GSK plc (GSK) Q4 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the GSK 2017 Full Year Results call. During the presentation, your lines will remain on listen-only. If you require assistance at any time, please key star, zero on your telephone and a coordinator will be happy to assist you. I’d like to advise all parties this conference is being recorded. I’d now like to hand over to your host for today, Sarah Elton-Farr, Head of Investor Relations. Please go ahead.

Thank you. Good morning and good afternoon everyone. Thank you for joining us to discuss our full-year 2017 results, which were issued earlier today. You should have received our press release and can view the presentation on GSK’s website. For those not able to view the webcast, slides that accompany today’s call are located on the Investor section of the GSK website. Before we begin, please refer to Slide 2 of our presentation for our cautionary statements. Our speakers today are Chief Executive Officer, Emma Walmsley; Luke Miels, President of Global Pharmaceuticals, and Simon Dingemans, Chief Financial Officer. Following our presentation, we will open up the call to questions and answers. We request that you ask only a maximum of two questions so that everyone has a chance to participate. Joining us for Q&A are David Redfern, our Chief Strategy Officer and Chairman of ViiV; Brian McNamara, CEO of our Consumer Healthcare business; Luc Debruyne, President of Global Vaccines, and Patrick Vallance, our outgoing President of R&D. Our incoming Chief Scientific Officer, Dr. Hal Barron will be joining us on our Q1 call in April. With that, I will hand the call over to Emma.

Thank you, Sarah, and good afternoon to everyone. Before I begin, as this is the last quarter that Patrick is going to be representing GSK, I’d like to take the opportunity to reiterate my thanks and appreciation to him for all he has done for GSK and very importantly for the patients that we serve. A strategic strength for GSK is our balanced business profile beyond pharma for sustainable growth, returns and cash flows. I’m pleased to say that we delivered growth across all three businesses in 2017 with sales reaching over £30 billion for the first time as well as group operating margin accretion and improved earnings and cash flows. With growth in all three of our businesses this year, we delivered group sales growth of 3% in CER terms. In pharma, our new respiratory portfolio grew strongly at 75% and more than offset the decline in Seretide/Advair. We continue to have high expectations for growth with this new business, and Luke is going to talk you through some of the detail on that in just a moment. In HIV, we continue to deliver strong double-digit growth driven by increases in market share for both Tivicay and Triumeq. We also saw the approval of Juluca, the first of our new two-drug regimens in HIV, allowing us to establish a new paradigm in the treatment of this increasingly chronic disease. Within vaccines, we also continue to deliver good growth with sales up 6% at CER, the key drivers being meningitis and influenza vaccines, and their strong performance was partly offset by competition and pricing on some of our established vaccines. In consumer healthcare, we saw improving sales momentum throughout the year with strong performances in wellness and oral health offsetting the impact of a weak U.S. season and competitive pressures in allergy, as well as divestments and the implementation of GST in India. Our power brands continue to deliver strong growth above market levels, and this has helped drive the margin improvements that Simon will talk you through shortly. At the group level, we delivered margin improvement of 40 basis points in CER terms as we improved cost and cash discipline while still investing behind our priority launches and R&D programs, including the investment in a priority review voucher to accelerate the introduction of Juluca. This has driven adjusted EPS growth of 4% and free cash flow of £3.4 billion, an improvement on 2016 of £400 million. In July last year, I laid out my long-term priorities for the whole company: innovation, performance and trust. There are changes and new focus that we need to reach our goals and to position us for stronger growth post-2020, especially within pharma and most specifically, of course, within R&D where we’re focused on making the right choices and changes as data reads out. Innovation comes first, and we’ve made real progress here. Last year, we achieved three major new approvals in the U.S.: Shingrix, a new standard of prevention in shingles, and Luke is going to talk about that in just a moment; Trelegy, the first once-daily single inhaler triple therapy for COPD, and Juluca, the first of our new two-drug regimens in the treatment of HIV. We are ambitious for each of these launches, which are now getting underway. We’re also advancing our pipeline and presented very encouraging data on our first-in-class VCMA asset at ASH in December, as well as exercising our opt-in rights to NY-ESO for Adaptimmune in cell and gene therapy. We’re putting new discipline into pipeline governance under new leadership. We’ve also made progress on our performance and trust priorities. We’ve re-prioritized resources to those areas best able to deliver growth, whether product or geographies. We’re fueling this through ongoing cost, cash and capital discipline and good progress on implementation of the restructuring of supply chain in our commercial pharma business. We’ve made some changes to our medical engagement policies to strengthen interactions with key external experts. We’re also maintaining our leadership within global health, be it in anti-microbial resistance or malaria where we filed an NDA for tafenoquine which, if approved, will be the first new medicine for the prevention of relapsing malaria in over 60 years. We’ve seen meaningful improvements in employee engagement scores which, as you know, are an important driver of performance. Of course, to deliver these priorities and lead our culture change which underpins them, what matters most of the caliber of our team. In our top roles, we’re bringing proven track records, new capability, fresh perspectives, diversity, and leadership strength with three new executive team members, and we’re making significant changes within the next layer of management also. We are focused on having the very best talent possible in the top 370 critical roles for the company and are aggressively building a winning team to drive change at scale and pace, and I expect that to continue. Many of you will already know Hal and Luke from their previous roles, and they’ve already made a great start making changes to the pharma business; but Karenann, previously CIO at Wal-Mart, also plays a critical new role with oversight for how GSK uses digital and technology to improve performance across the group. I’d now like to hand you over to Luke, who is going to give some detail on the commercial priorities and growth opportunities in his area. Luke joined us just in September and is responsible for pharma commercial activities excluding HIV, which I will come back to personally later, and he’s also responsible for our global vaccines commercial operations. Luke, over to you.

