GSK plc (GSK) Q3 2013 Earnings Report, Transcript and Summary

Thank you very much. Good afternoon, everybody and thank you for joining us for the Q3 Analyst Teleconference. As usual, I'm joined by Simon Dingemans, our CFO, who after I made a few introductory comments will add his commentary to the quarter and then we'll open for Q&A. So, GSK's third quarter performance as seen had continued to deliver a broadly based sales growth, bring significant new products from our R&D pipeline to market and grow returns for our shareholders. If I turn to the numbers first, total sales were up 1%, core operating profit up 11% and core earnings per share were up 16% to £0.289. The increase in core operating profit was driven by continued strong cost control, including a reduction in R&D expenditure and the delivery of a further benefit from the program of initiatives we started in 2012 to reshape and reduce certain long-term operating expenses. As we saw last year and signal to you earlier this year, contributions from this program are unevenly phased and we will continue to look for more of these types of opportunities to help deliver sustained reductions in costs and balance sheet liabilities. We continue to return cash to shareholders with the dividend again increasing by 6% to £0.19 a share and £1 billion of shares were repurchased by the end of the quarter. I can also, today, reaffirm our full year guidance of core EPS growth of 3% to 4% on sales growth of around 1%, both at constant currencies. Sales grew 1% despite the impact of a significant decline in China sales and the timing of various vaccine tender shipments. This was a resilient performance and is being driven by contributions across the group. In the U.S. first of all, sales grew 2% impacted by wholesaler and retailer de-stocking in the quarter, which if this was excluded growth would have been around 5%. This performance marks a continued growth of our business in the U.S. And is encouraging given the obvious intensifying price competition we continue to see in the market. With our significant new product flow and the changes we have made to our commercial model we remain very optimistic about future growth in the U.S. I was also pleased to see pharmacy and vaccine sales grow at 5% in Europe. And while the environment here remains tough, I believe we are starting to see the results from our restructuring efforts to focus this business on our core assets in key growth areas such as oncology, vaccines and respiratory. The performance in EMAP this quarter, down 9%, has been impacted by timings of both vaccine tender shipments and of course the significant decline in China sales. If we exclude just China, pharmaceutical sales growth in the region was 5%. Operations in China were clearly disrupted in third quarter with sales down 61% but we remain fully committed to supplying our products to patients in the country. At this stage it is still too early for us to quantify the longer term impact of the investigation to our performance in China. The investigation is ongoing and is complex and detailed. We continue to fully cooperate with the authorities and to respect the process of the investigation. As such, there is very little further I can say until it has reached its conclusion. However I do want to reiterate that the activities described by the authorities are very serious and totally unacceptable. They are contrary to our values and to everything I believe in. We very clearly recognize there is a profound need to earn the trust of the Chinese people again and we will take every action necessary to do so. To round off on the business performance for the quarter, consumer health care sales grew 4%. We continue to focus this business around a portfolio of key core brands and drive growth through geographic expansion and innovation. Before closing I would like to highlight the great performance from the R&D team. 2013 was always going to be an important year for our R&D organization and I am delighted with the progress to date with four of the six key assets highlighted at the start of the year already approved. Given how difficult drug development remains, this level of achievement in the last nine months is remarkable and unprecedented for GSK and I want to pay thanks to everyone who has worked hard to make this possible. The four approvals consist of Breo for COPD, Tafinlar and Mekinist both for metatastic melanoma, and Tivicay for HIV. In addition we have received approval for our quadrivalent influenza vaccines in the U.S. and significant new indications for three other products. Taken together these approvals represent substantial new growth opportunities in key areas of oncology, HIV, and respiratory disease. I would particularly like to highlight our respiratory portfolio. Last week we began shipping Breo Ellipta to U.S. wholesalers. This product is also now approved in Japan for asthma and has received a positive opinion in Europe for COPD and asthma. We also received in the quarter a positive recommendation from an FDA advisory committee for approval for another product, Anoro for COPD. The regulator decision here is expected before the end of the year. These achievements marked the latest developments in our 40 year leadership of this therapy area. They are clear indicators of our ability to expand our current portfolio with new medicines and inhaler technologies, which can make a real difference to the lives of patients with respiratory disease. I also want to highlight the positive findings seen earlier this month for our malaria vaccine, RTSS. This is something myself and the whole company is delighted with. As many of you may know we have been working on this project for around 30 years and we are now prepared to file for approval with regulators in 2014. The vaccine has shown to reduce by approximately 50% cases of malaria in children age 5-17 months and given the terrible nature of this disease, has the potential to help transform public health in Africa. Finally, as we deliver our pipeline, we continue to reshape our business and divest non-core assets. We have agreed to sell Lucozade and Ribena to Suntory for 1.35 billion and have accepted an offer of 700 million from Aspen for anticoagulant products ARIXTRA and Fraxiparine and their related manufacturing site. We believe these represent good value for shareholders. With that and to give you a little more detail on the quarter, I would like to hand over to Simon Dingemans.

