葛蘭素史克 (GSK) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to GSK analyst and investor call.

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

(Operator Instructions)

I would like to advise all parties today's conference is being recorded.

And now I'd like to have call over to their Andrew Witty, CEO.

Thank you very much.

Good afternoon and welcome to the call.

Q3 has been another strong quarter for GSK with continued sales growth, cost control and pipeline progression.

Core EPS was 32p, up 12% on a CER basis.

And group sales grew 8% to GBP7.5 billion at constant exchange rate.

Sales growth came from all three businesses across the Group, but primarily from the momentum of new pharmaceutical and vaccine products, which had sales of GBP1.2 billion, up 79% on the same period last year.

Pharmaceutical sales grew 6% to GBP4.1 billion.

HIV sales were up 32% to GBP940 million, with continuing very strong demand for Tivicay and Triumeq.

In respiratory, sales grew 8% to GBP1.6 billion, including 14% growth in the US.

At the start of the year, we said we would be looking for return to growth of this business, and year-to-date total respiratory sales are indeed up 2%.

New respiratory products are driving this performance, with third quarter sales of GBP269 million.

These new products, Breo, Anoro, Incruse and Nucala, position the Group well to manage the impact of potential genericization to Seretide/Advair, and to ensure GSK remains the world's leading respiratory company.

I am also excited by the progress we are seeing in our respiratory pipeline.

In the near term, we are on track to file our closed triple product for COPD in Q4 in earlier-stage developments.

Our next generation products include danirixin, our CXCR2 antagonist, and our PI3K inhibitor, which I am pleased to say it met its primary endpoint in a Phase II proof-of-concept study during the quarter.

Vaccines also had a very strong quarter, with sales up 20% to GBP1.6 billion.

This is not a function of phasing, but much more related to an improved execution of commercial performance, allowing for an earlier delivery of vaccines, given it is a high market share at higher prices, and you see a significant growth over 2015 and previous year's performance.

In addition, demand for Bexsero, our meningitis vaccine, continues to be strong, with sales more than doubling to GBP133 million in the quarter.

And we are investing to increase our manufacturing capacity in this vaccine.

Prospects for our vaccine business remain very strong and we were pleased to announce on Monday that our latest innovation, Shingrix, a candidate vaccine for shingles prevention, has now been filed in the US.

In consumer healthcare, sales were GBP1.9 billion, up 5%, a competitive performance relative to others in this space and ahead of our estimated market growth of around 3.5%.

Power brands, including Sensodyne and Voltaren, all grew double digits.

And 12% of Q3 sales were the result of new product introductions in consumer.

Looking at pipeline innovation more broadly, our most recent review of capital allocation for research and development reinforced our confidence in both our near-term portfolio and the potential of the assets we have in earlier stages of development.

We expect visibility of our pipeline to increase substantially in the next two years, with clinical data being generated on around 20 to 30 potential assets by the end of 2018 in core therapy areas such as oncology and immuno inflammation.

Assets with data readouts will include our OX40, the ICOS and BET inhibitors for various cancers, and our anti-GM-CSF for RA.

The Group's operating margin for the quarter was 30.7%, 2.7 percentage points higher than in Q3 2015, and 1.3 percentage points higher than in CER terms.

This improved operating leverage reflects sales growth and continued delivery of cost savings from restructuring and the integration following our three-part deal with Novartis.

We have now delivered GBP2.5 billion of annual benefits faster than expected, and on track to deliver our target of GBP3 billion.

These improvements in operating profits, together with benefits from currency, led to a significant improvement in our cash position with net cash inflow from operations of GBP1.8 billion in the quarter compared to GBP0.5 billion in Q3 2015.

At the earnings level, we are very pleased with the trends we are seeing in the business and very confident in achieving our 2016 earnings guidance for core EPS growth of 11% to 12% which, of course, we have already upgraded earlier in the year from our original expectations.

Total EPS was 16.6p, down 1% CER, primarily reflecting charges arising from increase in the valuation of the consumer healthcare and HIV businesses, which, in part, relate to the put options held by our respective partners.

Finally, the Board has declared a dividend of 19p for the quarter and continues to expect to pay an 80p dividend for the full year.

With that, I will hand over to Simon, to give you a little bit more detail on the quarter.

Thanks, Andrew.

The results we have reported today mark another quarter of progress and delivery against both the strategy and the goals we set out in the financial architecture to drive growth and earnings per share ahead of sales by improving our operating leverage and being more financially efficient, and convert more of those earnings to cash that we can return to shareholders or reinvest back into the business when and where we can see attractive returns.

Sales growth is being driven by all three businesses in the quarter, but particularly by continued momentum from the new pharma products and the standout performance by our vaccines business, that continued to build the new meningitis portfolio while also delivering very strong growth in flu vaccine, especially in the US.

We are generating greater operating leverage through continued execution of our integration and restructuring programs, which have not only delivered around GBP2.5 billion of annual cost saves since they started but are also creating significantly greater flexibility in our cost base, allowing us to maintain tight control of our ongoing costs, while also allowing us to reallocate resources behind targeted reinvestments, including supply chain improvements and new product support, as well as advancing the R&D pipeline.

Together with the continued efficiencies we are delivering through our funding structure, this improved operating leverage allowed us to deliver earnings-per-share growth ahead of sales growth, as well as a significant improvement in free cash flow, more than double Q3 last year, after adjusting for the restructuring and other transaction costs being funded from the balance sheet through divestment proceeds.

As you'll recall, we have already adjusted our earnings guidance upwards a couple of times during the year, and delivery this quarter leaves us confident in meeting the guidance we have set out for growth in core earnings per share for the full year of 11% to 12% in constant currencies.

We also said when we issued that guidance that we expected earnings growth for the two halves to be similar.

This reflects the greater seasonal weight to Q3 of the post-Novartis business, as well as the need to continue to invest consistently behind our new products and the R&D pipeline.

The press release provides extensive detail about the performance, so, as usual, my comments from here will focus on the major points, expectations for the rest of the year, and any comparator points that might help you in your modelling.

On currency, this is the first full quarter since the Brexit vote.

The resulting sterling depreciation delivered a tailwind of 15% to sales and 27% to core EPS, with the larger impact on EPS due to a higher proportion of our costs being in sterling compared to revenues.

The impact of a weaker sterling on the reported operating margin varies in the quarter by business, with pharma positively affected given its relatively higher proportion of sterling costs, while it is more of a drag for vaccines and consumer.

Vaccines has a large manufacturing and R&D presence in euros in Belgium and Italy in particular, while consumer also has a relatively large proportion of its cost base in euros, but also in Swiss francs.

If exchange rates held at the September month-end rates for the remainder of the year, and we have the same level of exchange losses as last year, we would expect a positive full-year impact on turnover of about 10%.

And we estimate the positive benefit to core EPS would be approximately 21%.

Total results were 16.6p, with the difference from core results primarily relating to charges from adjustments to the estimated liabilities for contingent consideration of the consumer put option.

In addition to GBP243 million for the normal unwinding of the discount on these future liabilities, in line with the quarterly run rate we expect, the remaining adjustments were as a result of changes to the forecasts for the relevant businesses for performance, but mainly currency, which increased their estimated sterling values and therefore the associated liabilities.

To help you model the impact of future exchange rate movements on these estimated liabilities, we have added some extra detail into the press release on page 50, including some sensitivity analysis and an explanation of what exchange rates we used.

Details of the payments to Shionogi to settle the contingent consideration are also set out.

