So every September time, we have those reviews. And if you went back six or seven years, that's when we surfaced Breo, Anoro, dolutegravir. All of the products which are driving our sales today were essentially identified through that process. We then swung behind them and moved them forward.

We do that every single year and every year. So last year, triple really surfaced through that at the end. Two years before that, Shingrix surfaced. That's really exactly how we do it.

Now, if I'm looking at this year's review, the ones that I'm watching to see how well we are doing are the dual in HIV, Shingrix, the triple obviously is late stage, danirixin, cabotegravir, the PHI program, the RIP kinase program, OX40, ICOS, BET inhibitor.

Those are the programs which are now all receiving absolutely daily kind of updates on priority and being flushed through the system as quickly as possible. And when we look at the whole portfolio, we will be simply doing a double check to make sure absolutely everything that can be being done is being done. I would disabuse you of the notion that we don't do that on a regular basis. It is absolutely what we do all the time.

Next question.

Jo Walton, Credit Suisse.

Three quick questions, please.

One, just to help us with our modeling, you've told us that your assumption of a 19% improvement from FX for the full year includes an [eagle] situation, the same as last year. So that was a minus [54] for last year. Is it likely, given the volatility of currencies going forwards that that eagle could develop and be more substantial by the end of this year?

And when we are looking at where to put this currency gain, should we model it effectively mainly in cost of goods? Because that seems to be where we saw it in the second quarter.

Could you also give us some more help, please, on the minorities? With the consumer business growing, with [reve] growing, naturally you would have thought that minority would be getting higher. Maybe there are some funnies in there, but if you could help us with that, that would be very helpful.

And finally, pushing on Advair for next year, are there any opportunities for you to do long-term contracting so that you can at least retain volume, even if there is an issue of price? And can you give us any insights as to how that might be progressing? So what might be realistic for us to assume in terms of your volume retention in the US?

Let me take the last question, Jo, and then Simon will obviously address the other ones.

Clearly, we are going to explore and are actively exploring all the possible scenarios for continued business retention of a proportion, hopefully substantial proportion, of Advair post any generic entry. And there are definitely, to your precise point -- yes, there are ways in which we can contract or we can compete in different ways to keep volume in the US.

What I'd remind you of is that there is no generic file for the MDI. And so that business alone you would not anticipate being genericized.

The key to all of this is -- when does a generic begin? And it may or may not be -- again, I would -- clearly, there is a risk of it being in 2017, and it may very well be in 2017, but it may not be.

So we need to be, first of all, alive to that, and we also need to be alive to what really is the shape of the generic competition. Is it one company? Is it multiple products? Is it substitutable? Are they all substitutable? All of that plays to what kind of deal we can do, frankly. And clearly, the later it is, the fewer there are, and the less substitutable they are, the better for us, just to be obvious.

And I think, in a way, it's unlikely -- it won't be for me to do, but I think it's unlikely that the Company will be giving you very precise guidance to answer your question, other than to frame it in the way that I just have, so that you can do your own assessment of -- if there's only one and it doesn't come until the end of 2017 and it's not substitutable, then that's a certain scenario, versus if three came in March of 2017. That's a different scenario.

I think there's still an awful lot to play for here, and when you look at our share acquisition, overall, we've grown our share of ICS/LABA over the last 12 months with Breo -- with Advair obviously declining, but with the strong growth of Breo. I think though we're in a decent position to continue to build a very strong, ongoing revenue base there. And we're certainly on track to what we've said to you before, which is that by 2020 we expect our respiratory business to be as big as ever. I think this transition looks very much doable in terms of where we stand today.

With that, though, I'll ask Simon to comment on the other questions.

Thanks, Jo. So, on the currency tailwinds, we've made an assumption in the 19%, as I said earlier, that will have exactly the same eagle this year as we had last year. This is an area that we've got a huge amount of focus on, and you are absolutely right that when currencies are volatile, it's even more difficult to control. So we're pleased to have come through the second quarter with none. But over the year, I think we have to expect continued currency volatility, and that's why we've made the assumption we have.

They typically show up in SG&A rather than cost of goods. The cost of goods benefit in the quarter is really more about where our costs are [in] sterling relative to other currencies. So for your modeling, I would assume they come in SG&A.

On the minorities, there's definitely some phasing between Q1 and Q2, and I think if you look at the half as a whole, then you'll see the trend more in line with what you were probably previously expecting. In Q2, we saw a number of bad-debt provisions in some of the other minority interests we have around the group, not the two big ones that we've just talked about, and obviously those create a credit in minority interest. That's a bit lower than you would otherwise expect. But just look at the half as a whole, and you'll be in a more sensible place.