Thank you, Andrew. To recap in the third quarter we delivered 1% sales growth despite significantly lower sales in EMAP which are impacted primarily by a decline in China sales but also the phasing of tender shipments in our vaccines business. The broad range of growth contributions we are now seeing across our business more than offset these pressures in the quarter. And if you exclude China pharm-run vaccines, the rest of the group’s operations delivered overall turnover growth of 2% in the quarter. Our results for both the quarter and the first nine months also show how we are improving leverage across the P&L. The rest of the group's operations delivered overall turnover growth of 2% in the quarter. Our results of both the quarter and the first nine months also show how we are improving leverage across the P&L. This is reflected in core operating profit up 11% and EPS growth of 16% and 1% turnover growth in the quarter. But also, EPS up 5% on turnover in line with last year for the first nine months. The 1% growth in turnover reported in Q3 is without any material contribution yet from our recent launches. We are pleased that in the U.S. our key pipeline launches such as Mekinist, Tafinlar and Tivicay are underway and since the quarter end, as Andrew highlighted, Breo has started shipping. As more geographies and products come online, contributions from our portfolio of new product should grow, but we continue to expect that in the current environment, they may take some time to build. To ensure that we deliver against this opportunity we are continuing to invest behind the pipeline while tightly managing our cost base. Our ongoing restructuring programs are on track and delivering in line with our plans. And in aggregate they contributed additional savings over the last year of over £200 million and total savings are now running at an annualized rate of over £2.7 billion. We also continue to implement the program we started last year to identify specific initiatives that could reshape and reduce our long-term operating expenses. Particularly, this quarter we delivered a significant reduction in our long-term employment cost through a restructuring of our post-retirement medical benefit programs. This is something we’ve been planning for over a year and was reflected in the guidance we have at the start of 2013. The restructuring contributed £267 million in savings in Q3 but will also contribute ongoing savings in service costs and reduces our balance sheet liabilities, very much like the other elements of this program that last year led us to restructure our pension obligations, releasing savings in Q2 2012 of around 100 million and in Q4 of 290 million. Overall, provisions for pensions and medical plans are now £1.4 billion lower than a year ago. We continue to look for further opportunities along these lines, but it is unlikely that anymore will be delivered this year. This will clearly create some comparative issues for Q4 as you think about your models, given the timing of delivery of last year’s savings relative to this year. So, overall despite the impact of China the momentum we’re seeing elsewhere in the business is offsetting this drag and as a result we are today reaffirming our guidance for the full year of EPS growth on a constant currency basis of 3% to 4% on sales growth of around 1%. Turning to our top line performance, as usual, I’ll provide some additional commentary on the performance in the quarter and my focus will be on constant currency growth rates and core results. In the U.S. in the quarter, U.S. pharmaceutical and vaccine sales were impacted by further de-stocking of our wholesalers and retailers and this cost this part of the business almost three percentage points of growth. Despite this pressure in the quarter, the U.S. business still delivered growth of 2% even though we’re also seeing an increased level of price competition in certain areas of our portfolio. This particularly affected the Respiratory business which was down 3%. New products grew more strongly, particularly Oncology up 14%, and remember this is before any material contribution from the recent launches. Benlysta sales doubled and the U.S. Vaccines business put on a particularly strong performance, up 24% with continued benefit from ongoing shortages of a competitor, but importantly the first shipments of our new quadrivalent flu vaccine also provided a significant contribution with flu sales up 29% to over £100 million. While the majority of flu sales were in Q3, we do expect further sales in Q4. And remember last year we sold almost all the capacity we had in Q3. In Europe, our pharmaceuticals and vaccine sales were up 5%. The reported growth does reflect the annualization of a number of austerity measures and a weak comparative quarter but it also reflects the benefits of the refocusing of our resources behind key brands such as Seretide, down 1% this quarter versus down 6% a year ago. Votrient, which more than doubled and Durandal which grew 27%. We’re also being more aggressive in pursuing vaccine tenders. And the improvement in the growth of vaccines up 4% shows the benefits of these efforts. Despite the clear progress we are making, we do remain cautious on the region’s overall outlook due to the potential for future austerity measures as well as increased competition to Seretide. In EMAP, the Mainland China Pharmaceutical and Vaccines business was down 61%, reflecting the impact of the current investigation. Given that it is ongoing, it’s too early to make any reliable assessment of the longer-term impact. Beyond China, EMAP was also affected by the phasing of vaccine tenders, which continue to be lumpy in the region and heavily phased to the fourth quarter. However, the rest of the EMAP business continues to deliver with pharmaceutical sales outside China up 5% driven by good contributions across the portfolio but particularly from respiratory up 9%, CNS up 19% and dermatology up 9% as well. In Japan, we saw another strong quarter for the pharma business up 7% with particularly good contributions on the respiratory portfolio with Advair up 8%. Vaccines were down mainly due to the suspension of the government vaccination program for Cervarix. Our consumer, our top line growth of 4% was driven by growth in Europe up 6% and the rest of the world reaching up 5%. Despite a significant decline in China where price controls and regulatory changes that we flagged in the previous couple of quarters continued to affect Fenbid and Contact and reduced overall consumer growth by approximately 2% in Q3. This is likely to continue to be a challenge for the consumer business through the balance of the year, particularly as price reductions in China are finally implemented in Q4. The fourth quarter also faces a tougher comparison given the strong start to the flu season we saw in 2012. On the cost side of the operating level, our core operating margin in the quarter was 31.6% which includes an exchange loss of 49 million on the settlement of inter-company transactions. Excluding currency the operating margin was up 3.1 percentage points and benefited from the delivery of the specific restructuring initiatives we covered earlier, as well as our ongoing cost reduction programs. The benefits of this particular restructuring fell mostly in SG&A but also benefited to a smaller extent COGS and R&D. Cost of goods margin was up slightly, 0.4 percentage points and this reflects the continued unwinding of prior year costs of manufacturing shortfalls that I have previously flagged as well as mix partly offset by some low write-offs, restructuring benefits and other cost saving initiatives. I continue to expect cost-of-goods to remain under some pressure due to mix but also as we initiate commercial volumes of our new products. Excluding currency, the SG&A margin declined 1.9 percentage points with cost savings and restructuring benefits, more than offsetting the continued investments we are putting behind the pipeline in our other growth markets. R&D expense of 791 million for the quarter was a decrease of 91 million versus last year and this reflects the completion of some of our significant late stage programs but also continued efficiencies in our R&D operations. I now expect that the full year R&D costs will likely be a bit below the total for 2012 which was 3.5 billion. On the bottom half of the P&L we have been able to continue to deliver on the funding side with a net funding rate for the quarter significantly lower than last year due to the shape of the refinancing that we have completed. This has enabled us to keep our net financing costs broadly in line despite the significant increase in net debt given some of the acquisitions we have made over the last period. Our core income tax rate was 23.5% in the quarter bringing the year-to-date rate to 23.3%. It looks now that we will do a bit better than the 24% we previously expected for the full year but how much will depend on the final mix of trading during the fourth quarter. We continue to focus on cash flow and operating cash inflows in the quarter of approximately 2.1 billion reflected strong conversion ratios. Working capital also remains a priority and we are eight days ahead of Q3 last year while still driving significant improvements in service levels in to our business and also putting significant inventory behind the pipeline launches in other growth markets. The remaining four days reduction is the impact of disposals. It is early days but the conversion cycle improvements are clear signs of the effectiveness of the supply chain restructuring that is underway. Receivables and payables also continue to improve. Our strong cash flow enabled us to increase the dividend 6% for the quarter. The dividend clearly remains the priority but we also see our shares as an attractive investment and so are continuing to return cash to shareholders through the buyback program. We purchased nearly 1 billion by the end of the quarter and through the irrevocable mandate we had in place during the closed period we have been able to repurchase an additional 300 million of shares to bring the total to date to 1.3 billion. We continue to target being in the range of 1 billion to 2 billion for the full year. Remember there will be periods during the year when we are not able to be in the market as you look at how that plays out over the balance of the year. Before concluding I should remind you that in September we finalized agreements to divest Lucozade and Ribena to Suntory and also our two anticoagulant brands to Aspen. We can expect to complete these transactions in Q4 and together expect after-tax proceeds of roughly 1.9 billion which represents a very attractive return. The proceeds used to reduce debt in the short-term but will be incorporated into the group the available resources for future investment or shareholder returns. We also expect to record a substantial non-core gain on these transactions in Q4 and for modeling purposes, you should assume the revenue of these products and these businesses dropout at the 2013. So, finally in summary, despite the impact of China, we continue to expect to deliver for the full year 3% to 4% earnings growth in constant currency terms on turnover growth of 1%. And with that I’ll had it back to Andrew.