These are included in the cash flow section of the press release each quarter.

The payments, remember, are made directly by ViiV, and in Q3 totalled GBP121 million pre tax.

The rest of my comments will be focused on CER growth and core results.

In constant currency terms, as Andrew has highlighted, group sales are up 8% and core EPS up 12%, reflecting the operating leverage we have already discussed.

Pharma sales, including HIV, were up 6%, more than double the growth rate from last quarter, as increased sales from new products continued to more than offset the decline on Seretide/Advair.

In respiratory, we continued to transition the portfolio from its previous reliance on Advair/Seretide to a much broader one.

Total respiratory sales were up 8% globally, with double-digit growth in the US and international more than offsetting a 9% decline in Europe.

This was primarily the result of growth in the new Ellipta products and Nucala, up GBP179 million in sterling terms, which more than offset the 7% decline in Advair/Seretide, which slowed its rate of decline in the quarter.

This primarily reflected a mix in the period of better RAR in the US and an improved performance in the emerging markets, offset by continued competitive pressures in Europe.

In the US, we are continuing to see greater volatility in our RAR rates quarter to quarter than might have been the case in the past, and that trend seems likely to continue given the dynamic conditions in the respiratory market in the US.

However, looking through that volatility for Advair specifically, we are expecting an overall rate of decline in CER terms for the year as a whole towards the mid teens, more in line with what we saw in the first half.

Moving on to HIV, our second largest therapeutic area, sales were up 32% as Tivicay and Triumeq continue to generate substantial growth.

Both are now amongst the largest individual products in the group.

And while we continue to see very strong momentum in the dolutegravir franchise, we are starting to annualize the significant acceleration we saw for both products last year and in the quarter.

We also started to see a more meaningful impact from generics for Epzicom and Kivexa, and we expect the generic impact to accelerate in Q4 and into 2017.

Elsewhere in pharma, established products had a stronger quarter than trend, declining by just 3%, which reflects some better supply but also some tender orders and other similar one-offs.

Looking forward, remember also that we announced a series of deals with Aspen in September that, when completed, will simplify our established product portfolio but will also remove around GBP100 million of revenues on a full-year basis.

We expect those transactions to close around the end of the year.

Moving on to vaccines, up 20%, strong execution across the business.

In flu we shipped much higher volumes with earlier deliveries this year than in 2015, as well as an improved product mix, driving sales growth of 55% in the quarter.

Part of this success was delivering early in the season.

So, we are not expecting as many deliveries in the fourth quarter compared to last year, as our campaign has been very deliberately more concentrated to deliver that progress.

Vaccines also continued to build the meningitis franchise with particular success in growing share and the overall market for Bexsero.

Supply remains tight, although, given that we have seen such a significant acceleration of demand for this product, we are continuing to invest in expanding capacity, but this will be a multi-year project.

Given the underlying trends we are seeing in the vaccines business we now expect that this year as a whole we will see vaccines sales growth at the top end of the guidance range we have previously given you for the business of mid to high single digits of rates of sales growth.

Consumer healthcare remains on track, continuing to grow in line with our mid single-digit expectations of 5%, even though the business was lapping a strong comparator quarter last year.

We delivered especially strong results from the power brands, including Sensodyne and Voltaren, which more than offsets some tougher market dynamics for Horlicks in India.

Flonase OTC also continuing to grow in the US with line extensions offsetting the increasing impact of private-label competition.

This quarter, Veramyst OTC received FDA approval and we expect to launch in the first quarter of 2017.

This will be the business's second switch in three years.

Worth noting, also, that at the end of September we successfully divested the Nigerian drinks business, the last of our drinks businesses, with annual sales of just over GBP50 million as we continue to focus and invest behind the core and power brands.

Turning to operating profit, excluding currency, operating margin was up 130 basis points.

Our continued delivery of integration and restructuring benefits and the leverage provided by better sales growth have enabled us to deliver an improved margin, while also absorbing pricing pressures and the declines of some of our older products and continuing to invest consistently behind our new products.

This is alongside supply chain improvements and R&D pipeline investments.

These investments and the recycling of a proportion of the restructuring benefits are key to sustaining the improved top-line delivery and operating leverage we are now seeing across the business.

On restructuring specifically, we have delivered GBP2.5 billion of cumulative annual savings compared to GBP1.6 billion at the end of 2015, so we are ahead of schedule.

Although the incremental amounts each quarter are now coming up against tougher comparators, we remain confident in delivery of the targeted total savings of GBP3 billion.

In the bottom half of the P&L, core finance costs were up GBP12 million to GBP160 million.

And I continue to expect interest costs to be slightly higher in the full year at constant exchange rates.

The core effective tax rate was 20.8% in the quarter versus 20% last year, bringing our year-to-date rate to 21%.

As in previous quarters this increase is due in part to the higher levels of profits being made in the US.

And for the full year I continue to expect a tax rate of between 20% and 21%, although the mix of trading and currency that we have seen this year is likely to land us at the upper end of that range.

On cash flow, for the first nine months of the year, excluding legal settlements of GBP166 million, and adjusting for tax payments on the Novartis transaction, restructuring costs and the BMS acquisition, all of which we are funding from retained disposal proceeds, the underlying free cash flow more than doubled to GBP2.6 billion.

This reflects both the improvement in operating performance but also the benefit of the move in sterling which contributed about half of the overall increase.

As well as generating stronger free cash flow, we have also realized attractive values on the disposal of various non-core assets including a second milestone payment on of atumumab of GBP150 million and almost GBP500 million from the sale of our residual Aspen stake.

We will receive the proceeds for the Aspen disposal in early October, so they are not yet reflected in the quarterly cash flows or net debt position.

Net debt at the end of September was GBP14.7 billion compared to GBP10.7 billion at the year end, but this includes a currency translation drag of GBP1.4 billion since December.

Year-to-date, in addition to using disposal proceeds to fund GBP800 million of restructuring and integration costs, purchasing the HIV assets from BMS, and paying GBP1 billion special dividend, we have also returned GBP2.9 billion of ordinary dividends to our shareholders.

I continue to expect this year to be a heavy investment year with net debt reflecting that, but as we move towards the end of the integration and restructuring program next year, we should see the demands on the balance sheet reduce.

Excluding the impact of currency, net debt continues to be in line with expectations.

In summary, another strong quarter of execution across the business, reflected in delivery of sales growth, integration and restructuring benefits, improved cash flow and earnings and, as a result, we are confident in delivering the full-year guidance.

With that I will hand back to Andrew.

Thanks very much, Simon, and let's open the call for today.

Operator, perhaps you could take people through the protocol and we will start the Q&A.

(Operator Instructions)

Graham Parry, Bank of America Merrill Lynch.

Thanks for taking my questions.

I've got three.

Firstly, on Advair, could you quantify the rebate benefit that we saw in the quarter in the US?

How much of that is a historic adjustment versus just a change in rebates and any channel that that mix surprise came from.

And I think you said that this was a trend that you expected to continue.

If you could just clarify that comment.

Secondly, could you run through for us the contracting position of Breo, Anoro and Incruse for 2017 -- I assume you are pretty much done on these contracts now -- just in terms of covered lives in tier 2 across Part D and commercial and any exclusives that you've got there.

And is there any risk that that positioning shifts if generic Advair is approved, and there are opt-outs in those contracts?

Thirdly, on Bexsero, you are annualizing over GBP0.5 billion in sales now, and capacity constrained.