Thanks Emma. Good morning and good afternoon everyone. This is my first earnings call since joining GSK in September last year, and it’s a pleasure to update you on our progress today. If we go to the next slide - thanks, over the last couple of months, I’ve had the chance to look at the commercial team and the pipeline in some depth and to assess how we can achieve our IPT goals. While visiting the markets and meeting the project teams, a few things became clear. When we are focused on actively competing, the results were strong as evidenced by the new product sales reaching nearly £6 billion at constant rates on the slide, almost three years ahead of the original 2020 target. There was, however, less focus and more management layers than optimal, and these are now starting to be addressed by simplifying our approach and more focus. In a very much back-to-basics way, we’ll use the IPT to make our products the essential focus for commercial. Linked to that, we’ve prioritized the geographies where we can create the maximum revenue and ensure that they are resourced for success. Finally, the structure and the people we’ve put in place has undergone material change to bring a more competitive and faster moving mindset. These changes when fully executed are designed to maximize shareholder value by using Trelegy and Nucala to blockbuster status and driving the strong uptake of Shingrix, and importantly enabling commercial to work closely with R&D to select and accelerate the most attractive projects in the pipeline. I’m certainly looking forward to working with Hal. Moving to our new vaccine, Shingrix, on Slide 11, as the title says, Shingrix represents a new standard of prevention with more than 90% efficacy in the prevention of shingles. We’re very pleased to have a preferential recommendation from ACIP giving a target universe of over 100 million patients in the U.S. alone, and our focus is now getting all of the ducks in a row so that when a patient walks into the pharmacy and asks for the vaccine, it’s in stock, it’s reimbursed, and the healthcare provider knows how to give it. I’m pleased to say we’re advancing this process of negotiating access with commercial and Part D plans and in parallel we’re beginning to stock pharmacies and educate healthcare providers. We see a three-phase launch: first, counter-detailing Merck because these guys are still out there, then targeting Zostavax patients for re-vax, and then in the third phase driving market expansion. The main thing and the rate limiting step once we have access will be the velocity at which patients come in for vaccination. Looking now at our respiratory portfolio, I want to highlight the growth and opportunity we see for Nucala. The key factor for Nucala in my mind is the strong and consistent efficacy outlined in the chart on the left-hand side. This efficacy, I think it’s fair to say, is the best within the IL5 class when you look at the level and consistency of exacerbation reduction. This efficacy is visible and compelling even at a relatively low EOS level of 150, which you can see here delivers a reduction of 56%, and at 300 EOS Nucala is able to show a reduction of around 60%, or more than 60%. These effects were found to be very consistent across the studies. We believe we’ll see significant growth ahead with this exciting product as there are still thousands of patients with severe asthma that might benefit from an IL5. In addition, we’ll be launching Nucala for EGPA later in Q1 and, pending FDA approval, COPD before year-end, with Nucala expected to become one of the largest contributors to our respiratory portfolio by 2020. Next slide, please. The other growth opportunity I’d like to talk to you about is Trelegy, the first once-daily closed triple treatment for COPD, which is on our excellent Ellipta platform. The introduction of Trelegy into this market sets a new standard for the treatment of COPD with the data from the IMPACT study consolidating the role of triple therapy. With FULFIL and now the IMPACT study, the data shows superiority of triple therapy over jules [ph] with significant reductions in exacerbations against Breo, Anoro and Symbicort. I’m pleased to add that we’ve also submitted an SNDA to add the IMPACT data to our label and we’ve also submitted this landmark study for publication in a leading journal. We’ve started to roll out our launch plans and promotion to 8,500 pulmonologists in the U.S., again in mid-November. Naturally, the longer term success is driven by the expansion and promotion to primary care doctors while accelerating the strong start with pulmonologists. We also have made good progress on access, and since early January 2018 commercial and Medicare Part D coverage has been secured at several of the top national players. Proactive promotion of the IMPACT study will begin if the SNDA is approved by the FDA later this year, and I would add market research that we have so far indicates that customers will find this additional data highly motivating. But before that, we expect the sales build to be steady but after approval more rapid uptake, and we’re highly confident of a longer term potential for Trelegy. With that, I’ll now hand over to Simon who will talk you through our financial results and 2018 guidance.