Next question.

Keyur Parekh, Goldman Sachs.

Good afternoon and thank you for taking my questions. Andrew, two for you, please. One, as you think about the Glaxo business over the next 5, 10 years, how do you think the challenges and opportunities that face the new CEO will be different from the ones that you faced when you took over? And consequently, what would your suggestions be for the -- [creates] for the new CEO?

And secondly, as we think about the progress you've made on the integration, we think about the benefits to the cash flow from the sterling being what it is, is there an opportunity for Glaxo to think about increasing the dividend in 2017 rather than it being flat in 2017 and then growing post 2017? Thank you.

Thanks very much for the question. The last thing a new CEO wants is a kind of instruction manual from their predecessor. They want the complete opposite. They want freedom to do what they want to do, and that's exactly how it should be here at GSK.

I think that, though, when we look at the Business -- where we are today versus perhaps where we were a few years ago, as we look forward, one of the really big differences is -- Advair is coming down quite quickly. It's relative importance to the Group is dropping very quickly. And while Simon's quite right, if there were to be a sharp genericization, it would hurt in the year. It's no longer strategic in the sense that it once was.

And actually, when you look beyond Advair, you really have no material genericizations until the second half of the 2020s. That is a massive difference to the last seven or eight years, where we've had a constant stream of expiration of product. It doesn't mean there won't be other issues and other threats, but I think the new CEO has the platform to be able to build growth, and focus on how to drive those elements of growth in the vaccine, consumer, and pharmaceutical businesses without having to always be taking two steps back before they take one step forward because of the losses of the older products. And I think for the next 10 years, that's a very, very attractive place to be as a company.

And I would argue -- and you know my view on this very strongly. I would argue that we've built extremely competitive positions now in vaccine, consumer, and in the key therapy areas in which we compete in pharmaceuticals, and that the mix of those areas give us a very, very strong, sustainable position against the likely ongoing pricing pressure in pharmaceuticals, especially in specialty pharmaceuticals, which I think is coming. And we need to make sure we are ready for that. Now, I'm not saying there isn't great opportunity there, and we want to play in that marketplace, but I don't believe we want to be totally exposed to that.

And so I think for the new CEO, they have that as a foundation to start with, and then they will make good decisions about how to further develop, enhance, and change the focus of the Company. I think in terms of the dividend, the Board have made it very clear they expect to pay 80p a share for 2016 and 2017, and then I'm sure the Board will take a view on what its ongoing dividend approach will be for 2018 and beyond. And of course, what will inform that is the position of ongoing cash flows; and as you rightly say, the underlying performance and the currency all help.

But I don't think anybody needs to, or would necessarily be well advised to, make a premature decision. I mean there's some water that has to flow under the bridge, and I think then they'll make a sensible decision going forward.

I think one thing you know from GSK Board is that they value their shareholders very highly, and I think we've had a long history of ensuring a good balance of return of cash to shareholders. And I think in my tenure I've paid out something like GBP40 billion, which is almost 100% of the market cap on the day I took over, back to shareholders.

Next question.

Seamus Fernandez, Leerink.

Great. Thanks very much. So, a couple of quick questions in the overall respiratory franchise. Can you talk a little bit about how you feel the progress of Nucala is going and how you expect that franchise to continue to evolve going forward as competition emerges in that market?

Second question is, on the closed triple, can you just help me understand a little bit of -- where do you really see the incremental value-add of the closed triple? Obviously, superiority to Symbicort is a good and attractive start, but we've seen good performances and superiority versus Advair with just a two agent combination from some of the other competitors. So just trying to get a better understanding of how you see that evolving on a go-forward basis and how the closed triple -- how you see the success of the closed triple and how you will metric it? Thanks.

Great, thanks very much for the question. So, Nucala is off to a good start, actually. So we are ahead of our expectations in the US and Europe on Nucala. We've seen a very -- I think we now have something like 3,100 patients on drug in the US.

This is a -- these are, as you probably know from other companies, I know Novartis went through exactly this when they launched [ZOLA] -- very complex to get patients on these kind of drugs. It's not particularly a clinical issue, it's a reimbursement issue. And it takes a few months to set up a process.

And on average, it takes us about six weeks to get a patient from the point where a physician says I want to prescribe, to actually being able to administer the drug, because it takes so long to go through all of the various reimbursement insurance triggers. There's a real issue there in terms of complexity of the US system.

It takes a few months to set something up which works efficiently. Efficient means six weeks, unfortunately, but we're in that rhythm, and we're seeing actually quite a nice continued ramp up. No impact at all from the competition that we've seen so far in the US, and I think the sub-cut administration and all the other benefits of the label for Nucala really stands as well, there. It looks very promising. I think it feels very good.