So, what is your ultimate capacity needed to meet what you perceive to be demand now?

And can you help us understand just how far penetrated you are as you think into the ultimate potential of that vaccine?

Thank you?

Thanks very much, Graham.

On the Advair piece, I think there are a couple of things.

About [GBP]50 million in terms of the RAR adjustment.

It is historic.

As you all know we don't know at the time that we ship the product which channel the product is going to be sold through.

It is an estimate.

We then have to correct one way or the other.

So, this is a catch-up or a correction on historic provisioning.

It is really important for you all to understand, we also -- we didn't particularly call it out in the press release by detail but we did make the general point -- actually, at the respiratory level it is a neutral impact because we had RAR provision changes going in the other direction for some other products, notably Ventolin.

The net-net of all of this is irrelevant in terms of the overall group, but product by product it has a slight impact, which is why we called it out for Advair, because obviously I know a lot of you are tracking the Advair decline curve.

The underlying performance of Advair is basically pretty much on track with what we have seen historically, but there is no big deal around this particular point within the respiratory business, and therefore at the Group level because it all essentially washes out between the various puts and takes.

In terms of contracting I think we are in the best position we have ever been for next year.

So, for Advair we are running very high favourable positions in the commercial book of business, as we are for all the new products.

The same in the Part D book.

You never quite know what is going to happen if a generic comes.

The key question really, Graham, obviously is, if it comes, what is it, what does it look like and when exactly does it come?

There is all of that uncertainty.

We have seen, and you have probably seen from some other companies, this increase in appetite for managed care clients to continue to think about how to keep the brand available, even after a generic arrival.

So, I think going into next year for the new products we feel really good.

For Advair we feel really good at this point.

And we will have to wait and see if and when a generic shows up and in what kind of shape it is by the time we get there.

In the vast majority of cases, all of our products are preferred brands, and obviously that is exactly where we want to be.

As far as Bexsero is concerned, we are expanding capacity as we go.

I would remind, if we go back two or three years I think Bexsero volume is something like 2.5 million doses.

I think we are heading up towards 10 million doses this year, more or less, maybe a little less than that.

We will see.

Certainly, over the timeframe of the next three, four years, we can certainly see a pathway to take us up into multiples of that 10 million type of level.

We have been investing in various aspects of the supply chain for Bexsero since we acquired the product.

We will continue to do that.

While we don't have unlimited capacity today, we have certainly got a growing capacity.

So, I wouldn't conclude that we are not going to be able to grow this product.

We will, but obviously the sooner we can bring on the new capacity the better.

In terms of penetration, I think we are very early days of this marketplace.

You're really in the -- I'd hazard a guess -- but you are probably in the 10% territory, maybe not even that, of the overall opportunity of this particular vaccine.

There is an awful lot of opportunity to go on a global basis.

We have seen very strong performances in the US, of course.

We have seen very significant business in the UK.

Spain has been important, Italy is important.

But it is still a relatively small number of countries against the overall potential opportunity.

So, big opportunity to go.

Expansion of manufacturing, ongoing, active.

I have personally been to the facility we acquired, I think, now, three times, gone through that.

Every time I go we are able to produce more doses, we have made progress.

And I think there is a really strong energy and commitment in the organization to do that, and I think we are on the right track with it.

And overall, of course, as you rightly say, we are now running at something like GBP130 million a quarter for Bexsero -- very strong growth and we want to continue to see that delivery.

James Gordon, JPMorgan.

Hello, thanks for taking my questions.

One was on the new respiratory launches, which is, when I look at Breo, Anoro, Incruse and Nucala, they are all a little bit below where consensus expectation was.

So, did we just do our sums wrong on this quarter or is there something that we missed, something like a step-up in rebating or something else?

Any reason we need to be a bit more cautious in subsequent quarters for these products?

The second question was just about where we are in terms of cost savings and looking forward a year.

I think there is about GBP500 million of further cost savings to come through.

Can you just remind us where they might fall in terms of the cost lines or by division?

Is a chunk of them still to come in vaccines, because I know the target is to eventually get to a 30%-plus margin, but it looks like you could almost get there this year actually.

Could you actually get there next year?

Then, just a final question, more generally, with Emma announced as Andrew's successor, coming from a consumer background, it could be read as accelerating a move to having a bit less pharma focus and more of a consumer focus.

Is that a fair move?

And when you are looking at in-licensing assets, is consumer increasingly a focus and pharma less so?

Thanks very much, James, for the questions.

I am going to ask Simon in a minute to comment on what the likely distribution of the next GBP500 million of cost savings are.

I think on Breo and Anoro it is a rounding error in terms of the difference between the expectations and the delivery, first off.

I don't know why that is there, but within the scheme of things I think it is a very close set of numbers.

Actually, if you look at the performance of the products, it's continued to be extraordinary growth, actually.

So, if you look at the US, for example, 100,000 patients a week are now being prescribed Ellipta-based inhaled products.

July 1 Ellipta represented the equivalent of 36% of total Advair volumes by prescription.

By September 30 it was up to 42%.

So, very rapid evolution there.

If you look in the US share position during the year, over a 12-month period, Advair has lost 7 share points, Breo has gained 7 share points.

Anoro and Incruse together in the broncho dilator market have acquired a brand new 12.7% share.

And in all cases the NBRx the leading indicator of completely new to brand, are tracking significantly ahead of the actual delivery.

So, if you look at Breo current TRx share, it is in the 11% type of territory, but NBRx is now up at 18.5%.

That gives you a very strong impression of where that product is going.

And overall, when you combine it with the HIV business, you can see the new products at GBP1.2 billion annualizing at GBP4.8 billion, growing at 79% year over year, a very strong new product portfolio.

To put that into context, for the pharmaceutical business, GBP1 in every GBP4 we generate in sales comes from products launched in the last three or four years.

So, basically it comes from the HIV products or the respiratory products we have just been talking about.

Nucala is tracking very well.

We have 5,600 patients on the drug now in the US.

We have a 10% TRx share.

But, interestingly enough, we have a 25% NBRx share, which shows you the ramp-up that is coming in there.

And I think right now, as of today, we have got something like 12,000 patients registered for interest to go on the drug.

As you know, it takes a few weeks for patients to cycle through onto the product.

I actually think from just a stand-back, cold look at the performance of the new products, particularly in respiratory and also in HIV, very strong performance, very sustained, growing share, accelerating as we came through the summer, very strong coverage for next year.

I think continues to be very substantial potential for us going forward.

Simon, do you want to talk to where the next GBP500 million would distribute in terms of where the cost savings are going to come from?

And just before you do that, I know you asked a couple of questions, James, which tried to get us to redefine some of the targets or the guidance we gave back at the May capital markets Day in terms of 2020 long-term guidance.

I just want to reiterate our position on that, as a general point, which it is not our intention to update each of those guidance points quarter by quarter, or even year by year, actually.

We gave you all of that as a long-term shape evolution of the Company.

It is very clear that we are on or ahead of the expectations that we set for ourselves in some of the key goals there -- for example, new products.

We have made clear that those would come forward, that GBP6 billion goal would come forward to at least 2018.

Who knows when we actually hit that number, it may be sooner than that.

We are not really going to get into a lot more precise adjustment of those numbers.

I want you to take it as a shape and I would encourage you to look at the delivery and then, as and when, obviously, if you want to adjust your expectations for the 2020, you are obviously welcome to do that.

Against that general comment, maybe, Simon, you could talk about the savings and then I'll come back and talk about the question you had relevant to Emma's appointment.

Sure.

James, as we have said before, in terms of the sequence, we always expected that the SG&A and R&D savings would come before the SG&A and cost of goods savings, if you like.

So, that is the general trend.

And that is true of the last GBP500 million, that we probably expect to see a heavier weight within cost of goods than the other two lines.

I think in terms of the business mix, probably consumer and pharma are where you would see the greatest contribution, some still to come in vaccines, although, as you point out, we have been ahead of that in terms of delivery, and the margin performance makes that pretty clear.

So, that is the overall shape but more cost of goods benefit than the other two.

In terms of your question about Emma, clearly, next year Emma will lay out for you how she sees the strategy to take forward the Company.

She is doing all the work now to really take the time to do deep dives on various aspects of the business, particularly the parts of the business that she has not personally run up to this point.

So, you will have to wait to see what her view will be.

I just want to, by analogy, just maybe make a point around why you shouldn't necessarily make any assumption until Emma actually stands up and tells you what she wants to do.

The last project I did for the Company before I was appointed CEO was to do an analysis of whether or not we should keep the consumer business.

And my ingoing prejudice, if I could put it that way, was that maybe we shouldn't keep the consumer business.

By the time I finished that project, I convinced myself and the Company that we ought to.

And, in fact, we massively kept it and invested and turned that business into a phenomenal organization for the Company -- 16% margin, sales up this quarter 5%, very substantial global scale and a terrific innovator, whether you look at the power brands like Sensodyne or the new switches like Flonase, and obviously, the approval we had this quarter for Veramyst.

All great stories around momentum.

Just by analogy, you might have looked at me six months before I took over as CEO and predicted one thing and I did completely the opposite.

I would simply use that as a reminder that, when somebody is appointed to be the CEO, they have a chance to really think about what they do with that organization that they are taking ownership for.

They have the chance to set their strategy.

You should not necessarily expect that what people have done in the past will be a precursor for what they do in the future in any particular way.

Andrew Baum, Citi.

Thank you.

Three questions, please.

First, could you just outline GSK's commitment to oncology?

Given the history of the asset swap, given the sheer competitive intensity of the segment, should we believe that epigenetics, IO, are here to stay for good inside GSK?

Secondly, could you give us some additional colour, Simon, on the tendering components around vaccines and how you anticipate it will play out over the next couple of quarters?

And then, finally, for China, Andrew, are you confident that we have now troughed here on the new base in terms of underlying outlook?

Thanks, Andrew.

I think on China the answer to that is, yes.

We had a little bit of benefit in this quarter of a systems cut-over.

But, fundamentally, we are back into growth.

We're seeing improvements across the refocused business.

Importantly, with the launch of new products in hepatitis B, the Viread launch, but also, critically, the Cervarix approval in the quarter, we can see significant opportunities to put more energy behind that business in the next year or two.

So, I think the answer to that question is, yes.

We are committed to oncology, Andrew, and what does that mean?

It means that we are absolutely focused on bringing through breakthrough medicines, as you have written several times, whether it be in epigenetics or in IO.

We've got significant opportunities for first-in-class meds.

It is a little early to say exactly what these medicines could be or can't be, but in the next 12 to 18 months we're going to know.

That data is going to come in thick and fast during 2017 and through to the middle of 2018.

At that point, Emma will be in the position of making the choices about how we then go forward.

You are quite right, of course, that this is a very competitive space, there is the potential for combination strategies.

You know we are already partnered with Merck in one or two of the combination exploratory trials with Keytruda.

We are very pleased to be working with them to explore the potential of our possible meds alongside of Keytruda.

But exactly how we then go forward is really dependent on what happens to which products over the next 18 months.

The number one driver is going to be how we maximize shareholder return from those assets.

Now we took a decision about how we could maximize shareholder return on the older generation of assets.

That deal, I think, did maximize shareholder returns very substantially.

And Emma will be in a position to make choices going forward.

But I would say that all options are on the table but the default option must be to develop this business ourselves.

If I went back to 2006-2007, we had no oncology business.

Within four or five years, we had built a GBP1 billion business, launched seven products, which we then sold to Novartis.

But the fact is that we built that presence up very rapidly.

And I think there is no reason why we couldn't do that again, if that were the right thing to do with the portfolio of medicines that come along.

But we won't know what that portfolio really is for probably another year or so.

Simon, do would you like to comment on the tendering question?

Yes.

Andrew, as we have talked about before, tenders do create a lumpy profile inside the vaccines business, mainly affecting the international piece of it, which is why I called it out.

It is not material to the overall position we reported for the whole vaccines business, but there's probably GBP30 million to GBP40 million within the international region, which is why we marked it.

It is on that scale.

I think just on the back of that, because if what you are digging at, Andrew, is how real is the Q3 vaccine number versus it being somehow phasing or tendering, I think the reality is that it is a very real number.

It does not mean that we're going to see the same sales number in every quarter, because there is some fundamental seasonality in the vaccine business, whether that be around the flu business, particularly in the United States, there are some vaccines which are associated with back-to-school periods, that sort of thing.

There is definitely lumpiness from a seasonality point of view, and there is definitely tendering, which can affect that.

There are also things like CDC stockpiles, which can be a positive or a negative.

Actually, in this quarter, that was a negative, so actually the number would have been even higher if we had not had that situation.

There are things which drive lumpiness of the quarter.

Now, in this particular year, in quarter three, the reason why we have such a strong performance is really twofold -- absolutely fantastic Bexsero meningitis sales in particular and absolute execution of the goal we had which was to ship more flu vaccine earlier so that we could, A, get higher share and achieve that at a better average price point than you get when you come late to the market.

That is a very deliberate effort to shift that flu business into Q3.

And obviously, going forward, the challenge will be to do that every Q3.

That is why we generated that.

It is not just that the sales have come into a different quarter compared to historic patterns.

They have come in in higher volumes and they have come in at higher average prices.

That is very substantially permanent, if I can put it that way, rather than simply a timing phenomenon.

It is quite important to understand that.

As I say, it does not mean you won't see lumpiness, but that is not really the feature of why you have seen this very strong vaccine performance in the quarter.

Kerry Holford, Exane BNP Paribas.

I just have two questions, please.

Firstly on the pipeline, I notice that you have terminated the maturation inhibitor from Bristol-Myers, and there is a mention of a back-up with a better profile.

Can you just give us some more detail on this?

What phase is that back-up in?

And can you provide us with more detail as to why 795 was terminated, and why you think the back-up will be superior?

Do you still think you can be first to market with an oral maturation inhibitor?

And, just to confirm, does that back-up also originate from Bristol-Myers?

And then, just following on from your comments, Andrew, on Nucala, you referenced the time taken to get patients onto drug following a physician writing a script.

Are you seeing that decrease now?

Is that moving in the right direction?

How long does it typically take to get patients onto drug now?

And any comments you would like to make about competitor products in that space currently and into next year.

Thank you.

Thanks very much, Kerry.

As far as the maturation inhibitor, you are quite right, we terminated 795.

It's really a tolerability issue.

We did not feel it was good enough from that point of view.

In fact, we have at least two more back-ups and they come from both Bristol-Myers and GSK Labs.

I don't think we're going to lose a lot of time.

We obviously lose a bit of time here, but not a lot of time.

I think we feel like the overall program is really still very much substantive and has a number of opportunities in it.

Even at the time when we did the transaction with Bristol-Myers, while we did not know the tolerability profile of this lead asset, we were particularly intrigued by a couple of the back-ups.

So, even at the time of the transaction, we have been increasing our focus on the back-ups.

As it turned out, the lead from BMS wasn't what we had hoped it would be but the reality is I think the program remains very much intact.

I do not think the time liability is going to be very material.

And the back-ups come from both BMS and GSK, which is good because that gives you a bit of diversity of chemistry and it gives us a bigger solution set to be able to come up with the right kind of product.

As far as Nucala is concerned, we are seeing that timeline shortened.

But the reality is, for anybody who is on these kinds of biologics, the timings to get through the reimbursement cycle and authorization are challenging, much longer than you would want them to be, and, actually, I think personally, one of the areas really deserving of a focus for all the stakeholders to work together to streamline in the US.

So, we continue to focus on how to take a day out here and there.

We are doing that, we are seeing that cycle time coming down.

We are seeing fantastic feedback from physicians and patients who are on the drug.

And, as I said earlier, our NBRx share is now up to 25% against our TRx position of 10%, so that shows you the kind of climbing curve that we're doing.

You can see that in the marketplace, certainly, as far as the products which are on the market today, Nucala is really the story in town.

Clearly there is potential competition coming in a year or 18 months time.

We will have to wait and see.

We haven't seen anything published there which makes us feel particularly anxious in terms of the profile for Nucala.

There are a few truisms in this particular target set.

The higher the eosinophilic count at baseline, the higher the proportional drop.

So, if you do your trials in patients with high eos counts you are going to get typically higher percentage drops.

What we have seen with Nucala is a very strong performance, even as you go into lower eosinophilic counts.

And, as you know, we have done trials at 150, others have done trials at 300.

And what we have also seen with Nucala is great consistency of performance.

You have seen some new interesting data published during the quarter and you will see more very interesting data on Nucala published in the not too distant future.

So, this product is very much in has very active launch phase.

It is going extremely well in terms of share acquisition, tracking very much, a little bit ahead actually of our expectations.

And we feel good for going into 2017, good coverage and the focus point is to try and make the patient experience a bit smoother in terms of accessing the product.

Jo Walton, Credit Suisse.

Thank you.

It is with trepidation that I ask this question, but it's about US pricing going forward.

Specifically you made a comment that plans were looking to keep the brand as much as possible post-generic.

I am not sure that those of us that follow French companies are seeing that that is a widespread factor.

So, I just wonder if you could tell us a little bit more about how you think that could play out in the respiratory market.

And, just generally, do you think investors are too worried about all the rhetoric that we are hearing on the US political scene?

Do you think that could turn into action?

And, if so, what would be your best bet as to what may happen on US pricing next year?

Thanks very much, Jo.

I didn't actually say that our plans, what we'd try to do is keep the brand as much as possible.

I said plans were more open-minded to looking at strategies to keep the brand.

And we are seeing that.

I think a lot of this depends on -- it's no secret to anybody, certainly not you, Jo, or anybody else on this call -- that the net average Advair price has dropped significantly in the last three years.

Essentially we have absorbed 50% of the economic effect of genericization already, notwithstanding the reduction in any volume market share.

Now, what that means is our net prices are in the range of being able to have a sensible conversation around potential generic entrants.

All this obviously all depends on what kind of generic marketplace evolves and when it evolves and how substitutable, how big the supply is, all those good questions which have been the subject of my earnings calls for nearly ten years.

Those things still exist.

The reality is, I think, against that backdrop, there are some significant merits for customers to think about some certainty.

And there are some significant merits to think about the overall portfolio that GSK has to offer versus the single debate of Advair versus a generic.

To contrast that to some other companies who have been very challenged in this space, you've got to step back and say -- Okay, we are doing just over 200,000 prescriptions a week in America of Advair, we are already doing 100,000-plus a week of the Ellipta-based products.

The dynamic of that whole conversation has really moved on to how do we work together on the new products.

That's why we are seeing such terrific access being established across the board of the respiratory portfolio.

And, remember, the triple therapy file is going in before Christmas.

And given that that may well have a shorter review cycle than 12 months, it puts us in a very interesting position to juice up the competitive dynamic in the US.

So, we'll see, but I think it is all to play for, Jo, is the way I would characterize it for us.

And I think the fact that we have absorbed so much pain on pricing over the last three years actually puts us in a more interesting zone going into the generic cycle.

Of course it would have an impact on us.

Of course generics would lead to a reduction in sales and profitability from Advair.

But the question really is to what degree, and that's very much determined by just exactly when, what the profile of the generic entry is.

And that's not within my control to predict, I'm afraid.

As far as your more general question is concerned, it is important to be conscious of the dynamics around US pricing.

And it's not just political dynamics although, of course, that's what drives a lot of headlines.

There are tremendous market forces at work in terms of the way in which the US market is changing, who is making the decisions, who is controlling the lives.

That's changed dramatically.

We have been talking about this on these calls for many years.

And it is what has driven a lot of our strategic thinking at GSK in terms of, A, making sure that our innovation can be differentiated, and then, importantly, priced at a sensible level to maximize returns.

And I think we are showing that in the new products.

I don't know how many other companies you cover can say that 25% of their sales come from products which have been launched in the last three or four years.

And I think that is proof point of the returns argument, that you can launch at a reasonable price vis-a-vis other products and generate significant economic return.

So, it has driven that agenda and it has, of course, driven our agenda of looking for high-returning growth opportunities beyond simply the traditional US pharmaceutical high-priced marketplace, if I can characterize it that way, which is why we have invested where it makes sense in the consumer business, the vaccine business, and elsewhere in the organization.

When we look at the returns that these three businesses offer over a 10-year period, they basically deliver very similar return rates.

That has been the strategy of the Company, to make sure that, yes, we continue to drive forward pharma innovation.

We have 20 to 30 new drugs to read out in the next two years, and we will look to sensibly price those markets into the US to get a decent return.

But we will take some of the pressure off that dynamic in the expectation that it gets a tougher world not an easier world by investing sensibly for a similar return in the consumer and vaccine business.

In terms of what to anticipate next year, I don't know.

Nobody knows what is going to happen next year, Jo.

I think next year you will simply see a further ratchet-up of the behaviour of the marketplace through the commercial payers and negotiators.

I think that the idea that certain therapeutic areas are immune will be dismissed over the next two or three years.

And I think that any kind of governmental interventions are probably more like a 2018-2019 scenario.

And I think, at the very least, what we should anticipate is more Part B type demonstration projects.

I think the intervention to limit Part B reimbursement is very telling of a potential pathway for how the US might evolve.

The good news of that is that they tend to be more sniper type shots at the marketplace rather than big tidal changes.

But the bad news is that they happen reasonably quickly.

I would anticipate more of that type of thing.

Might there be a much broader political agenda?

Maybe, but I am less sure of that, frankly, Jo.

And I think there are plenty of reasons why you might conclude that isn't the most likely outcome.

I certainly think commercial marketplace dynamics are now moving into a much more broad-based scale.

And I think the possibility of governments, CMS and others choosing to implement other demonstration type projects as a way to try and change the market must be rising, not falling.

Tim Anderson, Bernstein.

Thank you.

A couple of pipeline questions.

Going back to respiratory and the closed-triple, just thinking about market access in the US, when you launched Breo you felt you had more pricing power than you ended up having.

That obviously hurt the product launch.

I am wondering what lessons from that experience might port over to the closed-triple specifically?

Are there some similarities there or do you think this is a totally different product, different set of circumstances?

It is a ways away, but I am just wondering if investors should be bracing for another slow launch, no matter what you do?

Then the second question is on Shingrix.

Great efficacy, but on safety and tolerability there are some things that stand out.

In the New England Journal article, for example, about 10% of patients had grade 3 injection site reactions, which is pretty high, and higher reactogenicity.

So, for a preventive product, where patients aren't really coming to the office for active symptomatic disease, I am wondering if that creates a commercial impediment, or if there could be compliance issues with the second dose.

Great, thanks very much, Tim.

As far as the triple is concerned, I don't think Breo is a good analogy.

I'd actually look at what we have done since Breo.

You have to remember, Breo and Advair was a simultaneous event and has a very unusual dynamic.

If you then look at our ability to get Anoro, Incruse, Nucala even, all of these products covered very quickly.

And, in fact, our ability to reverse the setbacks we had on Advair and Breo, I think you can see a very different success rate in terms of our managed market position.

I am pretty confident -- I don't want to hand Emma a gift too much at this point in terms of one of those gifts where you have to constantly explain it -- but my guess is that triple ought to be reasonably straightforward, provided we go in with a pragmatic price proposition.

And that is what we have been doing since Breo.

And the consequence of that is we have seen excellent coverage, rapidly achieved, and then very rapid market share acquisition.

I think it should be fine, but it all revolves around walking the talk, Tim.

I have just talked for five minutes about how I see US pricing and we have to be consistent with that and have pragmatic pricing positions for new products like triple.

But I think that will work.

As far as Shingrix is concerned, fabulous efficacy, as you rightly say.

The injection site in the trial, remember that the placebo was literally placebo.

So, you are comparing something which is non-active against an active, so the comparison with the trial isn't really relevant.

If you look at other products like Pneumovax, you see very similar sorts of injection grade reaction.

The reality is almost certainly that is a function of the adjuvant and driving the immune response.

I think, honestly, Tim, if you sat down and you sit with somebody and say there is a response, an immunogenic response, as long as people know it is coming, there is an immunogenic response, but the benefit of that high immunogenic response is a much higher, in fact potentially a double end of your protection levels.

That's a bit like when I go for my flu shot that it's going to hurt a little bit, I still have it, and I have it because I am prepared to tolerate that for the benefit it gives me.

What we need to be very good with is making sure physicians understand what the experience is going to be like.

I think that the overwhelming positive news about this drug, phenomenal efficacy, phenomenal impact on potential future cases of post-herpetic neuralgia, and all of what comes with the efficacy side, I think that the issue of injection site reaction, A, in the trial looks more overstated than it should be, because it was a true placebo, but, B, I think is entirely explainable and not unprecedented in vaccinology.

Keyur Parekh, Goldman Sachs.

Good afternoon.

I have got three, please.

The first one, Andrew, there has been recent press about some UK government reaction to a white paper that apparently Glaxo and AstraZeneca and the ABPI had worked on towards Brexit.

It would be great to hear your thoughts on how you think that plays out for the industry.

Secondly, last quarter there was some question around intellectual property, around dolutegravir, cabotegravir, and whether the Gilead compound could potentially infringe that.

I would love to hear your updated thoughts on that, if you have any.

And lastly, and I realize you will have another quarter to do this, but just what do you think your biggest legacy to Glaxo will be?

How will we think about your time at Glaxo in five years' time?

Thank you.

Thanks, Keyur.

I think I am going to short-circuit the three.

Nothing new to add on IP or potential competition issues there.

Way too early to think about legacy.

I am still thinking about making sure we deliver a great year end for the Company.

And in terms of the UK government position, I think, first of all, there is a very good dialogue going on between the industry and government.

Of course, the overall strategic framework of the UK's exit from Europe is not clear or defined.

So, inevitably there is an absence of black-and-white decisions and clarity, if I can put it that way.

But I would say that the number one, most important thing that has definitively been confirmed since June 23 is that life sciences is one of the top three industrial sectors that Britain wants to swing behind.

That is incredibly important.

It is definitely creating the backdrop for a constructive engagement between industry and government, not just on the short run, but on long-term competitiveness.

That clearly is very important for GSK.

We are very actively involved in those conversations.

But I think it is also fair to say, and also reasonable for us to sit back and say this is a big, complex, big story around Brexit, and, therefore, it is inevitable that things don't necessarily get nailed sector by sector as quickly as some people might like.

Nothing to worry about, I think, from my perspective.

We are in an early phase of a complex process.

We are in a good position because we have been called out as a priority industry.

I think the benefits that that could bring in terms of continued commitment in science base in Britain, continuation of things like the Patent Box, ensuring that this is an agenda where the UK government looks for ways in which it can legitimately help encourage innovation to take place in the UK, are all very positive.

So, it is early days, but nothing to worry about.

And I certainly wouldn't be concerned about any observations in the media of this sort.

Steve Scala, Cowen.

Thank you.

I have several questions.

Andrew, apologies for asking a question you said you wouldn't answer, but regarding the expectation that new pharmaceuticals and vaccines are expected to reach GBP6 billion in 2018, GSK is on track to exceed that in 2017.

So, given the fact that it is nearly upon us, what are your reservations in revising that number now?

The second question is on zostervaccines.

Merck's strategy is to vaccinate as many people as possible before Shingrix is approved.

GSK has said that only 7% to 8% of patients have been penetrated.

But if Prevnar is a good parallel, only about a third of patients will seek vaccination.

So, is GSK's ongoing study of Shingrix in people already vaccinated with Zostavax recognition that the new patient pool is indeed fairly limited?

And then, lastly, what impact on Nucala would GSK expect if Astra's benralizumab is approved on a Q 8-week basis?

Thank you.

Thanks very much, Steve.

In terms of the new product piece, we are clearly tracking very well in terms of the performance.

And you can draw your own line.

You take the 79% growth rate over a 4.8 billion base and then you figure out what the decay rate of that growth projectile is, and you can come to your own conclusion.

It is more a general point that, right now, I don't think it is necessary for us to update for you.

I think the -- what is in the tin -- is more important than what is on the label of the tin.

In this situation, it is absolutely clear, fantastic momentum here.

I think it is also important that, frankly, as we look at forward-facing statements into 2017-2018-2019 I think that is largely for Emma to be very much the owner of as she takes over the business going forward.

So, I think that as we go through this transition there will be some things which we may all agree on, Steve, but actually it is right for Emma to be the person to say -- Yes, I am ready to make that commitment on behalf of the Company going forward.

No question, though, that I am super pleased with this performance.

And I'm going to reiterate, having a quarter of your pharma business coming from new products, most of which have intellectual property running until the late 2020s, feels pretty good.

In terms of Zoster, there are a couple of things, really.

Remember that Merck are only in a handful of countries.

Remember, because they have a live virus, the manufacturing process has always been significantly constrained through manufacturing volume.

They have clearly prioritized some of their biggest markets like the US but they are only in a handful of countries.

We see Shingrix as being a global launch.

As you obviously know, it is not a live virus.

We are not inhibited by the same manufacturing constraints that live viral manufacture creates for you.

So, first of all, this is going to be global.

That massively increases the marketplace compared to the Merck position.

Secondly, yes, of course, we are looking to prove that we can revaccinate someone who has already been vaccinated.

We owe it to them because if that vaccine only works 50% of the time, they have a one in two chance of not being protected.

So, that is something we really need to demonstrate.

And I think, from a public health point of view, if we are successful in that trial, I think that will have very material impact on what public health authorities potentially choose to do.

And I think it will also signal -- I am now 52, if somebody said to me I can have a vaccine, or I'd even had a vaccine which was 50/50 but now there is one which is approved for revaccination, if we got to that stage, then I don't think I would have too many doubts about going back to get it.

So, We are looking at the whole marketplace, frankly, Steve.

We are looking at the geography opportunity.

We are looking at the patients who have not come through the door yet who we would love to come through and be protected.

And we are also exploring whether or not there is a legitimate basis on which to develop the claim for revaccination.

I think this is going to be a very significant product.

I know Emma is super excited about it.

I know that this is an area where it is obvious that there is a real blend of the best of pharmaceuticals, vaccine and, actually, consumer healthcare skills.

And I think it's going to be a fantastic opportunity for GSK and for Emma as she takes over and drives it over the next few years.

Richard Parkes, Deutsche Bank.

Just got three questions, if that's okay.

Firstly, just a simple one.

I wonder if you could quantify the impact from the stocking in China and phasing of tenders in the established products line.

And then, secondly, given the beat to consensus forecasts in the third quarter, and the fact that you haven't raised guidance, looking at R&D you have increased spend in the third quarter, it looks from your comments that you are really taking the opportunity to reinvest some of that better underlying performance.

I'm wondering is that the right interpretation -- i.e., are you ahead of where you expected to be?

And how should we think about R&D spend versus margin development longer term?

And then, third question, we have seen Sandoz recently file a citizens' petition questioning the use of lower dose of Advair in bioequivalence trials.

I'm just wondering how likely you think that is to delay generics.

I think both current filers used the lower dose in their Phase III trials.

Thanks.

Thanks very much, Richard.

The stocking in China was a GBP20 million effect.

And, Simon, on the tenders?

About GBP30 million or GBP40 million.

So immaterial in the scheme of things.

And, to be honest with you, as you know in our quarters, you are just as likely to have one or two more of those.

You can get them in a quarter, you don't get them in a quarter.

But I would say those are small.

We really only called out the China one in particular because, back to Andrew Baum's first question, very positive about the beginnings of recovery growth in China.

But we didn't want to necessarily give the impression that it is going even more quickly than it is because of that distortion.

I think, frankly, if it wasn't for that we wouldn't call it out, because it is such an immaterial number.

In terms of where we are, we are ahead of where we expected.

That is why we have risen guidance, lifted guidance a couple of times during the year.

We continue to trade very well.

We are confident we can come in within the range that we have set for the rest of the year.

Let's see what Q4 brings us.

There are always degrees of volatility in the quarter.

I am feeling very confident about where we stand today.

But it is also true that we are incorporating into our short-run and medium-run expectations a gradual beginning of rising investment in the R&D business driven by the opportunities of the R&D portfolio.

As we look going forward, we start to see some of the big inhaled respiratory programs which have consumed a lot of resources, some of the big Tanzeum programs which have consumed a lot of resources historically, coming to an end.

We start to see the gradual ramp-up of new product investment coming forward.

We are investing in that.

And you can see in this quarter it's the one part of the P&L where we weren't delivering leverage up in R&D.

We delivered leverage in COGS, we delivered it in SG&A, we delivered it everywhere except for in R&D.

And that is reflective of the fact that the savings we are taking through normal restructuring are being immediately redeployed, plus a bit more.

And you should to continue to expect to see us invest intelligently in R&D.

Now, there is no target number, there is no target percentage of sales, but I think very much driven by the opportunity the pipeline gives us.

And as we look over the next two years, we've got between 20 and 30 potential opportunities to get behind.

One of the things the Company will focus on, and we do it all the time anyway but it becomes even more intense in the next two years, is exactly how much weight do we put behind each product as it surfaces if we get multiple opportunities surfacing.

So, you are right to reflect that.

Obviously we are going to continue to try and deliver the best number we can for the year without short-changing the future in any way whatsoever.

The R&D investment is all about making sure we have long-term foundations for sustained growth and sales delivery, but we are going to continue to look for every opportunity we can between now and the end of the year to deliver the best number we can.

As of today, we are very confident around the guidance we've given you.

Let's see how the next two and a half months plays out as to where we actually land.

I can't really comment on the Sandoz citizens' petition.

Obviously it's nothing to do with us in the sense of we didn't originate it.

I have no idea what, if any, dialogue has gone on between that company and the FDA already.

I would remind you that GSK filed its own citizens' petition several years ago, which is still a pending citizens' petition.

So, I can't predict to you how this might affect approval times, but I would remind you this isn't the only citizens' petition that has sat now at the FDA.

The only conclusion I take from it is something I've been saying to you for nine years -- it's complex.

And the FDA will have to make a choice in a complex generic space.

Something like only 11% of contemporary generic applications get approved on first-cycle review in the US.

That includes the simplest generics imaginable all the way through to things like Advair.

Advair is a very complex generic.

Let's wait and see whether or not people can thread the needle early in that process or not.

But what's clear from the Sandoz piece is that there are at least other generic companies out there who want the FDA to address some aspects of this complexity more than have already been done.

Who knows what that means.

I think it simply reiterates the point we have said repeatedly -- there's lots of moving parts to this.

Our focus at GSK is on the things we can control, which is all about the new products.

So, we are focused on driving that GBP4.8 billion annualized new product number up.

We will live with whatever comes on generic Advair whenever it comes.

I think, to restate the point we've made many times before -- we don't know, nobody knows, and we will deal with it when it comes along.

Nicolas Guyan-Gellin, Morgan Stanley.

Thank you very much for taking my question.

I have two, actually.

The first one is on 2017 margin.

This year currencies will help a lot combined with the Novartis integration and material synergies in OTC and vaccines, while I suspect ViiV also played a major role in pharma margin improvement.

How shall we think about margins for next year, so 2017, directionally, with further FX and synergy tailwinds, but potentially Advair generics in H1 and the [comps] vaccine?

Is there a scenario where you can improve margins as anticipated by the consensus, despite Advair being genericized?

And the second respiratory question -- what do you expect from the soon to be published head-to-head trial that Novartis is running with Ultibro versus Anoro?

Do you see any particular upside or downside there?

Thank you.

Thanks very much.

Nicolas, you have a super-elegant question, but I am going to not give you guidance for 2017 while we are still in 2016.

The only thing I would say is if and when there is a generic to Advair, obviously Advair is a very profitable product.

We don't have very much commercial resource attached to Advair.

We are focused on the future, not on Advair.

So, if and when there is a generic to Advair, then the loss of Advair volume, it is a high profitability product so you have to be aware for that.

I think in terms of the only other piece I would say, and I think you alluded to this in your question, it is important to remember that, all else equal, it is highly likely we will retain a significant currency tailwind into and through much of next year if everything stays as it is today.

Now, there is no guarantee of that, of course.

It's hard to remember, almost, that the pound was at 1.50 as recently as June 22.

So, for the first half of next year you are likely to see a very significant currency tailwind.

But beyond that, I am not going to make any comment on margin.

Again, I think all of those kinds of comments are very much appropriate in 2017, not in 2016.

They are driven enormously by the timing.

So, if a generic came early it's one thing; if it came late it's another; if it came never at all then it's another.

Those are all things which Emma and Simon will no doubt be chatting to you about at different times during next year.

No, no particular comment on the Novartis trial.

I think it's for us to talk about our trials, particularly before they are published, -- sorry, our trials when they are published, not other people's when they haven't been published.

Let's wait and see.

The only good news I will share with you on that front, which is fantastic news, is that GSK is now number one in the double bronchodilator global marketplace.

And given that we started second and we are now number one, it feels like that race is playing out well.

And we are continuing to see some very good progress.

And I think we will see in some global guidelines some evolution over the next few months which will also potentially open up opportunities for us there.

Jeff Holford, Jefferies.

Thank you very much for taking my questions.

I am trying to look a little differently on Advair for 2017.

Maybe for Simon.

Do you have any general thoughts about when you're going to give guidance on 2017?

Can we just assume that you will be ignoring the potential of Advair generics in 2017, and we will just see where we come?

Or will you try and bake that somehow into guidance for 2017?

I am interested in your general thoughts on how you're going to deal with that.

Secondly, maybe just a comment on generally the Company's appetite for M&A right now, and the focus and size, if there is any interest.

And then, just last, Andrew, thinking from some of the comments you have made today, playing down the potential risk of things like changes to LIS and dual eligible patients rebating over the next year or two.

I wonder if you just might tell me if I am correct about that, and why you have that view.

Thanks very much.

Thanks very much, Jeff.

I think on things like dual eligible, the point I am trying to get across is I think the chances of that in the next year or two are low.

I think as you get into the end of 2018 and 2019, it rises.

So, I think there is a timing dynamic around that.

I think there are some other things that could happen more quickly.

I do not think it is a zero risk at all, Jeff.

I don't think it is a 2017 risk and it is more a case of the pace and speed at which some of these various things might evolve.

As you know, GSK has a low fraction of its business exposed in the Medicaid/Medicare space compared to many, and what we do have there is dominated by Advair.

So, slightly ironically, if there were to be a generic Advair, our risk to dual eligible drops dramatically, which is an interesting upside to something that you didn't want necessarily to happen.

In terms of guidance for next year, Emma and I will sit down over the next few weeks or so to start to think about how we plot this.

But, rest assured, between the three of us, between Emma, Simon and myself, we will do everything we can to make sure that we give you as much help as is appropriate, so that you can understand what the true underlying growth of the Company is and what the potential impact of generics might be.

So, we will definitely be discussing that with you.

But obviously it is super-critical that that is owned, and something that Emma feels good about, and, therefore, that's one of the reasons we're not going to rush anything out because it would only be sensible to have that conversation once Emma has had her chance to get to grips with the process she is going through now in terms of familiarity with parts of the business that she hasn't necessarily run directly.

So, you're just going to have to bear with us a bit.

We would not normally give you guidance until we were into the year.

I think that is a very safe assumption in this situation.

The three of us will work together on it and, at the right time we will be describing to you, I am sure, both what the effect would be if there were no generic, but also give you some indication of what the impact of a generic would be.

Seamus Fernandez, Leerink.

Thanks for the questions.

Andrew, given your dour views on the industry and near-term prospects, particularly on pricing and access, I am just wondering, also, as we enter a more biosimilar heavy environment, as that accelerates, what are your thoughts on the prospects for mega-cap M&A, as we saw heading into the big 2007 to 2012 cliff that the industry had to weigh into?

Obviously you guys took a very different strategy than mega-cap M&A, but others may have a different view.

I was just wondering how you feel GSK ultimately is positioned in the context of that environment.

Then a separate but similar question, this interest in further consolidating OTC consumer, and just maybe giving us a better understanding of Novartis's ability to block a deal that GSK may want to do, that could be a little costly in the near term but could be significantly value-added long term.

Obviously we are seeing some challenges at some of your partners in that regard.

Thanks.

Thanks very much Seamus.

I think from the mega-cap M&A dimension, I think that possibly the economic rationale for that type of thing must be rising if you believe the environment becomes more pressurized from a price perspective.

But, we're now -- certainly when I started in this industry, I think there were 65 global drug companies.

We're down to a reasonably small number.

These are very big companies, typically, and they are complex.

We have obviously seen a variety of potential or putative transactions launched and then cancelled in the last two or three years -- always for slightly different reasons but, nonetheless, they have been tricky to get done.

I think that is an issue -- the complexity of the transaction, when these businesses are so big and they have lots of overlapping pieces potentially.

And then the issue about do you really want to run a drug company with 250,000 employees in it.

I think it's a really interesting question, actually.

These companies are very big.

There are relatively few companies in the world with a 250,000 employees.

That is not a completely trivial challenge to think about if what you want to drive is top-line growth.

So, where do I come out?

And obviously when Emma takes over she will develop her own views of this.

But my personal view is that, from a GSK perspective, I think we are sat pretty well to deal with the challenges which are coming.

Over the years we haven't always been flavor of the month for this.

But I think we are sat well to anticipate a challenging price environment.

We have invested in businesses which have differential risk exposures -- consumer, vaccine, pharma.

We have invested in different geographies.

And we are delivering now a GBP27 billion, GBP30 billion company, this quarter growing 8%, growing healthily at the top and driving leverage.

It doesn't make me super hungry to go rushing around and put all of that at risk, frankly, from a personal point of view.

I think we are well-positioned and we can navigate this well.

If we get a decent yield from the next generation of R&D that has come in, and if we can take the current GBP4.8 billion of new products to where they could be in 2020 or 2022, that portfolio feels like a tremendous prize.

Remember, after Advair there is almost no intellectual property risk to the portfolio.

We have no biosimilar risk to that dynamic.

We have no high-priced oncology risk baked into our current number;.

All of those risks sit somewhere else.

0.1% of our business is in Medicare Part B in the US, so we have no exposure to that type of thing.

And, as I said, post-Advair our exposure to dual-eligibles drops dramatically.

So, when I look at the risks that could be coming towards the industry, a lot of them we have either engineered out of the Company or, by chance, by luck, our portfolio doesn't expose ourselves to those areas.

That gives us, I think, the basis to feel pretty confident and robust around the future, which is why we gave you the 2020 shape of the Company which, in itself, predicted significant growth in sales and earnings, even absorbing a full genericization of Advair.

And, as we have made clear on a number of occasions, we are tracking very well against that set of expectations that we laid out.

So, where I come out is for us, personally -- but I certainly don't want to restrict Emma's freedom to maneuver at all -- but for me personally that would be my analysis.

As far as consumer is concerned, clearly there are opportunities to consolidate in this space.

Clearly, in the current JV structure it would need to be something that the co-owners would have to agree.

The relationship with Novartis in that Consumer JV is extremely positive, extremely constructive.

And I think that if there were value-creating opportunities for both firms, I know that both organizations would behave very rationally to ensure that both companies achieved the value they wanted.

So, yes, we are thoughtful about those sorts of things, Seamus.

We do see the opportunities there.

But, again, having just done the Novartis transaction, we are just now at the point where we are delivering the value from it.

That is going to be for another day and it is going to be for Emma to really give her thought to as she takes over.

Thanks Seamus.

With that, I am going to bring the call to a close.

We appreciate all of your questions today.

The IR team at GSK is obviously at your disposal if you have more follow-up questions.

For those of you who limited your questions to only three, you can always come in and ask the other five.

Very much appreciated and I look forward to seeing you all at different times in the future.

Thanks very much.

Thank you.

Ladies and gentlemen, that concludes your conference for today.

You may now disconnect.

Thank you for joining, and enjoy the rest of your day.