Thank you, Luke. The results we’ve reported today are in line with our guidance for the year and reflect our continued focus on execution. This includes driving growth from new products in our recent launches; second, making sure we are controlling costs tightly to create the flexibility to help build better operating leverage across the group while also making sure we are investing behind our key future growth drivers; and third, improving our cash generation to give us more capacity to support those investments as well as the dividends we pay to shareholders. Our earnings release provides an extensive amount of information, so I’ll focus on major points, our expectations for 2018, and important comparators to take note of for your modeling. As usual, my comments will be on adjusted results and on a constant exchange rate basis, except where I specific otherwise. Starting with the headline results, sales up 3% above £30 billion for the first time, adjusted operating profit grew ahead of sales, up 5% with profit growth in all three businesses reflecting improved operating margins in vaccines and consumer and despite some margin pressure in pharma as we invest behind new products, including utilizing the PRV and continue to transition the respiratory business. Adjusted EPS was up 4%, in line with the guidance we provided in July. Free cash flow grew 14% on a sterling basis, reflecting operating profit growth, a greater focus on cash, and the benefit of a currency tailwind. Turning to total results, compared to 2016, there are three main differences in the items not included in adjusted results. First, intangible impairments were higher in 2017, reflecting the decisions announced in July last year to focus the portfolio and make a number of divestments and discontinuations, including Tanzeum and sirukumab. Second, transaction related adjustments were significantly lower than in 2016 primarily because compared to last year, we’ve not seen the same level of currency swings or business-driven adjustments to the valuations of the contingent consideration and puts. The other big difference versus last year is the impact of U.S. tax reforms passed in December. The reform is a net positive for us and boosts the estimated after-tax valuations for our U.S. businesses. As a result, we’ve recorded related charges of £666 million as part of re-measuring the liabilities for contingent consideration and the consumer and ViiV puts. We’ve also recorded tax charges to reflect the impact on our U.S. deferred tax assets and the repatriation tax. In aggregate, these charges were worth £1.6 billion of earnings or £0.333 per share. I’ll come back to the subject of U.S. tax later since we also expect a benefit to our effective tax rate going forward. Turning to sales, pharma sales up 3% despite a 1% drag from divestments, with strong growth from HIV, our Ellipta portfolio, and Nucala, partly offset by declines in Seretide/Advair and established products. In 2018, the HIV business, including some sales from Juluca, is expected to continue to deliver good growth, albeit at a lower rate than 2017 after taking into account the larger base of the business. We have factored in a reduced drag from generic [indiscernible]. We also expect further progress from our new respiratory products, including the first contributions from Trelegy, even as Seretide/Advair continues to decline. I’ll come back to our expectations for Advair and our guidance in the event a generic Advair launches in a moment, but if we do not see a generic in 2018 we expect the momentum in HIV and new respiratory to deliver low single-digit top line growth for pharma overall offsetting declines in older products, including established pharmaceuticals. Improvements in supply helped the 2017 performance for this group with sales for established pharmaceuticals down 5% after a 3% drag from divestments. We will continue to rationalize these products where we see opportunities to deliver value. Growth in 2018 will continue to be impacted by some of the divestments made in 2017 as well as some expected in 2018, and we anticipate sales from this portfolio to decline this year as a mid to high single digit percentage with the exact rate depending on the timing of when the current year divestments are completed. In vaccines, we generated significant growth from the meningitis and flu portfolios, finishing the year overall up 6%; and remember, this was against last year’s strong comp, which was up 12%. We continue to expect this business to be a mid to high single digit grower over the period to 2020, despite increasing competition for our pediatric and flu vaccines. Growth from the launch of Shingrix will add to contributions from meningitis and other established vaccines. In terms of phasing, vaccines sales will continue to be lumpy due to tenders and CDC stockpile movements. The pace of the Shingrix roll-out may also vary quarter to quarter as we build demand and get coverage in place. Consumer delivered low single digit growth despite the headwinds that Emma mentioned Q4 saw a bit better consumption than we’d expected in some of our key markets, including a decent start to the cough-cold season. The international region also benefited from comparison to a weak fourth quarter last year, which was impacted by demonetization in India. In 2018, we continue to expect low single digit growth from consumer after factoring in the impact of tail brand divestments, the TDS generic, and the impact of GST in India, which in aggregate are expected to reduce growth by about 1.5 percentage points on a reported basis. We remain confident in the long-term profile of the consumer business and in the outlook for low to mid single digit top line CAGR to 2020. Moving to the operating margin, we delivered a 40 basis point improvement in the group margin at constant exchange rates. COGS as a percentage of sales improved 50 basis points with benefits from product mix and cost savings helping to offset price pressure in the inhaled respiratory market as well as investments in our supply chains. SG&A as a percentage of sales also improved 50 basis points, including benefits from sales leverage and cost discipline. We are continuing to build more flexibility into our cost structure, allowing us to re-allocate expenses more easily and quickly, limiting growth in SG&A behind sales and focusing it on support for the new launches and other higher returning investments. R&D was up 8%, reflecting investments to strengthen the pharma pipeline and to accelerate and expand support for the high priority assets. This included investment in the PRV we used in 2017 to accelerate Juluca, which drove about 3% of the 8% increase. We continue to prioritize developing the pharma pipeline and we are likely to continue to rebuild our R&D spend over the next couple of years, subject to how the data comes in. Our royalties on Cialis came to an end in Q4, which is reflected within the overall decline we saw in 2017, and we expect the total royalty number to decline further to around £200 million in 2018. You can see many of these factors play out by business. The pharma margin was down 600 basis points in constant exchange rates, in large part reflecting investments in the pipeline. The 2018 margin will clearly be very dependent on how Advair performs and particularly whether and when we see a generic. Advair is still among our highest margin products. The vaccine margin was up 1.3% in constant exchange rates with the benefit of product mix and some one-off inventory adjustments offsetting the significant investments to expand capacity and prepare for the Shingrix launch. In 2018, we expect to reinvest a decent proportion of the expected leverage from sales growth into the ongoing launch of Shingrix and expanding capacity for our meningitis and other vaccines. The consumer margin was also up 1.3% in constant exchange rates and continues to make good progress towards our 2020 target through a combination of power brand growth and strong cost control. All three businesses remain on track to deliver the margin outlooks we provided for 2020, remembering that these are at 2015 rates. Looking at the factors that will impact our overall operating margin in 2018 with Advair generics more likely, we will continue to carefully balance the need to invest in the businesses with benefits from cost savings and expected leverage from sales from our new products. We’ve ratcheted up cost discipline across the group. On COGS, this includes supply chain efficiencies from a mixture of site closures, consolidating our manufacturing supplier base, and simplifying our global distribution and logistics network. We’re also stepping up our focus on procurement through a new global organization. I’m very much using the lessons from the consumer integration to target a much more consistent level of annual savings across our global spend. This will contribute to COGS but also SG&A efficiency, even as we invest behind our growth drivers. This will also be helped by the benefits of our restructuring program and the multi-year upgrading of our systems and function organizations that is now coming to an end. We are particularly targeting non-customer facing spend to keep G&A costs flat to down, even after absorbing inflationary pressures globally. Turning to the bottom half of the P&L, we continued to deliver financial efficiency, including successfully refinancing maturing debt during 2017 and holding net financing costs relatively flat. For 2018, we expect net interest will again come in broadly similar to 2017. On tax, we estimate U.S. reform will benefit our effective rate by 2 to 3 percentage points and will also help stabilize the rate which we’d previously expected to rise over time. For 2018 and going forward over the next few years, we expect an effective tax rate of 19 to 20%. After accounting for minority interests, we expect about two-thirds of the benefit to drop to our net earnings. The lower tax rate will increase our flexibility to support our capital allocation priorities, particularly pharma R&D. Minorities meanwhile are expected to reflect the growing after-tax profits in our HIV and consumer businesses. Moving on to cash generation and net debt, we remain focused on driving greater cash discipline across the group. Beginning in 2018, we’ve instituted a new company-wide incentive plan directly linked to improving cash flow that pushes targets directly down into the individual businesses for the first time. We’ve increased free cash flow by over £400 million in 2017 to £3.4 billion after investing £106 million for the PRV and around £450 million into inventory primarily to support the new launches. As those launches progress in 2018, we expect to continue to drive down the number of inventory days as well as begin to reduce the absolute value at constant exchange rates. As expected, reductions in cash restructuring spend also helped to deliver the 2017 cash flow improvement. As we indicated in July, we expect similar levels of cash spend this year as we accelerate the final stages of our restructuring program to deliver the benefits more quickly. Capex has been a significant commitment as we invested behind the launches, the expansion of our vaccines capacity, and the upgrading of our operational systems, but we are now moving past the peak for tangible spend. We have instituted a new cross-company capital allocation review process to ensure we are prioritizing investment more sharply, backing the priority assets and highest returning opportunities for growth while also making sure we keep our infrastructure fully up to date with expected standards. These reviews were also a key driver of some of the disposal decisions taken last year. In 2018, we expect total capex, tangible and intangible, to be around £2 billion with most of the reduction in tangible spend. We continue to look for further opportunities to improve the efficiency of our capital allocation processes. More broadly, we expect our 2018 cash flows to be again weighted to the second half of the year, as they were in 2017. This is due to some seasonality, a higher contribution from the new launches in the second half, but also the impact on free cash flow in the first half of the milestone of $450 million going out to Novartis due to the growth in vaxaro [ph]. This has been paid at the end of January and should be factored into your models for reported free cash flow for 2018. Net debt was down a billion from Q3 to £13.2 billion, reflecting the strong free cash flow generation in Q4. Looking at 2018, the outlook clearly depends on whether Advair encounters substitutable generic competition in the U.S. If there is no generic in the U.S. this year, then we would expect core EPS growth of 4% to 7% on a constant exchange rate basis. This is based on an expected decline of around 20% to 25% in Advair’s U.S. sales in 2018, which reflects somewhat higher expected discounts and rebates and further transitioning to the new Ellipta products. However, it seems more likely now that a substitutable generic to Advair is launched in the U.S. during 2018, given the filings that have been made. Clearly the timelines, the pricing strategy and supply capacity of any generic are all uncertain, so as last year, to help you with your models we have estimated the impact of a midyear generic. In this event, we would expect U.S. Advair sales to decline to around £750 million at constant exchange rates, i.e. $1.30 to the pound, and for adjusted EPS to be flat to down 3% at constant exchange rates. We’ll update you as and when we have more clarity, but realistically it’s likely to take some time for the potential impact to be clearer, most likely not before the middle of the year even if a generic comes earlier. Currency will also impact actual sales and earnings growth on top of the CER performance. Given the recent strength of sterling, if exchange rates remain at the average January rates for the rest of the year, we’d expect a headwind of around 4% to sales and around 6% to EPS. Under either Advair scenario, we are increasingly confident on delivering on our financial outlook for the group of mid to high single digit EPS growth over the five-year period to 2020, given the progress we’re making with our new products and the benefits from U.S. tax reform. The new products we identified back in 2015 have now almost reached the £6 billion target three years early and with clear momentum, and as a result we will not report on this particular target after this set of results. Finally, we’ve delivered on the dividend expectations we laid out at Q2 last year with £0.80 declared for 2017 and £0.80 expected for 2018. With that, I’ll hank you back to Emma.