Ex-US, we're seeing very good performance. Very strong start in Germany in particular, but across the board we're seeing good reports. And we just launched in Japan, and I just came off the phone with our General Manager in Japan and they've had a phenomenal first couple of weeks. So far, so good on Nucala.

As far as the triple's concerned, I'll just make a couple of points. I said earlier about a third of the market was in an open triple, more or less. You've got to remember, though, GSK might only be playing in about half of those prescriptions.

So let's assume that Symbicort has about half the base steroid combination. We have about half, and of course, we don't play in hardly any of the Spiriva element. So when you break down that third of the current market, we're playing in a relatively small fraction of the total value of that marketplace.

So, the first thing, of course, is to try and capture more of that. And I have a funny feeling -- I was thinking the other day about triple, and it reminds me a lot of when we launched, 20 years ago, fluticasone and salmeterol, both of which were highly effective medicines. Competed like crazy with Symbicort -- sorry, with budesonide from AstraZeneca -- and it was only when we brought Advair out that it really -- it really drove the dominance of GSK in that space. Took Astra then another five or six years to try and catch up, and they've never really been able to, in terms of share.

I think this may be something somewhat similar. That you have a scenario where we've introduced a series of new medicines. This time they've been doubles rather than monos, but actually the thing that really clinches the market is the triple.

And I think that -- if you can establish yourself as the triple of choice -- it's a bit like the Brexit negotiation, right? Once you've decided what the answer is, you know what you're negotiating strategy is. I think if you decide that your triple of choice is the GSK triple, then why wouldn't you start with the double of GSK? Why on Earth would you start with somebody else's double?

Now, remember, in America as well, there's never going to be another once-a-day double product in the marketplace. So we start -- I think we start to create an extremely persuasive pathway, because the reality is, in COPD, everybody knows the patients are going to progress. Patients are not going to stop at any particular level. Over time, unfortunately, their disease is going to progress, and they are going to need to move on to different regimens, and therefore, the physician will need to establish for themselves a pathway. If we lock in the endpoint, then I think it becomes obvious where the start points are.

I think for us there is an obvious share-take opportunity within the established open space, and I think there's the potential for this to be the absolute clincher of the whole respiratory strategy for GSK. And I have to say, with the way in which the Ellipta device is now being used and welcomed -- it's why we're building yet another set of production lines, announced today, to keep up with demand. And the way in which the feedback on the individual molecules and doubles that we've got, I think we're simply building up a tremendous amount of energy and goodwill around these new products. And when I look at what could come from the competition, it's either late or it's twice a day in the key market of the US. And I think we've got a tremendous chance to really drive this market forward in the way that I've just described.

Next question -- last question, I think, actually.

Kerry Holford, BNP.

Thank you. A couple of financial questions, and then a put-out question please.

So first on cost savings, your target for the year remains GBP2.4 billion, and yet you've effectively booked much of that in the first half of the year. So I wonder why you're not raising that guidance and, as such, why that run rate should slow so dramatically into the second half? And if indeed that is the case, how is an incremental GBP6 million achievable for next year? If you could just talk about the saving, there?

And then on the operating margin, that was up around 250 basis points year on year. Could you give us a broad guidance to the components that are split between the underlying performance of the Business, restructuring benefits, and one-offs such as the Advair rebate reversal? And then on the triple, could you just confirm whether you would expect that putout to receive a 10-month or a 12-month review in the US? Thank you.

Go ahead, Simon, please, on the first two.

On the cost saves, clearly, as we've said in the remarks at the beginning of the call, we know we are well on track. In many of the programs, we are a bit ahead. There's still quite a lot to do in the second half of the year. So let's get a bit further before we call where we're going to eventually end up.

But do -- as I highlighted, the second half of the year is up against significantly tougher comps in that sense, and that we started to ramp up in Q3 and particularly Q4 last year. So the incremental amounts, you should expect those to be significantly smaller as we head into the second half of the year. So I think direction of travel, pretty clear, but a bit early to call that.

I think on the operating margin, there are no particular one-offs that I would call out. I mean the Advair adjustments that we referred to are pretty small and certainly not a material driver of margin. It is much more about operating performance and the leverage from the top line. Leverage from the top line is probably delivering about 40% of the total, and the rest is coming from ongoing cost savings, as well as the integration and restructuring benefits that combine in the 2.5% that we delivered in the quarter.

Thanks, Simon.

And then just finally, Kerry, on the triple, it's a 10-month review.

With that, thank you very much for your attention and your questions. The IR team at GSK is obviously here to handle any other questions for you, and thank you for your attention today.

Thank you, ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.