Thanks very much, Simon. And I’m very happy to open up the call to questions please.

Thank you. Ladies and gentlemen, your question-and-answer session will now begin. [Operator Instructions] Our first question is from the line of Graham Parry from Bank of America Merrill Lynch. Please go ahead. Graham Parry – Bank of America Merrill Lynch: Thank you for taking my question. Just on the pensions benefit. Given you booked £395 million last year, you’re only booking 367 this year, am I crazy thinking that's about a 20% headwind to operating profit growth in 2013 and if I had envisaged Kevin about 2%, you guidance is really implying underlying EPS growth for more like 7% to 8% after you strip out those two headwinds. And then looking into 2014, should we think of that as a bass to add pipeline growth onto or do we expect that 367 benefit for this year to dropout next year and just be pure headwind? Secondly, on China, if you could just explain how the phasing of your business has gone through July, August and September? So, which is the worst month, because September is starting to look a little better than August, are we seeing any kind of stabilization there at all. And then thirdly, if you could quantify the European contracting benefits to Pharma and the wholesaler benefits to wellness sales end consumer in the EU. Just so we can track the underlying growth properly there. Thanks.

Thanks very much, Graham. Simon may want to add a little bit, but I think your math on the impact of the headwinds of VESIcare and the year-on-year between the pensions last year – pension adjustment we made last year and the U.S. health benefits program we confirmed today, I think your math works out. We're obviously not going to give you guidance for next year but certainly your assessment of what the equivalent headwind is for 2013 I think makes sense. China, I won’t go into too much detail but I would say, kind of, July, August were worse than September and I wouldn't call that a trend yet but we want to see how October and November plays out. But I think it’s very clear that July and early-August were particular difficult for us. I’m not sure I completely understood your question on Europe. But I’ll ask Simon, did you understand?

No, I was going to ask Graham to repeat.

Okay. So, Graham, you’re going to have to bear with us and just repeat that if you wouldn’t mind.

[Operator Instructions]

Okay. Graham, if you want to ask again, come back on and we’ll come back. I’m sorry, I just couldn’t quite follow the thread of the questions. If we could move on to the next question then, please.

It’s from the line of Tim Anderson from Sanford Bernstein. Please go ahead. Tim Anderson – Sanford Bernstein: Thank you. If I can just go back to China and really have a slight influence of other markets outside of China, whether that's in the emerging markets or developed markets. In your press release, you say, you’ve notified the U.S. Department of Justice and the UK’s Fraud Office of the China situation and I'm wondering, why you would feel compelled to do that? Second question is on generic Advair in the U.S. and the IP landscape specifically, which has never been a 100% clear to me because that entails both the drug and a device and I know you guys talk about the last device patents expiring in mid-2015, but is it in the realm of possibilities that you'll be able to exercise some sort of additional IP that could end up delaying generics beyond that? I would imagine you'd be pulling all available levers here.