Thank you, Simon. So, good progress on our priorities in 2017. Let’s conclude with priorities for this year ahead and our outlook. Our long-term priorities are innovation, performance and trust. In 2018, we’re particularly focused on three things to make progress on these, all underpinned by a necessary shift in culture. First, excellence in commercial execution - Luke has already covered our plans for Shingrix and respiratory. HIV is of course our other leading therapy area in pharma, and I’ll take just a moment to update you on our progress here. We have built a winning portfolio with our leading integrated inhibitor, dolutegravir. Although we do anticipate the imminent introduction of a competing agent to the market, we believe we have the best core agent with the strongest set of data, with five studies in which superiority was demonstrated. The two comparative studies of the competing agent versus dolutegravir that have been published to date have shown non-inferiority, but in both cases with the trend favoring dolutegravir, and in our view the data doesn’t give any medical reason why patients taking either Triumeq or Tivicay should switch. We also offer the greatest degree of flexibility for patients. In addition to Tivicay and Triumeq, we are now launching Juluca, the first of our oral two-drug regimens for well controlled switch patients looking to reduce the burden of medication. We continue to lead the way in innovation in HIV therapy. In mid-2018, we expect to receive the 48-week Phase III data from the GEMINI study of dolutegravir plus lamivudine, which will form the basis of a submission for our second oral two-drug regimen. By the end of the year, we expect to have Phase III data from the ATLAS and FLAIR studies on our long acting injectable two-drug regimen, cabotegravir plus rilpivirine. With this growing portfolio of assets, we believe we are well positioned to meet the changing and different needs of HIV patients as life spans and durations of therapy increase. The second very important priority this year is strengthening our R&D performance. We have new leadership in place with Dr. Hal Barron having joined us just last month, and before he joined we’d already taken some steps to prioritize our pipeline and improve development discipline with better commercial input, but there is further work to do. As data reads out, you should expect some assets to fall back and others to be accelerated. Hal will be giving you a first update on the direction and priorities for R&D at Q2. Finally, a third major focus for us in 2018 is cost, cash and capital discipline. We will be allocating resources to those areas where we see the best returns. We’re proceeding with the divestments and review of the supply chain that we outlined last year, and we’re in the process of restructuring our commercial operations. To ensure the entire organization is focused on this, starting from 2018 cost and cash discipline will be included in incentives for all employees. Let me reiterate our capital allocation framework and our dividend policy as laid out at Q2 last year. Our main priority is to invest in the business with pharma and its pipeline number one so we can ready the company for its next wave of growth. Then, we have investments in the consumer business put option, should it come, which would strengthen our position in consumer healthcare and, we expect, would be accretive to EPS and free cash flow, and then also further investment to expand capacity in our growing vaccines business and support an exciting new launch. Nothing will compromise our investment in the business to drive long-term growth and returns. Our second priority will be to deliver cash returns to our shareholders through payment of dividends, and similarly there’s no change to our policy. Dividend payments will be determined primarily with reference to free cash flow generated after funding the investment necessary to support growth, and we are aiming to rebuild our dividend cover. Given all this, we’ve indicated we do not expect an increase in the dividend in the near term and we expect to pay £0.80 in 2018. Lastly, we would use cash for business development purposes with scale M&A obviously dependent on the right kind of return profile. In conclusion, clearly in 2018 we face the potential challenge of generic Advair and the shape of our earnings trajectory over the medium term will be impacted by the timing of that, but we have planned for it and we are ready for it, and we are confident of delivery of our 2018 guidance. The launches and opportunities we have combined with the performance improvements we are making and the benefit of U.S. tax reform provides us with increased confidence in our ability to drive growth over the next two to three years and deliver our 2020 outlooks. As a reminder, beyond the Advair genericization, we do not expect significant generics until beyond the mid-2020s. In addition to good momentum in our recent launches with Bexsero, Menveo, and our Ellipta portfolio, we have the landmark preferential ACIP recommendation with Shingrix which has accelerated our expectations for this launch. We have compelling data from the IMPACT study for Trelegy which underscores the place of inhaled corticosteroids in this treatment of COPD. We have the leading biologic therapy for the treatment of asthma with Nucala with more consistent data than competing agents on the market or in development, and we have an exciting and robust data package and a comprehensive range of treatment options with dolutegravir and potentially cabotegravir in HIV. In conclusion, we are confident in delivering our 2020 outlooks of mid to high single digit EPS CAGR. Now all the team are ready for your questions, so Operator, if we could please open the line for Q&A.

[Operator instructions] Your first question comes from the line of James Gordon from JP Morgan. Please go ahead, James.

Hello, thanks for taking the questions. A couple of follow-up questions on HIV, please. I know consensus has got low double-digit HIV growth this year, but there’s also some concern around whether that will be achievable in light of the Gilead competition. Two questions - first one is just about patient stickiness, as in how quickly do HIV patients switch between therapies, how often do they get the opportunity to, and particularly mindful of patients who might already be on Tivicay and Descovy who might be able to switch to a single product from Gilead? The second question would be HIV growth drivers. I think some of them were mentioned earlier in the presentation, but what is the biggest growth driver or the biggest offset to the competitive pressures? It is probably [indiscernible] or is it other factors? What’s going to provide the most defence?

Thanks very much, James. I’ll ask David, the chairman of our HIV business to pick up both of those.

Yes, thanks very much, James. I think on your first question, I would expect it to be pretty sticky. I think HIV is an increasingly chronic disease. Patients who are well tolerated, well controlled typically now visit their physicians probably only once every six months or so, so it’s relatively conservative - I think that’s the first point. Secondly, as Emma said in her remarks, I think when you look at the clinical data, we don’t see any good medical reason why patients well controlled and well treated on dolutegravir today should switch to something else. Just to go into that in a little bit more detail, we’ve now seen some of the pivotal studies on bictegravir, and in particular the two head-to-head studies that were presented at IAS in Paris last summer. The first of those and probably most pertinent to your question was a comparison of BIC/F/TAF with Descovy-Tivicay, so this is a straight comparison really of bictegravir and dolutegravir, given the nucleotides are the same. It was not inferior on its primary endpoint of HIV RNA levels less than 50 copies, but it clearly trended in favor of dolutegravir - I think 93% versus 89%. Actually if you drill down into it in some of the patient subsections, the sicker patients with higher viral loads, it was 94% versus 86%, and patients over 50 years of age 95% in dolutegravir’s favor versus 88%. The second pivotal study was a comparison of BIC/F/TAF versus Triumeq, and again it was non-inferior but slightly in Triumeq’s favor, and really no significant differences that we see in the side effect profile. I think that really reinforces those patients doing well on dolutegravir. I think they and their physicians will be keen to keep them there. Thirdly, I’d just say of course we expect the competitive intensity of this to go up, but we’ve invested significantly in our U.S. medical and commercial organization and we have very deep relationships and credibility, I think, to make all these arguments. In terms of future growth, very much from the dual regimes and long acting. If the GEMINI studies are positive, I think that--we would expect that over time to become the bigger opportunity because it’s in naïve patients as well as potential for switch, so we see that’s where most of the growth coming from, and then as we introduce long acting in a couple of years or so, we are increasingly confident around dual therapies.