Tim. Thanks very much for the question. I mean, as far as communication with various regulators, that’s kind of a routine thing. We signal that out even in Q2 I think. And, you know, nothing particularly unusual but absolutely the appropriate things to do in these sorts of situations. As far as generic Advair is concerned, I have always believed there are – there is much more to the genericization of products like Advair than simply the IP environment and there is really in my view three discrete things that have to all happen. One is obviously a clear runway from an IP perspective and as you well know and I think you allude to, we retain particularly for the Discus device, IP protection in the U.S. through in to 2016. So there is an issue around – some people – is there a clear runway on IP. Secondly, are there clear guidelines about how to manufacture and how to register such a product? And thirdly, even if you have one and two can you actually manufacture the product to the specs which have been agreed within the regulatory process and then what we have seen with a repeated number of putative generic competitors is that one or other of those hurdles have proved insurmountable for them and it is not always the same hurdle. Now over time, obviously, the IP hurdles start to diminish, by definition, but those other hurdles still remain, and again, even with things like draft guidance, and we emphasize the word “draft”, so presumably it still has a potential to change from FDA, there remains the challenge of whether or not people can manufacture, and I think even if you talk to companies like AstraZeneca and you talk to companies like us, there have been times in our history whereas the originator of the product we have had delays in product launches as we have made sure manufacture is absolutely where we needed it to be. So we know those issues are real and I think composite of all of that continues to tell me that this is going to take a while for anybody to get through. Certainly everything we are hearing from the latest front runners in the generic debate is that even they think this is multiple years away and whatever or not they can ultimately get to a substitutable generic is in itself a further hurdle of uncertainty. Now from where we sit, I will be honest with you Tim, our focus is moving on from the debate around will there or won’t there be a generic of Advair and is much more focused on the new portfolio of respiratory. So if you think about where we are today versus a year ago, we have Breo approved, shipped and in launch phase in the U.S. We have it approved in Japan for asthma and we have it recommended for approval in Europe for COPD and asthma. The entire world major market is essentially ready to go on Breo. We have Anoro now at its very final stage with the help of a positive recommendation from AtCom [ph] for the U.S. We filed in the last few months our UMEC LAMA monotherapy. We filed today on monotherapy steroid. We are progressing very well with our phase 3 program for mepolizumab in severe asthma. We are going to be progressing that molecule into different disease indications you will see shortly and it is no secret that we are chasing down the triple combination opportunity as well. And it is really that portfolio which is going to be the future of the respiratory business, I fully anticipate Advair is going to be a very substantial part of our future for a very substantial number of years. Just as Ventolin is 40 years after we launched it and 20 years after we lost the patents. So I really do feel today very materially more optimistic about what our long term game plan has always been, which is to remain a respiratory market leader and to grow market share over the next several years. And that is all about confidence in delivery of the advanced respiratory pipeline. Tim, thanks for your question and next question please. I think Graham maybe back on to clarify his Trivial Pursuit question. Graham, go ahead.

Graham, you are on the line now, please go ahead. Graham Parry – Bank of America Merril Lynch: Okay, thank you. It is a question in relation referred to – in EE things, some contracting benefits in Pharma, and then you also saw some wholesale benefits to your wellness sales in consumer in the EE. Both of the questions are about the EE business, so I was wondering if you could quantify what those benefits were both on the contracting side for Pharma and on the wellness side in consumer EE?

I think on the consumer side we have seen over the last several quarters the European business delivering at low single digit growth and that is probably the underlying trend so will some stocking in the quarter reflecting that contracting position and some internal restructuring as well which will unwind in Q4. I think on the pharma side it is less significant and not something I think we should break out from an overall improved focus in the business which is driving the top line performance. I think in the growth of 5% that we have got, if you want some guidance on that, I think that is kind of running probably a couple of points ahead of the underlying trend in the quarter but it is only a quarter so I think the overall improvement you are seeing quarter by quarter really reflects the broader set of initiatives that we're putting into the business. So, hopefully that’s helpful. Graham Parry – Bank of America Merril Lynch: Thanks, Simon and Graham. Thanks for bearing with us to clarify it. Next question.

Andrew Baum from Citigroup. Please go ahead. Andrew Baum – Citigroup: Yeah, good afternoon. Couple of questions. First, U.S. scripts [indiscernible] Advair and Flovent continue to deteriorate. I mean, about minus 8% now in volume terms. How much of that decline in volume in the market share is just due to pricing pressure. I read the recent Thorax review, highlighting the 75% increase in pneumonia with Advair versus Symbicort. How challenging is that for you in the marketplace? And then following on from that, given Breo’s greater redundancy in the lung and the fatal pneumonia signal, how much is that going to be a challenge for you as you try and rollout that product? And then perhaps you could also comment separately on the Express scripts formula restrictions and how we should be thinking about the impact on the marketplace over the next 12 months? Thank you.

So what we've seen on Advair over the last several years is gradual, slow script volume decline which bounces up and down according to where the market is. So, the market slowed down a little bit over the last couple of quarters, that's just knocked that script decline down into the minus 4%, minus 5% territory. At the same time what we typically get is shifts in prescription size which often brings that volume back up again. And then of course there is various price effect, whether that be list price effect or RAR effect. And one of the things that we've been very, very good at over the last several years is to manage very carefully our discount exposure in the U.S., and particular in Advair. And that contrasts quite significantly, I think, to some other products in the sector. Flovent, similarly what you see in products like Flovent are swings as you see slightly more dynamic contracting. So, in Flovent what we've seen during the year are some shifts where we've seen more exposure into Medicaid businesses, we've seen some shifts in and out interestingly. So, early in the year we saw some shifts of some commercial books of business. We’ve actually seen some of that decision-making go back the other way in the last few weeks in our favor. And so, you’re going to see, I think, on these older more established products in the U.S. you’re going to see a lot of quarter – not necessarily quarter-to-quarter volatility but you’re going to see volatility over a 12-month period as the varied swing – puts and takes of contracting play through. And it's one of the reasons why in the release I made the point that it is a more dynamic pricing environment in the U.S. There is more – there are more companies trying to use discount in the marketplace and you have to respond to that. And of course that's what you see in a little bit in some of those shifts as you go through. Now, that makes it very frustrating for you to forecast because you can win a block of business and it makes a big positive difference, you can lose a block and it can go the other way. The ESI decision-making, it’s really important to understand what's happened here. So, first of all, for Breo, we’re actually on or ahead of our expectations for coverage in the U.S., making great progress in the blocks of business that really matter. Particularly, Part D blocks of business. And actually, I often say to my team, it’s the first time we've launched a product in the U.S. where we've actually got coverage before we start because we normally launch very quickly after the NDA approval. Because we want to take out time to get everything right this time for Breo, particularly making sure we had enough volume and batches manufactured to go, gave us a bit of a window to get some coverage in place before we start. So, we’re actually launching into an environment which is much more positive than we normally do at this stage, and I've been very pleased with that. Now, ESI, and I think this is a feature of the dynamic of that marketplace is decided to introduce a very high control formula for a subset of this patient population not for all of its patient, somewhere between maybe a quarter and a third of its patients may be affected by this. And of course what they've done is they've looked to all the major products, including products in other categories like diabetes, where they’re looking to try and drive some opportunity for discount. Now, the question is whether or not those high control formulas are actually going to drive huge amounts of change in the marketplace or not. History tells us, from other people who've done that, is that it takes a long time and doesn't always move the shed as anticipated. We have to wait and see how that plays out. Within the overall potential for Advair that Breo though, this remains a small part of the overall number of lives. Confident, as I said, we’re feeling very confident about the Breo coverage as we stand. As far as the data you described, I'm guessing that that refers to one of AstraZeneca sponsored studies, done in Scandinavia and I think called PATHOS and if I’m incorrect on that obviously come back but I'm guessing you're talking about the PATHOS study. We don't think that's really indicative because of the – first of all, it was was a retrospective study, secondly it looks at a part of the world for, obvious historic reasons, where the non-ceratide product in the class dominates the space and therefore we think there is a kind of, if you will, almost a selection bias which happens in that trial where essentially our product ends up being used by folks who are potentially more severely ill. And as a result of that we are not convinced it draws any particularly important or relevant conclusion. Obviously Andrew, if you are talking about a different study you should get in touch and we can talk about that more offline. As far as Breo is concerned, I think from the overall FDA review and all of the data that has been generated, we feel very confident we have a very effective medicine with an appropriate risk/benefit described in the label. As is always the case with GSK we will make sure that that balance is properly communicated to prescribers but all of the sensation we get so far is that the balance of all of the aspects and features of this medicine are something which is very attractive to potential prescribers and we are thrilled to be in a position to be launching it right now, hard on the heels of three other launches in the U.S. which have already started successfully. With that, next question please.

This is from the line of Mark Clark from Deutsche Bank. Mark Clark – Deutsche Bank: Good afternoon. I just wanted to ask a question about China. The 61% reduction, is there any way you can give us some feel of how much is that due to inventory run down by sort of scared wholesalers, if you like and how much is actually end user demand collapsing? And I am also interested in that some products that one would expect to lose share to directly competing products, for example Advair to Symbicort. I am sure we could all have guessed that they would lose out, but some of your products are essentially the standard of care and yet those are also highlighted in the statements of having fallen sharply. So I wonder if you could just talk us through some of the dynamics. Just so we can at least make our own assumptions as to the scale of any rebound.

Thanks Mark. I won’t go into, you know, huge amounts of detail, mostly because I think it is just premature to call a trend here and I think there is a lot of potential volatility. As I signaled earlier it was worse at the beginning of the quarter than at the end but again I am not going to call that as a trend. It is just a fact. A couple of things just to be aware of. You will all be aware that some time ago, a year, maybe 18 months ago, China changed the pharmacopoeia vaccines which affected many importing companies including our own and what that meant was that a number of vaccines were no longer able to be imported pharmacopoeia change and that has nothing to do with the events over the last three months. That alone accounts for about 15% of the decline we have seen in this quarter. So a chunk of this, although we characterize appropriately, the total decline in China, a chunk of this is clearly really nothing to do with these events. If you then look into the rest, there is clearly a de-stocking effect. Now the problem – we can’t tell you really what that truly is – data doesn’t exist in the China in the same way that it exists in the U.S. to be able to call out inventories and it is clear there has been a de-stocking effect. We can only really get to the bottom of what that looks like over the next six to eight weeks I think where what we see through September, October, November maybe even December really will start to give us the proper trend of what is going on. So very hard to call out beyond those guidelines. I think it would be misleading for me to get in to more specific analysis, because it is just as likely to be noise in the system as something real and it is just as frustrating for me as it is for you.

From the line of Andy Kocen from Redburn, please go ahead. Andy Kocen – Redburn: Hi there, I have a couple. One on SG&A, which grew pretty strongly on an underlying basis if you exclude the provision reversal, so is that down to launch costs and if it is how long should we expect this sort of bulge to last for? And secondly, on R&D, should we expect another update on your IRR from R&D at the full year results now a couple of years on from the last guidance? And also how do you really feel you delivered in terms of genuine innovation and my apologies for this it feels childish light of all of the launches you have got this year, I am not saying that you have not delivered. But clearly the innovative scientific risky products that you have pursued over the last couple of years have tended not to work and the ones that you are launching now while most important have not really been that novel in terms of mechanisms. Kind of philosophically, how do you feel about your R&D going forward.

Okay. Let me take the SG&A question. I mean, I think a little bit in the same vein as the benefits that we've delivered on the medical side. I wouldn't focus too much on the individual quarter. If you look at the nine months, you’re broadly flat on last year in terms of overall SG&A expense. And that's really being driven by recycling of the savings we’re making out of our ongoing programs as well as some of these particular initiatives that we've identified to give us the flexibility to support the pipeline launches without a big bolus or ramp up in expenditure as we've talked about a number a time. So, I would kind of step back from the quarter and just look at the underlying trend, which is broadly steady and that's probably what you should think about going forward.

Thanks, Simon. So, Andy, as far as R&D is concerned, yes, we would intend to do an update on the rate of return analysis for the full year. As far as the how innovative or not that would be. I think the reality is, it's a portfolio, isn’t it? We've developed over the last several years what we think is a balanced portfolio. We all know – and in fact even I think Glaxo in the 90s fell into the trap of having a portfolio which was all unprecedented mechanisms and I remember an era where we had medicines in there for stroke, cognitive function, et cetera, et cetera and they all failed and partly created one of the big gaps in the Company's history. We can all think of other companies, competitors of ours, who’ve been very, very dominated again by unprecedented mechanisms and had sequential failures, very late stage developments and which then went on to cause great strategic challenge for those companies. So it's important to have the blend. Now, what’s then critical, I think, is that within the blend everything creates value for the patients and for the payor and that's where I think you have to really look at the GSK portfolio and you got to give it some credit for that. So, yes, Breo isn't a first-in-class product but it addresses the two or three fundamental needs that we know patients are really striving for in COPD, who are using inhale therapy. They want basically a full 24-hour duration of action drug, they don't feel that exists in the marketplace and they want it. They want devices which are easier to use. And that's what we've striven to build into this. Now, the date which will potentially really define this product will come with things like the summer study, but by definition that can’t come before we start. But the investment we’re making there demonstrates the confidence we have in the potential of this drug. If you look at Anoro, it’s a first-in-class. Now, okay, it uses two mechanisms which pre-exist but nobody else has been able to put it together at the speed we have and be able to get it at the stage of development it is for the U.S. marketplace. And I think, again, really demonstrates an ability to leverage our skills to create value, hopefully for patients in the U.S., an extraordinary contribution to COPD. You then say, okay, let's look at the rest of the portfolio. The MEK-inhibitor is a first-in-class, unprecedented mechanism first-in-class. BRAF is a second into market. These products must have something to say for them, because in the first 12 weeks of marketing we’ve taken a 50% market share of new prescription, so presumably somebody sees some therapeutic value there. I believe they’ve got remarkable benefits as individual treatments for melanoma. If we look at Tivicay and HIV, widely now been regarded, I think, as a very, very substantial breakthrough in terms of quality of asset, yes, it's the second into its category, but as we’ve seen many, many times before, the second or third drug is very, very often superior. What we see in head-to-head trail after trail after trail great data coming forward, so again, very positive. If I then flick down the list of what's coming and you start to look at things like, mepolizumab, looking at that within severe asthma as well as the new indications, which we’re just beginning to move in towards Phase III. If you look at the P38 Map Kinase Inhibitor for ACS, if you look darapladib, if you look at the MAGE-3 program, if you look at our new oral med for malaria vivax, if you look at our program for threatened preterm labor, Retosiban and Oxytocin receptor antagonist, if you look at our work in amyloidosis, if you look in out anti-TNF, map all through the pipeline, you will see drug after drug after drug. Which is either a very thoughtful substantial clinical enhancement of what preexist or is going into a unprecedented area. The bottom line is we have a very, very substantial pipeline which as a portfolio, we believe, creates the opportunity for great value creation over the long run. And if you look at the thing that really matters which is how much of this asset portfolio makes it to the finish line, then you can see that whether you look on the one year basis where we have had four and did major NDA approvals, the next best performing company only has two in 2013. If you look over the last eight years where we have had 17 major NDAs approved in the U.S. of which I think 11 are new molecular entities, that is really the track record that we are looking to deliver. And that is why I think we are going to deliver an improvement in our rate of returns as we are bringing these projects through to fruition with profiles which can underpin confidence in future sales. Next question.

It is from the line of Jeffrey Holford. Go ahead. Jeffrey Holford – Jefferies LLC: Hi, thanks for taking my questions. So just on relative pricing of Advair and Breo in the U.S. market, can you give us any more color on how you expect to proceed here going forward now with the launches getting underway? Do you intend that you keep these on parity pricing with each other and are there any initiatives like couponing that you will particularly apply to Breo to help for some switch there? And also just related to some of your comments earlier, Andrew, now that you have a little bit more visibility on these disposable gains coming through, you sound a bit more cautious than usual in terms of increasing the buyback more aggressively at least through to the end of this year anyway, is that just due to timing when proceeds will be received or does it reflect a slight shift in sentiment on capital allocations from you from disposables? Thank you.

I think on the latter no shift in our mind set vis-à-vis capital allocation and I have said repeatedly, that while again, I am not giving you any guidance for next year, I think you should be surprised if we gave you any guidance different on share buy backs than we have given you for the last two or three years. We are very, very comfortable with the notion of starting the year saying we are going to buy back between one billion and two billion. That sometimes proves quite difficult to do when you have very, very busy regulatory years like we have this year. But the intent absolutely is to continue to lean into the buy back at a nice steady pace, not create lots of drama or noise in the buyback space, but a nice steady pace combined with a commitment to constantly increase the dividend. That is exactly what we are doing. You are quite right the proceeds of these disposables won’t come until the end of the year but the reality is no change in terms of our I think balanced sustainable commitment to how we use capital and most importantly reaffirm the signal that we are not in the business of creating reserves of capital to go do some major acquisition. We remain very much of the view that we are tilted toward the seller rather than the buyer of assets. It doesn’t mean we will never buy an asset or invest in a business that maybe we already partially own. But as you have seen over the last 20 months or so we have been very much a divester rather than an acquirer. Why? Because we want to continue to improve the quality of the company as the pipeline and the pharma vaccine business portfolio strengthens, take out complexity, take out low margin businesses, take out businesses where we believe that others may be better on their own than we are at a time when we have a tremendous amount of opportunity to prosecute in the pharma vaccine space. So that is really the position that we have on that. Next question.

The next question is from the line of James Gordon. Please go ahead from JPMorgan. James Gordon – JPMorgan Securities Plc: Hello, thanks for taking my questions. This is James Gordon from JPMorgan. The first question is just following up on the response about the use of divestment cash, I was wondering do you worry about fines and that might mean that you need to carry a larger than normal cash buffer? What is the right level of net debt to GSK or how much cash you actually need to carry? And one other question is on emerging markets, if we exclude China EMAP pharma vaccines grew 2% this quarter, what is a realistic run rate for Q4 and for next year if we exclude China? And then just a final question which is about a year after the Hoxsey [ph] acquisition, growth are good for the U.S. but not doing too much outside the U.S. So my question there would be how should we see this acquisition, and do you think Benlysta is going to accelerate a lot now, is it going to become a very material product for GSK? And the other part of the Hoxsey acquisition, the other part would be the not having to pay royalties to Hoxsey, what are the plans there in terms of -- is that something you are going to sell yourself or partner with someone?

Okay James, I am going to try and cover all of that. So as far as fines, you know, what is important, and the number you should be looking at is what legal provisions we take. Our obligation, quite rightly, is to make sure that we provide it in our accounts for what we believe to be the most likely outcome of liabilities for the company whether they be legal or any other liability and we review that regularly at every quarter and we make adjustments up and down according to that. So that signals to you what our composite view is of our legal liabilities and I think this quarter we’re holding a legal provision of about £750 million, something like that. And within that that covers the whole raft of things and I would say that is at the low-end of where it’s been for the last several years, because we resolved a huge amount of litigation over the last few years. We can’t give you any guidance on EMAP growth rates because that would be guidance. So, we will wait and do that in February and we’ll decide what we share with you at that point. But it’s fair to say that EMAP remains – growth remains slightly volatile quarter-to-quarter mostly because of vaccines and there’s no question, just as we’ve seen in the last several years, that you should anticipate Q4 being a substantial vaccine quarter for EMAP because that’s just the way the customers choose to order the product. As far as HGS is concerned, actually, Benlysta has had a slow start ex-U.S. but it is beginning to build up some quite nice momentum particularly in Europe. Interestingly enough, we’ve seen a very similar phenomenon with Prolia, the drug we partnered with Amgen, very slow to start, very prolonged period of market access negotiations but gradually beginning to get in place and actually beginning to see some quite nice movement. So, I think we will now start to see, particularly through ’14 and ’15, Benlysta start to move up in Europe. I’ve been very pleased with the continued progression, as you highlight, in the U.S. I think it’s also worth remembering, we bought HGS for a whole variety of reasons, one of which was Raxi, the monoclonal they have for anthrax, which as we announced earlier in the year, we’ve secured a whole series of quite important business opportunities in terms of stockpiling. We’ve achieved all of our synergy goals and, of course, we’ve taken full control, not just of Benlysta but of darapladib and, of course, albiglutide. We continue to explore opportunities for partnership with albiglutide, which maybe different region-to-region. And we’ll update you when and if that’s appropriate. But albiglutide is obviously the sixth of our six key assets that we profiled, we’re expecting a regulatory decision toward the end of Q1 of next year. So, it gives us a little bit of time to finalize exactly what we’re going to do there. I have to say, given all the data we’ve seen through the eight studies, I think our potential positioning for this drug looks very, very compelling and I think it’s a product that we are increasingly motivated and excited about. Next question.

It’s from the line of Keyur Parekh from Goldman Sachs. Please go ahead.

Good afternoon. Thank you for taking my questions. I have three, if I may. First, Andrew, just I noticed that you’re kind of talking about pricing pressure in India in addition to what you’re facing in China, can you just help us think about the possibility for further pricing pressures across the rest of the emerging markets? Secondly, for Simon, as you look at the ongoing benefits from the cost reduction and the substantial benefit you get in this quarter, how should we think about the ongoing benefits on the service cost? And then thirdly, Andrew, as you launch kind of the respiratory product, what is going to be your marketing message? Are you looking to switch patients from Advair to Breo or should we think of this more as an opportunity for new patient starts? Thank you.

Thanks very much. So, as far as India is concerned. As you know, there’s been a new price control regulation brought into India that’s affected a whole raft of companies. Of course, as one of the biggest companies with some very big products, we’ve been affected by that. I think that’s going to take, you know, obviously the next couple of three quarters to really wash through the system and you’re going to see some adverse quarter-on-quarter comparisons as those price cuts come through. It’s also worth remembering that some of the products which were in the old price control system will now be able to have price increases, not immediately but in the future. So there again GSK had a lot of products in that old system, so there’s going to be some puts and takes there. And the key to India is really the key to the whole price question for emerging markets is understanding what the volume elasticity of demand is. So, the reality, of course, is that India, in particular, every product we sell – almost every product – has multiple generic copies out there, very often sold at lower prices than ours. So, I think it’s highly likely that as we see prices cut we’re very likely to see volume go up, because if you had the choice between the generic and the lead brand in a market like India, I think we’re going to see increased volume demand for the product. So, I think what you will continue to see is governments intervene periodically on pricing, I don’t think that’s unexpected or surprising, I continue to believe that the underlying demographic momentum of most of these countries means that over a period of two or three years very often the volume compensates for that price effect, but you just have to realize that over a period of a decade you are going to have two or three rounds of price interventions at different points. Simon, if you want to answer and then I will come back to the [indiscernible] question.

In think in terms of the ongoing benefits as well as the particular benefit we reported this quarter, I think if you assume a few tens of millions you are probably in the right sort of territory but remember each of these produces similar kind of savings so they build up over time. And the other important thing to remember is that it also addresses significant balance sheet liabilities, which require cash funding over time as you agree the evaluations of those and so it is reducing the volatility of those requirements and leaving us cash free to invest elsewhere or return to shareholders. So there are a number of benefits from these programs.

I would just like to add to this and compliment Simon actually, because right from when I first announced Simon’s appointment and people asked me why we hired Simon, I explained that I wanted him to focus on a number of things in the business but also to really address; a: our tax strategy b: our interest rate exposures and c: our long term financial exposures, and at the time I talked about pensions. And Simon has done a fantastic job over the last two or three years on all three of those dimensions and on this latter piece of these significant long term costs which frankly many companies have not tackled – this company had not tackled for a long time, what you are seeing is a program year-after-year now of taking on these big areas of day-to-day P&L costs but also significant balance sheet liabilities which needed to be addressed and we planned last year to do the UK pension environment, a very difficult thing to do, we did that, we planned this year to do U.S. health care for folks who are still in employment but are going to retire in the future. We have other things that we have planned for next year and it seems to me completely right that we should be putting in place a very sustained program. Not just to tackle the things we can turn on or off in a quarter but to really fundamentally get a grip of the shape of some of those cost areas which aren’t actually talked about very often on these calls but actually represent enormous expense for the company and in some cases can create almost unlimited liabilities down in the long run. And I just want to thank and congratulate Simon for extraordinary leadership in delivering this and that is one of the reasons why just like in two quarters last year, we have another quarter this year, where unfortunately we have this slightly lumpily phased benefit, but it is real value and it is part of the long term multi-year program and I would guide you to expect more of these sorts of things over the next few years. As far as the question that you asked about respiratory, I am not going to go in to the detail about how we are going to compete with Breo. It is a very competitive marketplace obviously, but it is fair to say that the benefits we believe that Breo brings will be interesting not just to patients who are on Advair but to new patients coming in to the marketplace and people who are on other complex products. This is the first once a day product and it is a 24 hour duration of action medicine. We know that that is something that many patients are interested in and many physicians are interested in and when you combine that with a very easy to use device, we believe, that we have got here something which will be very attractive to physicians and to patients. And we will see over the next six, nine, twelve months, we will see what the reaction is in the marketplace. But it is a very exciting time at GSK to have hard on the heels of two new cancer drugs, a HIV drug, and now a respiratory drug all launching in the U.S. marketplace. We have time for one last question.

It is from the line of Luisa Hector from Credit Suisse. please go ahead. Luisa Hector – Credit Suisse: Three questions please if I can. You just said that Andrew about restructuring in 2014 I wonder if you can give us any more details to tell us what they could be, could they be as sizable as we have seen this quarter and then maybe exceptional question of whether they should be treated as quarter earnings playing forward. A question about the [indiscernible] particularly in the respiratory in the U.S. As you enter into the fourth quarter is that something that is unlikely to change going forward, do you think U.S. would stay as the top of the year to run with low inventories -- levels of many of these respiratory drugs and for what? And largely can you confirm whether you have recruited more sales reps ahead of the US Breo launch and do you plan to do –to recruit more ahead of the Anoro launch early next year?

First of all, let’s not – we are not talking about restructuring for these – this restructuring over way we treat things like benefits. So there is no big cost associated with it. I don’t want people to confuse that there are big cost costs associated with the changes in the way we would normally talk about restructuring. These are – I prefer the word re-shaping the long-term cost profile of the business. We have a plan for more these things next year, I am not going to tell you what they are just yet for some obvious reasons I think. This year’s benefit is somewhat lower than next year’s and we will potentially give you some sense of that next year. So Simon, do you want to add to that and also what – make the comment on the core earnings and I will come to the other two.

I think as Andrew has highlighted that they are not restructuring in terms of charges and savings from fixed costs as we reprogram or make the change program would be. This is about changing the nature of benefits we are providing in the future and the savings arise therefore from the accrued savings that you make over time. And those are through the core P&L and those charges otherwise flow through the core P&L and say what we think is appropriate the savings should play through the core P&L. And that’s how we thought about last year, it’s very much more of the same what we plan for the future will be treated in the same way as well.

Thanks Simon. Just so on the last couple of points, so the destocking we have seen has been pretty sustained over the last 12, 14 months, not clear to me whether it will restock in the fourth quarter or not. I think it’s possible we’ve often seen restock trends in the fourth quarter but occasionally for example last year we didn't. So we just have to wait-and-see what plays through on that front. What’s been interesting I think over the last six or nine months is that we have seen some destocking both the wholesale and on retail level. We are seeing a lot of these companies talk about cash management. So it wouldn't surprise me if this was a bit more permanent than temporary but again we just have to wait-and-see what comes from that. As far as our sales force is, if your real question is should you expect a big jump up in SG&A because we are going to hire lot more people? The answer is no. We feel like we have the right overall scale of operations to deal with the products we are launching out at the moment including Anoro if we were able to get approval at the end of the year. I would say we have reconfigured as you would expect our deployment of resources in the U.S. as we move from the old portfolio to the new portfolio. So I am not going to quantify that but I can tell you that substantially more people involved in our research business rather than there was a year ago. More importantly we’ve reconfigured over the last four our entire U.S. operations to be much more we believe aligned with where the modern customer dynamic is really going in the U.S. and we believe that combined with our innovative incentive system puts us qualitatively in a different place to many of our competitors in the U.S. I think the launches which are underway the success we’ve had with – the initial progress that we're seeing although very early days in HIV with Tivicay and we will see with Brio but so far so good in terms of really, really testing whether or not a new approach to the U.S. marketplace is going to work, very, very encouraged by the early signals, I am incredibly excited that we've got the first once a day steroid bronchodilator combination so far ahead, maybe there will never be another once a day products as far as I can see from other companies in the US and ride hard on the hills of that, we have the potential to get Anoro. So the opportunity to completely step forward in the US is there and I am excited to see the early results we’ve got coming in, we'll see how it plays out. It's very early days, we are not taking anything for granted but I can tell you we are totally focused on making most of these opportunities. With that, I am going to thank everybody for their attention on this call. And if you of course have individual questions the IR team at GSK is at your disposal. Thank you.