Thanks very much. Can we have the next question, please?

Of course. It comes from the line of Graham Parry from Bank of America Merrill Lynch. Please go ahead, Graham.

Thanks for taking my questions. First one is on the tax rate - you thought it was at 19 to 20% for 2018 and beyond, but it sounded like you were saying that some of that would be reinvested in R&D and the business. Did I understand that correctly, that we shouldn’t expect all of the tax benefit to drop to the bottom line, and what tax rate should we assume for the consumer and ViiV businesses when we’re calculating the impact, or the offsetting impact of tax reform on your minority pay aways? Then secondly on the Pfizer consumer business, I think your comments at the conference in January seemed to be somewhat dismissive, saying you’d take a look at this but it’s not a priority and it’s not something you’d do if it compromised your ability to rejuvenate pharma R&D, and yet [indiscernible] they’re now reporting there are two bidders left, of which GSK is one - obviously highly speculative, but I just wonder if you could help us square that circle and perhaps give us an update on your comments from January. Thank you.

Thanks very much, Graham. So I’ll hand over to Simon first to answer the tax questions, although obviously overall this is good news in terms of the increased flexibility it gives us, and then I’ll come back to your second question afterwards. Simon?

I think, Graham, as I said in my remarks, you get about two-thirds of the benefit dropping to the earnings line because obviously there’s more benefit in the two U.S. legs of the JV businesses. I think the other important point is that we think the tax rate is going to be stable now going forward over the next several years, whereas previously we’d expected it to be rising, so that creates a bit more oxygen, if you like, in the system that we can use to drop to the bottom line, or we can use to invest in the business where we see decent returns, and particularly given the focus on R&D - that’s why I called that one out as a place where we might want to put a bit more spend over the next several years, and this gives us more capacity to do that and still meet our 2020 outlook of mid to high single digit bottom line growth. So that’s really the context for that comment. As for the individual tax rates of the businesses, I don’t think I’m going to go there; but needless to say there’s a complex mix of how the supply chains work, but we’ll give you some more color on that when we’ve seen the detailed regulations. Thanks.

Thanks. So Graham, to the second question, as you’d expect, I’m not going to comment specifically on the process that you refer to, and certainly not on the media commentary either. But I will reiterate what I’ve said previously - first of all, you would expect us to take a serious look at any major assets that come up in the market. This is an attractive business. We are a world leader in consumer healthcare and we have a good track record of integrating businesses effectively, but our first priority remains pharma and both investing in the launches and the execution that we have underway, but also more specifically prioritizing the pipeline within pharma. We will not do anything that cuts across that prioritization. Likewise, we are going to be extremely disciplined around shareholder returns, and maybe most importantly we’re very happy with our consumer business as it is and the progress and momentum that it’s making, so this is not something that we need to do. Perhaps on that, it’s worth me just calling on Brian to just make a couple of comments on updating on our consumer business progress. Brian?

Okay, thanks Emma. Yes, as you mentioned, we had a stronger Q4 with growth of 4.3% and continued margin progression of 130 basis points. The results were driven by a number of factors, including strong performance of our power brands which are growing at high single digits in the quarter, and also all seven brands are growing share on a global basis if you look at the latest three-month period. That’s really anchored by some strong innovation like Sensodyne Rapid Relief launching in 40 markets in the back half of 2017; Voltarin No-Mess launching in Germany, our largest Voltarin market, and we have some market dynamics. In the U.S., as Simon mentioned, we benefited from an earlier and more severe cold and flu season in the U.S., but importantly our Theraflu brand is growing well ahead of the market. We also are seeing share growth back on Flonase in the U.S. as we anniversary the private label entry. You’ll see that we were flat in the U.S. on the quarter, and that’s because the TDS generic impact of the U.S. results. In India, we benefited from demonetization in the base but also seeing strengthening consumption on Horlicks, where we’re also back to share growth. So overall, I feel really good about the health and momentum in the business - as we look to next year, as Simon said, low single digit growth with the negative 1.5 impact drag from GST, TDS and divestments, but we also expect to see continued margin progression to continue on the path to 20-plus by 2020.

Okay, thanks very much, Brian. Next question, please.

Thank you, it comes from the line of Steve Scala from Cowen. Please go ahead, Steve.

Thank you so much. Advair was about 10% of total revenue in 2017. GSK has previously said that two-thirds of the Advair price pressure has already been experienced, so presumably if you lower the price another third, you could sell all you want. It would imply that about 3% of total group sales or turnover is at risk, so given this, it’s hard to envision why the bottom line will be impacted by negative 4 to negative 10 in 2018. Can you walk us through the math that’s involved with that, please? Secondly, versus initial expectations several years ago, the U.K. patent box benefit didn’t seem to be fully realized given GSK’s rising tax rate over time. I realize this is a result in part of geographic mix, but what is the risk that U.S. tax reform leads to a similar dynamic and the benefit we envision is not fully realized? Thank you.

Thanks very much, Steve. Simon, do you want to pick up both of those, please?

Yes, I think Steve, as we’ve talked about before, that the complexity of the Advair modeling, if you like, is because we’ve got a relatively steady now decline in the existing product, and then you have to layer on top when and how does a generic arrive, so we’re anticipating this year that we’ll see Advair decline 20, 25% - that’s a slightly higher number than we had last year, where I think we guided 15 to 20%. If you kind of look through the different RAR true-ups during the course of 2017, we were pretty much from an underlying perspective within that range to maybe the slightly higher end of it, and then off a smaller base we’re going to continue to decline, hence the bigger number. Overall, though, I think the pattern hasn’t changed, and equally when a generic arrives, we’re going to go from roughly £1.6 billion of U.S. Advair sales in 2017 to £750 million. That is very, very high margin business, and when that drops through the P&L it is going to have an impact on the operating margin for the pharma business, and it’s also going to have an impact on the operating margin for the group and therefore the earnings position that we’ve described in the past. That is factored into the guidance. That obviously falls at a point when we’re also trying to invest and have decided positively to invest in the pipeline, but also in Nucala, Trelegy and Shingrix, and the continuing growth of Breo, Anoro, et cetera. We think that’s the right thing to do for the long term value of the company, but it does create a particular [indiscernible] during the course of 2018, so I think that’s really the answer to your question. On the patent box, the dynamic we have here is Advair is in the patent box, or Advair/Seretide is in the patent box, so as Advair goes we lose quite a lot of the benefit that we’ve been seeing to date, and then clearly the benefit from the newer products is taking some time to build up the other side of that transition, so that is why we were seeing some more upward pressure on the rate previously. Obviously, again, it depends on exactly how Advair falls, but we are expecting to see more benefit from the patent box going forward as the new products kick in bigger revenues and we see increased benefits from those going forward. But I think all that is factored into--all that transition is factored into the now 19 to 20% flat guidance that we’ve given you.

Thanks Simon; and Steve, I would just add that ’18 will bring some challenges if the Advair generic comes, but to repeat, we are very much prepared for it and we are ready for it, and what we are extremely focused on is the growth of our new products. As a reminder, the new recipe products were up 75% in 2017. Breo has crossed the £1 billion sales mark, Nucala is a very competitive medicine in our move into biologics, and we are extremely excited about the medium and long term possibilities of Trelegy, particularly once the IMPACT data gets shared more broadly. So we’re ready for the challenges of this year, but our confidence in respiratory and the broader overall company performance is growing in terms of outlook for 2020. Thank you. Next question, please.

Thank you, it comes from the line of Andrew Baum from Citi. Please go ahead, Andrew.

Good morning. A couple questions. First, the administration is talking about lifetime caps for Medicaid. Given the heavy representation of HIV patients under Medicaid and given the [indiscernible] you might enjoy with your 3TC [indiscernible], would such developments be viewed as a positive for you and your ability to take market share, or alternatively is it a negative in terms of potentially deflating the overall market? That’s the first question. Second question for Luke and Emma, I noticed that you had changed the head of your immuno-inflammation, a senior position inside GSK. Given Hal’s geographic background, can you tell us just a bit about the background of the new candidate, including where he will be based?

David, would you like to pick up the question first of all on HIV?

Yes, thanks Andrew. So you’re right - in HIV, Medicaid in the U.S. is a relatively important segment. It’s about 20% of the volume that we sell in the U.S., recognizing actually there’s also the ADA segment, so we watch what happens in Medicaid pretty carefully. I think on things like lifetime caps, it’s far too early to say how that will play through, and there’s obviously some potential other dynamics in Medicaid that we’re watching, whether it’s block grants out to the individual states or changes in eligibility for Medicaid. All of that I think is still to play through and will probably take a bit of time to play through, so too early to say whether it’s a threat or an opportunity. I hope that whatever happens, HIV patients remain eligible for treatment. We will obviously do everything we can to play our part in that, working with individual states. I’m not going to comment on price. What I would say is we have a very flexible portfolio because although we have SDRs and fixed dose combinations, we also sell the single agents as well, whether it’s Tivicay and so forth, so we have quite an offering we can offer individual states, and we will do everything to ensure the right product and the right medicine to the right patient.

Andrew, just to conclude on your second question around personnel within R&D, obviously Hal is spending a lot of time looking deeply at the assets that we have in the portfolio and spending a lot of time with the people and being thoughtful about his own team and how he wants to take that forward. I’m not going to comment on any specific individuals, but as we’ve said, he will be with us on our Q1 results and then most importantly bringing an update, his first update in terms of priorities, and undoubtedly teams too at Q2. Next question, please.

Thank you, it comes from the line of Keyur Parekh from Goldman Sachs. Please go ahead, Keyur.

Hi, can you hear me okay?

Perfectly, Keyur.

Excellent. Two questions, please - Emma, one for you, and one for Luke. Given the guidance that you’ve given today, if one assumes a scenario that you do get generic Advair in 2018, then it’s likely that 2019 could also be impacted given the full-year impact from that, full-year impact from bictegravir competition, and potentially the higher R&D spend that presumably Hal will want to do. How should we think about the growth profile for ’19 versus ’20 to get your high single digit 2015 to 2020 outlook, because right now it looks like you will need to do somewhere between 8 and 10% CAGR to get there between ’18 and ’20. That’s question number one. Question number two for Luke - Luke, your new competitor in the inhaled respiratory space has been making some very bullish commentary about their product and their ability to differentiate that product versus Nucala relative to dosing, relative to the label that they have. Just give us your perspective on how you see Nucala being positioned for growth in that market. Thank you.

Thanks very much, Keyur. I mean, you’re right - if we assume a midyear launch on Advair, you would then get--for the generic Advair, you would then get some drag in ’19, but don’t forget we’re also talking about the building momentum behind launches that are going on now, particularly Shingrix, Trelegy as coverage builds as well, and also over time our expansion of our two-drug regimens within HIV. Just to reiterate, our confidence in the 2020 outlook continues to build. We have factored in an Advair genericization at some point, we’re ready for it, and the shape of the curve will depend on exactly when that lands. Luke, do you want to give comment on respiratory?

Sure, thanks Keyur for your question. I’d answer it in two parts. I think firstly if we look at biologic usage in severe asthma, it’s relatively low - I mean, we’ve got around 20,000 patients on Nucala. The U.S. market, depending on which data you look at, is around 250,000 to 300,000 patients with our profile, so first point is there’s plenty of room to grow. Now, if a physician wants to engage us in a conversation about the relative merits of Nucala versus benralizumab, then we’re very happy to have that conversation. I think the key thing with products in this area, of course, is efficacy. All of these studies, the primary was--in the pivotal studies was exacerbation reduction. I think you saw that in a slide that I used. It’s very consistent and, I would argue, very powerful with Nucala from 150, 500, right up you can see to the high ranges of EOS there, so very, very powerful. Our aim is really to steer the conversation onto what’s clinically relevant and what a physician can observe in their patients in terms of benefit. There will--there’s quite a few samples out there right now, so I think we need to look at this over the next few weeks and just see the picture; but in the end, our aim is very much to focus this on efficacy. In my experience, when it comes down to a discussion, all else being equal between efficacy and convenience, in my experience physicians will go with efficacy every time, and that’s really our focus. Our aim is to compete there and make the point on efficacy for Nucala.

Thanks Keyur. Next question, please.

Thank you, it comes from the line of Kelly Holford from Exane BNP. Please go ahead, Kerry.

Thank you. Two questions, please, both on respiratory. One, just following on from Keyur’s question on Nucala, does that drug only get to be a blockbuster, which you were alluding to, Luke, if you succeed in bringing that to market in COPD and the other inflammatory indications you’re looking at? How do you think about the opportunity across those different therapeutic categories?Then secondly on respiratory from a long-term guidance perspective, you’ve reiterated that group 2015 to 2020 guidance, but I wonder if you would revisit the respiratory sub-guidance where previously you’ve said 2020 sales to be at least or above the 2015 sales figure. Since that was set, we’ve had regulatory approval for Nucala, Trelegy, there have been some changes in [indiscernible] and I wonder if you are willing to be any more specific on that gross of sales now.

I’ll let Luke come back to you on the Nucala-specific question, but I don’t think we’ll be revisiting our respiratory guidance until after we navigate through some of this year. But again, we’re feeling very confident behind these new launches. Luke?

Sure. I think we could get there, but I think that it’s--well, you never know until you get the final decision from the FDA, but I think it’s largely academic. I think we feel very confident about our filing. In terms of hierarchy, clearly severe asthma is more valuable just because of the large number of patients, but there is interesting data in terms of higher [indiscernible] levels in COPD patients, a lot of academic interest there, and certainly we’ve had a lot of interest in our program. EGPA of course is a smaller group - we use three times the dose there, so it is quite an attractive segment though it’s limited by the number of patients who suffer that condition.

Thanks so much, Luke. I think we’ve got time for just one last question, please.

Thank you, it comes from Emmanuel Papadakis from Barclays. Please go ahead, Emmanuel.

Thanks. Maybe a follow-up on HIV. You talked eloquently about the lack of a medical incentive to necessarily switch patients, but presumably there still persists the potential adherence and/or cost, for example, co-pay reasons why patients may choose to switch. Could you talk about any offsetting levers you could pull as regards those considerations when working on forthcoming competition? Then maybe a quick on Shingrix - it looks like an interesting start. Could you talk a bit about how the relatively higher price point for that vaccine could drive margins for that division in the midterm, particularly thinking beyond the 2020 target of 30%, where you think that might enable you to get? Many thanks.

Okay, so David, do you want to pick up the HIV, and then I’ll wrap up on vaccines.

Yes, sure. Emmanuel, it varies by channel, but certainly in the commercial channel, we offer various different patient saving cards for patients that co-pays are a significant issue for them, so I think overall in that channel, it’s not really a big deal. The level of co-pays in Medicaid and so forth are relatively small, and I would say in a specialty area like HIV, what matters more than anything else is the medical data and whether it’s the right medicine for that patient, and that really overrides everything else. So it’s not totally irrelevant, but I really don’t think it’s a major factor.

Thanks David. Just to conclude on Shingrix and vaccines margins, you’re right - this shows that with a vaccine that has this kind of efficacy, over 90%, a premium can be charged and demonstrate meaningful value, which is why we also ended up with a preferential ACIP recommendation at that price. That said, whilst we are very ambitious and good signals, as Luke said, to date, we still need to read through how the progress of Shingrix is going to be delivered through this year, and we’re very confident in our outlook for vaccines. We’re not going to give any targets beyond 2020, and we certainly think the opportunity for Shingrix runs very well beyond that. As a reminder, the vaccines margin was 30%-plus, so let’s see how we go. With that, thank you very much to everybody who has joined the call, and we look forward to conversations in coming days in the near future. Thank you very much.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining.