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Executives

Sir Andrew Witty – Chief Executive Officer

Simon Dingemans – Chief Financial Officer

Analysts

Francisco Ruiz Martin – Exane BNP Paribas

Andrew Baum – Citigroup

Graham Parry – Bank of America Merrill Lynch

Mark Basile – Barclays Capital

Mark Clark – Deutsche Bank

GlaxoSmithKline plc (GSK) Q4 2012 Earnings Call February 6, 2013 9:00 AM ET

Sir Andrew Witty

Okay, good afternoon everybody. Welcome, thanks very much for coming to the GSK Annual Results. We’ll obviously as usual I’ll take you through a few slides, just to frame where we think things are at maybe cover a couple of the highlights from the results announcement today. And then Simon will take you through more of the detail, give you a sense of maybe shape a little bit of the year to come, and then most importantly give you the chance to ask any questions you might want to have.

Just a highlight to you, we have David Redfern in the room here, who is our Head of Strategy for the Company, very busy last year buying HGS shares in Theravance, the Indian business, Shionogi and few other things. So he’s been very active for us and has come out here for a rest. So it would be quite good, if you asked him lots of really difficult questions, so he doesn’t relax that much.

Let me take you through results, before I do that, unfortunately I think as many of this I needed to share with you the statement and hopefully to draw your attention to it, and you can probably recite it better than I can.

Let me move on to where we are as a group. Nothing is changing in terms of the strategy of the Company, but clearly as we move through the last few years, as things becoming clearer and clearer of what GSK really is. I think we’ve got a very clear case of a balanced business, balanced exposure geographically, a balanced exposure across our different sectors, our consumer business, our vaccines business and pharmaceutical business and also some very good opportunity around the development of our pipeline of new products.

So good balance, we’ve been very, very focused on building synergies within the organization. That exists at lots of different levels of course all of the organization increasingly works through a common core backbone of services that I talked about three or four years ago, that has led to very significant reductions in cost about 20% reduction in administration costs in the Company since 2008 partially facilitated by that core backbone increasingly now been supported by the deployment of our global ERP platform which we have began to aggressively roll out, its now well on the way to roll into Europe and then we’ll go beyond as we move through the next year or two, so that they are all whole binding together at the service organization of the business, very important of course we have global manufacturing, we’ve always had that, but we’ve increasing that now moves towards global supply chains. So we started to strip back out of our commercial businesses, the ends the commercial distribution ends of our supply chains and bind them back together with our core manufacturing supply chains, that’s taken out all the interphases, it taken out all of the opportunities for inventory builds out interface which often happens again a nice source of synergy.

And then of course a key one is the interaction between our consumer business and the pharmaceutical business, which increasingly is focused around two key points of synergy one is where the business is a bound OTC consumer obviously very closely linked to pharma many of those drugs were in fact pharma products originally, and of course distributed though pharmacy very often, so tremendous obvious synergy there, has always been there, and then in emerging markets, really the second pole of synergy where we see tremendous share distribution capability.

One of the things we’ve announced today is the review of our Lucozade and Ribena brands at least partially because they don’t naturally sit in either of those two poles. We don’t have the big emerging market in Lucozade and Ribena business they are not distributed through pharmacy OTC pharma channels and so we are really looking to see how we best now develop a long-term brand value all options on the table. A quite good example I think of us really testing if it doesn’t naturally fit to where we believe the core points of synergy are and then we are going to ask the question of how exactly how we should deal with that. I’m sure we’£ cover that a bit later on as well.

So we’ve been focused on driving for the development of this business we obviously have now a much balanced business geographically, we are looking for more and more efficiency in the organization, we are committed to cash conversion as you’ve seen over the last two, to three years, and then very substantial repatriation of cash, back to shareholders either through dividend growth or through share buybacks.

If we look across really there kind of four different types of businesses we have, clearly we are all above the pro-innovation markets, I’ve talked about these in the past being particularly United States and Japan. Over third of the Group, obviously this is the part of the business, which is going to benefit the most from new products as they come through the final stages of regulatory approval. We worked hard to make sure that in both of those geographies we’ve got the right operating models to go forward. That’s been much more the focus in America as we’ve responded both to the shift in our portfolio, frankly some lack of competitiveness in our business four, five years ago, also to the effects of the Affordable Care Act. As you’ve seen I think sporadically we shared with you bits and pieces of what we’ve done differently there. I think we’re now a very, very strong commercial organization, only evidence from our early launches of niche products, small specialty products very, very encouraging in terms of share. We’re starting to see some nice improvements even in the bigger older products like Advair and its share performance, and also its market performance in the last few months. All of which is reassuring very good metrics coming back from the key decision makers in the U.S. marketplace, ready for the pipeline.

Japan, we’ve just launched Votrient sarcoma indication in Japan that was the 70th new product we’ve launched in Japan since the year 2000, and we have 30 more new products to launch in the next three or four years. So very exciting portfolio of opportunities to come I hope in these businesses, but both of them ready, really to start to move forward with where our hope will be bigger commercial opportunities than we’ve had in the past.

In Japan, specifically during the year, we built the joint venture with Daiichi Sankyo to ensure that in the vaccine space we can complement our new high-end vaccines with the base vaccine portfolio that Daiichi Sankyo has, and that’s of course in a very strong position for the long-term in Japan, I think as well.

Emerging markets obviously being the focus since I took over, we significantly increased our resource base there now you can see very material part of the group continues to grow very strongly. I was delighted last year although we suffered in the first quarter particularly with the Arab Spring, very strong recovery during the rest of the year, 16% up in the pharma, vaccines space in the fourth quarter very strong consumer business, and overall still a 10% growth rate.

As we started to see some of our multi-national peers growth rates drop off. I think that’s larger because we’ve got the right business model in these markets. We are very focused on innovation and great continued growth of our newer products, but we are also very focused on ensuring access of the body of the portfolio. So we see good volume numbers, we see good adoption of new products.

Just a look at Synflorix as one example £400 million of turnover, just for Synflorix, just in the emerging markets is really a good signal of the way in which we can generate adoption of newer products as well as sustain the old ones.

Europe of course has been the challenge very much the focus of last year disappointing for us to see the environment turnout more negatively than we anticipated, very much expressed through price so we continue to see our European business perform a round zero minus one type of volume movements.

Our biggest product Seretide last year actually grew 2% in volumes, had a significant price reduction. So the volumes nothing dramatic very much in line with where we see the market operating volume shares don’t look anything to be worried about, but like everybody else significant price pressure, although at the beginning of last year it felt like we were the only people to get such significant pressure as we have that Seretide price cut roll through, I think as the years going on you’ll see most of our peers have had very similar kind of price dynamics to our own. And actually when you look at our performance in Europe is very much along side the rest of the industry. But we are determined to do something about this, we don’t believe the European picture is going to suddenly improve, and we don’t think the European macroeconomic situation is going to facilitate in dramatic relaxation of pressure in Europe, and therefore as a group, we want to make sure that we do everything we can to maximize our efficiency in this region, while we then focus on the growth opportunities in the other 80% of the group. The very dangerous trap to become obsessed with Europe when in fact, everything else in the world shows great opportunity.

So we’ve already announced today, the beginnings of a significant restructuring program of our European business within our overall change program, I’ve announced today. This will focus on obviously reducing the size of these organizations, it will reduce the headcount of these organizations, eliminate overlap duplication in the like.

Most of that were full in the SG&A arena, so that will be administration sales organizations. There will be an element of redeployment, so some of the reductions in eliminations will be redeployed on some of the brands we think we might be a little underpowered on at the moment, all of that makes sense, it’s all completely obvious and it’s underway as we speak.

We are continuing however to look at bigger, broader strategic solutions to Europe, Europe is not a one or two year issue, we think it’s a strategic issue for the business, actually bumping for the industry, and so we continue to look at other options. We are not in a position today to share those details with you, but it is very much something which is on the front burner off the company, and we intend during 2013 to get to resolution and obviously when we do, we will share with you, what the shape of that look likes.

We’ve already signaled as an example of perhaps the least ambitious perimeter of what the next step might look like, that we are looking for a partner for albiglutide commercialization, so that might be one pathway, where we look to do more specific partner and to avoid build up of European infrastructure when we know it's a relatively tough environment. At the other end of the perimeter, you know historically we've transacted deals like ViiV, where we’ve created very different structural approaches to try and resolve very complex pressures in a particular segment of our business. I'm not guiding you that we’re going to do either one of those things, I'm simply signaling to you the spread of the perimeter and I think that gives you a feel that we are very serious about looking for the right strategic response. But we need to make the right decision at the right moment and obviously not simply to synchronize with the results announcing.

So a lot going on in Europe, a lot of changes, a lot of work we have seen as you saw in Q4 a slight improvement in performance there, which is good a slight improvement in volume and a little bit of a reduction in the price pressure as predicted, because the Seretide price pressure went down a bit, but nonetheless we would expect 2013 to remain a negative price environment in Europe, as we saw last year, probably mid single-digit source of territory.

U.S. and Europe consumer businesses remain very strong, very dynamic particularly in America outstanding consumption growth every single month of last year we grew faster than our categories. In terms of consumption, we’ve seem very strong performance of all of our brands in these geographies particularly the oral care business; Sensodyne now $1 billion brand, it accounts about 8% of the world’s toothpaste market, so as a brand which most people think about as a bit of a niche is actually ended up or has become a very significant part of global toothpaste business, and has grown in double-digits for 14 of the last 15 quarters including the last quarter.

So very strong business, very good performance in America, very much benefited from stripping out of the ‘tail’, so by divesting ourselves of the ‘tail’ last year has really cleared the way for us to focus on essentially 15 brands, as 15 brands drive about 80% of that organization. It’s an extremely concentrated business, and has got a very, very sharp focus.

As I mentioned two brands, Lucozade and Ribena really sit a little bit outside of the very strong synergy points of this business, that’s why they are up for review. Again this is a review which as no predetermined decision, and has no options ruled in or out. So it could the most conservative end of the perimeter, conclude that we should invest more and we should carry on doing what we are doing, but with more investment in different geographies, and it could at the far end of the perimeter include divestment of these assets.

So that perimeter is as wide as that no decisions taken and I think we have the first phone call from a bank at 12, 18 and we had six since. So all credit to the investment bank community although I was surprised it took them 18 minutes to get on the phone.

R&D I think has been a really tremendous story for us during 2012, really the continuation of the momentum, which has been building up in R&D organization, very strong delivery of clinical trial results, fabulous delivery of efficiency in the trial environment something like three times as many patients in GSK, clinical trials today as compared to 2008.

So a massive step-up in activity, trials getting done, many trials finishing early, many trials coming under budget, all of which or why we’ve been able to hold our R&D budget flat to down, even with this massive step-up in pipeline, really the truth if you will, the efficiencies that we’ve begun to put in place in that organization, 14 assets still to report are over the next couple of years, and we think with the six, which are already under review, kind of the potential to have 15 new drugs or vaccines, that’s not line extensions as 15 complete new drugs or vaccines in the next couple of years.

Lots of news this year, lots of catalysts for those of you who love catalysts. So there will be lots of moments, where I’m going to be very nervous, you’re going to be very interested, and we’ll see how we both feel in the morning, it’s going to be one of those sort of years, it’s a very different solid atmosphere for us, obviously it is going to be lots of twists and turns in this year, not everything is going to go smoothly, there’s bound to be twists and turns as we go along.

So we’ll see how the year progresses, but we’re in a great shape, we built six files in already, and of course, during the year, we’ll also get the first data back on the major three therapeutic vaccines, and darapladib, and while we’ve always signaled that those are high risk, but very high return opportunities, it’s impossible not to get excited about as those days start to progress toward us.

So a lot coming in terms of pipeline, I really couldn’t be happier in terms of the progression of what we’ve done there, and been able to do all of that, and at the same time, show that we can be more efficient, and our R&D is not simply a function of how much money you throw at it.

We believe and we have the first two (inaudible) obviously at the regulators. We believe we have the opportunity for up to 10 new respiratory drugs in the next five or six years. And we are very confident of our view that we can grow our respiratory franchise over the medium-term as these new products start to roll in, not withstanding the fact that they will inevitably be continued price and in some areas generic pressure, to some of our existing products.

One of the reasons, why we have been buying up our stakes in our partners is because of our increasing confidence in the assets and our desire to get more economic control and also to simplify some of the relationships, so to avoid having to negotiate everything to speed up decision making and buy up the economics, it was really behind our deployment of capital last year, and essentially almost of our bolt-on acquisitions all of our deployments last year were targeted around that arena.

In terms of looking how we simplify the business, I covered a couple of these things, the first to you’ll see these are updates on the numbers you’ve seen before, a very substantial reductions in the size of R&D footprint as an example, it’s a much leaner organization almost on every dimension to much more creative organizations and much more accountable organization, we’re certainly leaner. We are in the midst of change in our manufacturing organization, and the change program, I’ve announced today, £1.5 billion charge for about £1 billion of savings covers the European restructuring. It covers the elements of the changes that we are stimulating in R&D manufacture. This is going to lead I think to a really significant technology leap for the company. Areas for example we are going to be accelerating is a jump toward more continuous process manufacture, a shift from synthetic chemical reaction to enzymatic reactions, and a whole reframing of how we do analytical testing in all of our facilities. The net-net of all of that a very significant reduction in process time, very significant reduction in cost, carbon footprint inventory and speed. All of those things are on offer and we’ve been spent in parts of the organization we almost never talk to you about in our platform sciences units.

We’ve been working over the last five, or six years on the series of technologies, which we believe now are ready to industrialize, we commissioned the first, we began building the first facility in September of last year in Singapore where we are going to start deploying the enzymatic technologies into market selling actually first of all, but it’s already been deployed in two of our pipeline assets, and will not be accelerated across the rest of the organization.

Just to give you a little sense of what that all means, because I could see when I said enzymatic reactions one or two people kind of glazed over just for a second, just to bring that into what that might mean from an economics point of view, a couple of metrics. So when we normally make a chemical, which goes into medicine we need a facility which is about 900 square meters in size that gives you a sense on average to do at this way it takes about 100 square meters, so you are talking about a massive reduction in capital deployment and space occupancy obviously, you will see something like a 50% reduction in carbon footprint insolvent use up to a 50% reduction in cost, is our enormous levels on the biggest part of the cost base in terms of the cost of goods.

How big could this be, just again if you look at our current portfolio between one-third and 50% of all the chemical reactions we do in our factories is amenable to this technology? So this is not something which will be a rarity, it should be something we can apply on a very broad basis. So that really is a new avenue for us. I’m excited about this because I think this reflects this is company that has spend five years working to deal with the patent cliff, working to do with lots of other issues form the past, reinvented its R&D organization to deliver a pipeline, rethink it’s commercialization modeling key businesses, grapple with core strategic issues of fit like HIV, like Lucozade and Ribena and at the same time invest in developing technologies which can allow us to take another leap forward in terms of change in our cost base for the medium term. So I think it reflects the capability and the focus of the organization to relentlessly keep looking for ways to build momentum into long-term value creation.

All of that of course, is design to generate sustainable sales growth, we think this year should be a year of growth, small growth, low growth with leverage, but nonetheless a year of growth, obviously we hope that that would have happened last year, but with the pressures we saw in Europe combined with a decision to dispose some of the tail, that really took that growth away. This year, we think we can get to growth, we’ll have to see what the environment throws at us, but based on what we see today, we expect that. We’re confident we can deliver EPS growth, lot of that leverage comes from our financial engineering, and Simon will touch on this a little bit more, the work has gone on to refinance the Group, reduce our cost of borrowing, really has made a significant difference as of course does the tax rate.

So all of that should start to deliver for us a very, very consistent delivery over the next few years as the pipeline start to feed into the top. We continue to work to reduce working capital and of course, we continue to then focus on returning the cash back to shareholders.

We’re guiding today, that we will increase the dividend again, that’s our goal consistently increase the dividend, we’ve done it today by 6%, we continue to aim to do that during ’13, and we will continue to buy back shares initially setting a range of £1 billion to £2 billion, very simple architecture for the company, very much focused on sales, driving into the top of an efficient organization, using leverage at any place we can within the P&L to try and maximize the EPS growth, with a view that the focus should be on organic growth, and it should be on returning cash to shareholders rather than significant acquisitions. Those are essentially the key messages for you; I think we’re in good shape.

Last year wasn’t quite where we hope to be where we’d be, but actually the way it turned out wasn't far off either. And so the key for us as we go forward this year is to lock in on the growth opportunities, make the right decisions on the strategic challenges of Europe, Lucozade and Ribena make sure that the R&D pipeline continues to move forward. There are bound to be twists and turns during the year, I certainly start 2013 with a very high degree of confidence.

With that I am going to hand over to Simon.

Simon Dingemans

Thanks Andrew. Clearly, as Andrew has highlighted 2012 was a challenging year and one by looking back on it turned out to be a lot more challenging than we had expected at the beginning of the year. But I am very pleased with how the business performed and responded during the course of the year to those challenges, and equally pleased that we were able to deliver on the updated guidance that we gave you back in October, delivering sales broadly in line with last year, flat excluding the drag from the OTC disposals, and earnings per share flat on the year before.

Europe was obviously a key issue for us to deal with during the course of the year, and in fact if you look at the near £400 million drag that Europe introduced to the Group, that reflects basically all of the downturn that we saw at the group level as well. So you can see the sort of scale of the challenge that we have to deal with. And I think what made it particularly difficult to respond to, was the way in which the formal austerity measures really spread in a very diverse way across the continent and really played out in different markets in very different ways, which meant the business had to become a lot more agile, a lot more adept in tackling those challenges, and I think the business has responded very well, and even though, today we’ve announced a number of changes, and some restructuring charges to put Europe on to a sound of footing, if that’s not where we’ve started from already a number of changes during the latter part of last year, and already we’ve taken a number of resources and reallocated them across the business to make sure that we’re really focusing where the European business can make the best return.

and I think from my perspective, that’s also very encouraging in the way in which the financial strategy that we’ve laid out for the Company and the financial metrics and architecture that we’ve given the businesses really being applied out at the front-line, so that was not only meant reducing cost, but it’s also meant reallocating resources either back to the Group for other purposes, where we can see better returns or even within Europe, where picking two or three of our key products, putting extra resources, and extra investment behind them, which might see counter intuitive in the face of that sort of pressure has actually led to some of the volume growth that Andrew described for you, and really allowed us to improve our market positions in a number of key territories across the continents, and we’re going to be looking to do much more of that as we go into the continuing review of the European business during 2013.

I think more broadly across the business, you can also see other areas where the financial strategy is really starting to bite and have a material impact on our bottom line performance. I’m particularly pleased with the progress we’ve made in delivering our funding objectives a year early with our net interest cost now down over 200 basis points from the year before I came and that’s really a function of taking advantage of different opportunities on the interest rate curve, refinancing some of our debts and really building a much more sustainable and flexible capital structure to fund the business going forward.

Equally on the tax rate, now I’ll talk some more about that going forward. I think we really build a much more sustainable position to allow us to continue to improve and continue to deliver value at the bottom line.

Equally on the cost side, we’ve got a number of ongoing programs, our OE program which is now coming to an end. The new initiatives we have announced today, but also we continue to look at areas where we can release value either on an ongoing basis or an one-off basis, they all contribute to our flexibility to be able to deliver funding to the businesses, where we can deliver the best return and the best growth. As some of the benefits changes that we’ve highlighted in the release today even though they maybe lumpy in the way they deliver value, really a) put those plans on to a sustainable long term basis for our employees, but they also release a lot more funding flexibility into the company. And is something we’ve been working on for sometime even though they have only arrived in the fourth quarter this year, and we will be looking for further opportunities along that line.

And I think equally has Andrew highlighted the financial strategy is one of the key drivers why during the course of last year and this year, we’ve looked at some of the assets that we got coming through the pipeline, some of our partnership arrangements and have bought in the economics during the coarse of this year to really make sure that we are driving at the end of the day, the more sustainable long-term earnings per share growth. And I think it’s worth remembering that the strategy that we have outlined to support the Group’s objectives, it’s designed to drive two things; earnings per share and free cash flow growth, and that’s why the guidance we have given is focused on earnings per share. And we deliver the earnings per share, the focus we now have across the Group on free cash flow conversion will deliver the cash flow that we can either use to reinvest in further opportunities or return back to the shareholders as dividends and buybacks as we said before and that will be done on a very rigorous CFROI basis benchmarking those opportunities to see where the best returns can be delivered.

So if we turn to the results for 2012, as we said I think good delivery particularly in the second half of the year, and particularly pleased with how a number of the key objectives we had in the fourth quarter came through. We highlighted back in October that we had a significant number of vaccines deliveries to make in the emerging markets especially, but also the U.S. saw a very good takeout from the vaccines business in the fourth quarter as well, and that is not delivered without lot of effort from the vaccines business to make sure they arrive with the patients, and the right timeframe and in the right markets, so a good successful execution there; equally emerging markets pharma business consistently picking up the pace since that disruption of the Arab Spring in Q1.

Europe again also a slightly lower rate of declining Q4, I think partly reflecting some of the measures we have already taken, but I think it’s too early to call that a trend, because clearly the markets remain very challenging, but I think that also helped to contribute to the overall delivery. I think the U.S. also making progress, although we did see slightly less stocking in the fourth quarter than we have historically seen, that maybe a change in pattern where we are still working through how that may flow into Q1, but I think that is why we have ended up as a little short of where we were expecting in the U.S., but overall general performance very strong.

And the operating level, good contribution for a variety of cost saving measures really allowing us to minimize the impact of the top line drag of the operating level to around 30 basis points. We flagged on top of that the cost of HGS coming in the back half of the third quarter and into the fourth quarter, we take about 30 basis points this year, clearly that’s going to fade out as we go into 2013 and then contribute from 2014 onwards.

So overall, I think we’ve managed to deal with a very unpredictable environment, and maintain pretty much the same margin as we had last year. The leverage has really come at the bottom half of the P&L in the financial measures, which we’ve described in the release today, but good progress on the funding, tax, looking at the share accounts and the benefits of the share buyback, allows us to deliver core earnings per share flat on last year.

Quick run on free cash flow, which is obviously one of our core metrics, down 17 for the year, and I think that really reflects just a continued focus on generating and converting earnings cash, but also during the year as we flagged a year ago, we were going to need to put a bit more investments into the capital expenditure behind the delivery of the pipeline, and also the absolute amount of working capital released during the year, lower than the 2011, but still a very good contribution that has allowed us to fund £6.3 billion of distributions back to shareholders during the year.

If you look at the sales contribution, then and look underneath that in terms of the overall mix, as Andrew highlighted, we went into the year expecting a material drag from the disposals of the OTC businesses, we aren’t sure exactly when they would get exited, but we saw that combined with the final stages of the roll up of Avandia. and then the comparison with the spike in Cervarix that we saw in 2011 through the five cohort catch-up program in Japan which really put about £600 million of drag into the sales level for 2012.

Now I’ll come back to some of that still, we’ll play out in the first half of next year, but that obviously is a material factor, I think if you then look at the shape of what the contributions from the different businesses have delivered during 2012, you can see immediately the drag factor that Europe and the $400 million decline really introduces into the mix, because the rest of it is very consistent with the patent that we’ve described for you over the last several quarters. The U.S. broadly flat when you strip away the decline of Avandia, generics of offsetting the continued growth of the promoted products and really without new products to add to that mix. The U.S. is holding steady, but needs that extra additional portfolio to be able to really move forward. These likewise, experiencing generic pressures and obviously it has an exciting new product with the regulators at the moment, but again, that’s going to be new product before that really moves forward.

And then offset by the continued strong performances of our emerging market businesses, our Japanese business and our consumer businesses, which are consistently delivered over the course of 2012. And at an absolute level you can see that leases down 1% broadly in line with last year, but Europe really being the swing factor in our performance, and when you look forward into 2013, the reason why we’ve given guidance at 1% is that we continue to see some drag from those exiting businesses, most of that will fall in Q1, we have about £400 million in total to flow through the course of 2013. But when you look at that business below those drag factors and you can see without calling it a very different position in Europe that again, we need the pipeline to move the U.S. forward, we need the pipeline to move ViiV forward without that, that remains a relatively high degree of offset against our existing growth businesses, which means it’s expecting about 1% for 2013 on a constant currency basis.

If we look far side of the margin, I think you can see here very much the dynamics that we’ve talked about before and how we want to manage the P&L to drive bottom line performance, we’ve had a number of different offsetting factors, but overall the key message that the margin is broadly the same as last year despite the top line pressures that we’ve seen really reflects our continuing balance of releasing cost savings from our established businesses, putting them behind our growth drivers in the emerging markets and putting them behind getting ready for the pipeline if and when it’s approved by the regulators.

And that’s going to be the path very much during 2013, but I think if you look at the overall mix, you can see that the SG&A block sitting in the middle, which really reflects holding that expense steady in the phase of falling sales line, we think that’s the right thing that we’ve done given that if we pull back, we’d have to put it into the business again, it will be slow on the uptake if we get these products approved. The rest really reflects the mix and the impact of just lower sales against relatively static cost base.

I think if you look at R&D, this is also a good example where we’ve been able to manage your expense despite obviously a lot going on in the R&D business that they maintain their focus on cost control, they maintain their focus on efficiency, and we’ve got a number of phasing benefits in the course of the year, but they have maintained a very tight discipline on the amount they are investing.

Going forward they clearly going to have to also pick up the additional R&D cost as a result of folding machine overall interest back in directly to ViiV, as we work on dolutegravir and also the HGS costs. So I think we are continuing to manage that to the broadly flat guidance we gave you at the beginning of 2012, from about £3.6 billion and we’ll work within that parameter to make sure that we are really driving the best returns out of the R&D portfolio that we can.

I think on the SG&A side equally more consistency looking to release resource from our developed markets continuing to put them behind our new growth markets and you can see broadly that’s balanced during the course of the year, quite a lot of the structural savings that we have made out, the OE program now coming to an end, and these savings really being about, the ongoing measures, and the improvements that I talked about a couple of times before particularly in terms of our functional capability whereas Andrew highlighted we are continuing to roll out on new ELP platforms, we will have over three quarters of our European business by revenues on to the new ELP platform by the middle of this year. That’s starting to drive some significant changes and open up new opportunities as well, to simplify the functional and administrative costs of the Company, which just over in the first two of our business centers, which are really going to be hubs to provide coverage across both Europe and this is central part of the EMAP businesses, three or four more to come, but I think we are already making significant progress that leaves us confident, we can continue to offset the investments we need with the release of cost measures either one-offs on going or a combination of both, that will hopefully allow us to play this position forward, and that's certainly the plan. I think what you can see is that fixed sort of flat cost number, against the declining sales obviously is the other 0.5% that you saw in the margin impact during the course of the year.

Where we see more pressure is at the cost of goods line and many of the measures that are contained within the new change program we've identified today, are really designed to address the ongoing competitiveness of our supply chains, and how we really adapt them to both the considerable burden of expansion there bringing as many new products through the pipeline is going to require from our manufacturing businesses, and they are already gearing up to do that. A new product inevitably takes some time to develop to the optimum margin and cost structure, but also making sure that we are continuing to take cost out of the manufacturing line, supplying into emerging markets, and those were up by the price point is different. I think we’ve already seen even in the last six months and the focus of these new programs that have been summarized in the release today. Significant changes, so take Ventolin where we've had a number of product presentations of Ventolin designed to go into the emerging markets.

By taking some of the lessons from the consumer business and really designing those products for value, we've reduced the costs to supply those, by not just sort 10% or 20%, but 70%, 80%, which not only makes us competitive with the local producers in those markets, but it also allows us to access more patients and broaden out the access and coverage of those markets again opening up new opportunities for us to expand in an emerging market, so I think it’s just a small example for our products like Ventolin, which is 30 years old where you can still make very significant changes while aligning the supply lines with the end customer and making sure that you are really focused on where the value sits in that chain.

So I think overall again a little bit like you have seen on the SG&A side, cost managements and OE savings along the lines of the sort of programs I’ve described offsetting our current drag that we have in the cost of goods line of the mix of the business as it’s changed over the last two or three years. Clearly as the pipeline comes through and those sales go to the U.S. or Japan, then that mix is likely to change, but this is a factor that we need to continue to build into our plans to make sure that we are covering the costs and the impact of that.

I think the shorter term issue is clearly being volume where in a declining sales environment particularly one where sales have declined this quickly as they have in Europe, moving the manufacturing changes to respond is quite difficult, particularly when of those our supply lines are 18 months long, and we have seen here some volume impact in the course of 2012 some of that was still flow into 2013 as we unwind some of the impacts from this year, but one of the reasons we want to shorten our supply chain is to allow us to be much more responsive to these sort of pressures going forward.

So overall, the savings that we’re expecting to make out to the new program will total £1 billion by 2016, that’s going to be phased as was in deed where the savings are to the OE program. I think like that program, you should expect us to both invest as well as release to the bottom line typically, our patent has been roughly 50-50 in terms of those benefits, and I would expect that this probably a little bit more concentration on the investment side in the short-term as we get ourselves ready for the pipeline, but we do expect progressive delivery of those benefits into the mix, and we will allow those to flow through as we see the opportunities. But this will take a number of years to really reach full run rate, we think that’s the right thing to do given the number of moving parts that we’re having to manage.

So on the financial side, as I highlighted earlier, we set out a couple of years ago, some targets to reduce on that funding costs by a couple of hundred basis points, we’ve delivered that this year, a year earlier than we planned and we’re continuing to look at ways of improving that and it’s worth remembering, we’ve taken the net debt of the company out from £9 million to around £14 billion, the interest charge this year is pretty much the same as last year in 2012 relative to 2011, really reflecting the progress that we’ve made in the way in which we’re funding the Group.

Equally on the tax side, we’ve delivered 24.4% this year again, ahead of 25% target a year earlier that we set out, and this really is a function of the continuing efforts we’re making to restructure the way in which the Group’s operations and its financial structure are aligned. And you’ll see in the release today, some details of some of the moves that we’ve made to bring substantial amounts of our intellectual property back to the UK, and that was done during the course of last year, that has contributed a little bit in terms of how we have ended up this year, but it’s really about the story going forward. Why we believe we can take 24.4% from the 2012 into 24% in ’13, and we continue to look for ways to improve that going forward as we now have a significant amount of our pipelines sitting in the UK available to access the Patent Box and some of the taxing symptoms around that, which go with the investment and the activity we’re also bringing back to the UK, so that we believe that is the sustainable position going forward and one that’s going to contribute materially to the bottom line in the future years as the pipeline delivers.

We bought shares of 2.5 billion back, and next year, we’re looking again, like last year, to start with a similar shape of a range of 1 billion to 2 billion, we’ll see how we progress during the course of the year, but that will very much depend on where alternative investments might come, maybe they don’t in which case we’ll work our way through the arrangement. I think it’s too early to call that, and we’ll keep that under review. And I think that’s very much this the patent that we followed in the last couple of years, so again, for 2013. So I think the other bits of the financial structure for next year is that we should, we were expecting the financing expense to be again broadly similar, core tax rates are identified at 24. And so hopefully, you’ll see that with sales guidance of 1%, earnings per share guidance of 3% to 4% that we are delivering leverage through the P&L, but it’s across the P&L and we’ve always made it clear that we expect more leverage from the financial side and the shorter-term until we see the pipeline beginning to make material contributions.

I think the core EPS that we reported 112.7 just flag also the total EPS of 92.9, when we instituted call, we gave you guidance that there was typically 10 or 11 pens of difference or delta between the two this year, higher than that and really the main difference is a 9p tax charge related to the implications and costs of moving the IP from around the world back into the UK which is driving the tax benefits I’ve just described, so that’s really the reason that delta this year is a bit higher than we had seen previously.

Quickly on IAS 19, which we will be adopting from the January 1, 2013, this as you will recall is really about substituting return rates on assets for the discount rate that you’re using, so increases the cost of your benefit plans restating 2012 takes it for 112.7 to 111.4 to 1.3p coming off that. Our estimate for 2013, is that it will have an impact of about 2.5p on a like-for-like basis that really reflects obviously the continuing decline in interest rates and obviously the impact of the discount rates that has.

So turning to free cash flow, I think I’ll call particularly here the working capital £400 million of contribution to the cash. We continue to make steady progress here, the numbers in days terms during the course of the year, we’ve gotten a number of distorting factors in there from a reflecting and a number of the intangible adjustments we made to brining the transactions of the economic interests that we’ve described, but overall we made about five days progress, and we continue to set up programs inside the Company to deliver steady and most importantly sustained progress, and while we have probably made the most progress in the short term in receivables and payables that has also help manage our risk in Europe, clearly and in terms of sovereign risks, but we’re probably coming to the end of that in terms of when material improvements might receive, and so that real focus in 2012 has been putting in place a series of programs to give both the vaccines and pharmaceutical and consumer manufacturing businesses real end-to-end ownership of the inventory across the Company.

So that we remove the buffers, we remove the sort of interfaces across the Company where inventory tends to accumulate and particularly in the third and fourth quarters last year we saw those programs already dropping quite a lot of finished goods, materials and inventories out of the commercial operations lots more still to do, but that’s really where the opportunity will be going forward.

I think as we highlighted during the course of the year the legal charges obviously have material impact on the free cash flow, but we have effectively funded those in terms of how we think about it off the balance sheet in the same ways we have done the various acquisitions we made during the course of the year. So free cash flow £4.7 billion pre-legal contributing to the distributions of £6.3 billion that we have made during the course of the year, and really the debt increase financing that legal charge, and also the HGS and other acquisitions that we made during the course of the year leaving the debt to £14 billion on a net basis.

So to summarize our guidance for the year 3% to 4% on a constant exchange rate basis of the earnings level and that is the key metric that we are focused on driven off an assumption for sales growth of around 1% gain on a constant currency basis, really reflecting the mix of those different growth drivers, the U.S. waiting for the pipeline and the continuing offset from the exit of Avandia, the OTC disposals, and Cervarix, which you’ll remember the third wave of that came in Q1 2012, is a little bit more of that to come, but even absorbing that we still expect to grow this year. Most importantly, the leverage coming through the P&L, with the financial side contributing more allowing us to continue to invest behind the pipeline, behind those growth drivers, and make sure that we’re building the right and most sustainable platform to deliver earnings per share growth in the future.

With that, I’ll hand back to Andrew.

Sir Andrew Witty

Okay, thank you very much Simon. And let's open up for questions please.

Question-and-Answer Session

Francisco Ruiz Martin – Exane BNP Paribas

Good afternoon Francisco, Exane BNP Paribas. Few quick questions, first on emerging markets, could you tell us what is behind the success and the quick performance of this division this year, is it due to the restructuring your earnings last year, or is it due to a certain measures, I remember a few years ago you presented a slide where we saw a curve in India you have decreased massively the price, and at the same time you’ve also kind of strong increasing volumes. My second question is on the recently launched products, could you share with us, if there is some new dynamics on new products there, because they were present still 7% of your total turn over? And third one, on the restructuring, could you share with us, could you give us color on what’s new could be done at Glaxo on the restructuring simultaneously in Europe. No later than yesterday some of your competitors suggested that, if you want to keep some pricing power in Europe, you need to keep some operations and some business like in the research high value added business. Thank you.

Sir Andrew Witty

Okay, great, thanks. So in terms of the EM success, first of all I am very proud of the performance there, because we continue to see very robust growth, we were at the warble at the beginning of last year with the Arab Spring really in the Middle East. But since then we've seen a very strong recovery, what are the key observations, first of all, actually it‘s a very broad base, so every region in REM business portfolio has had a very continue to do very well, Latina, Middle East and Africa, even the least developed countries growing dramatically, very strong China performance, very good India performance, very good Russia performance actually. So across the board, we’re seeing all the regions move well, and in a funny away, it’s very analogous to consumer. Consumer is also delivering very broad multi-region, multi-category growth, which I’m very encouraged about, it feels very sustainable action. So that’s the key, how is that happening again, again we’ve seen across all the key products, I think in the top 15 products in emerging markets, the only product that didn’t grow last year was Cervarix, because it was rolling off some big tenants, every single other product was growing.

So it was very deep growth, within that, you’ve got products like Votrient, going great, we got products like Synflorix and new products going great and you’ve also got Ventolin [Zina], and when was the last time we have talked about Zina again, chipped in about £10 million pounds of growth last year. And so all the way through that portfolio, what does that reflect; I think an increasing ability to drive access of every product. So where we’ve got all the products we’ve used price typically to drive our way into another tier of the marketplace from where we were before, we’ve talked about that many times strategically as a goal. And I think it remains quite a key differentiator for us versus most of our peers, and then gradually the emerging markets are doing for us better and better job with the new products, so the innovative product, we’re starting to capture significant opportunities we go through.

So I think there is every chance that will continue. It’s just to reflect maybe, yeah, I think this is quite good thing to reflect you guys, some of you know, we’ve restructured our interface between R&D and commercial franchise groups, which is essentially the mechanism through which we get from the countries, input to R&D of what they need and through which R&D communicated the countries what’s coming through the advanced pipeline. Historically, that’s been dominated by U.S. and Europe and within Europe, it was dominated by the UK, Germany and France. We have seven franchise groups, I think it’s a very interesting reflection on how we view the world, the UK, Europe no longer sits on any of the franchise groups, the UK only sits on one, France, Germany and Italy sit on two or three each, Japan is on all of the them, America is on all of them, Brazil is on all of them, China is on all of them, it tells you everything you need to know about what we think about the future, and the whole way in which we are thinking about this we start to see increasingly significant opportunity to layer on more and more innovation opportunity on top of that access strategy and the key is can we do both, and I think that’s really it’s encouraging so far, but that’s really the key executional challenge for us in the next few years.

So that’s the first one, in terms of generally new launches, as I said repeatedly we’ve had lots of new launches, but they have generally being niche specialty products. Actually as you rightly say, they now account for about 7% of total, so given that there is no single big product in there almost several big products in there not bad. So what are the lesions we are seeing?

First of all we are seeing great performances in short, if you look at things like for Promacta in the U.S., you look at things like Votrient particularly since the approval of sarcoma very strong performance, if you look at the performance actually of Votrient across the world, if you look at Volibris in Europe, very strong performance. So you see very good performance is generally lessons learned every thing is taken about a year longer than you’d expect from old models, so all the curves are about a year to the right. It’s about patience, resilience and kind of sticking added through that first year or two, seeing the same with Benlysta everybody expected big bangs at the beginning we’re seeing a nice steady click forward through Benlysta in the U.S.

So those it’s all about being a little bit more patient than we used to be, why well because the whole world is more cautious not pricing that access point of view. All systems almost everywhere in the world have got more gritted than they used to have. There is more inertia in the system that they used to be.

What we’re finding is, we are needing a fraction of the resource we used to need. So much lower levels of sales forces, we are not talking about specialty products launched in America with less than 50 people per product, a very dramatically down on where we would have been historically, all because of the change in the structure of buying patterns all because of the change in structure where decisions are being made particularly accelerated, not accelerated in parallel to the ACI right. So very different from that point of view, and that actually we are seeing great performance again in the U.S. of businesses, which were restructured first to award a new ways of operating, so oncology specialty business, vaccine business, all performing very well which is why we got high degrees of confidence with the primary care business, which is now also reform the same way ready for the pipeline of products coming.

In terms of creative solutions to Europe, well, we are working on it. So I think we are as I said it in my introductory comments, we are very we view this as a strategic shift and therefore we want to explore whether or not there are strategic options for us to resolve, we are going to do the obvious things we are doing the obvious things in terms of right sizing, scaling and all of the rest of it. We have very few R&D centers now in Europe, we have Britain as a very material R&D center, we have the unit in France and we have a unit in Spain, the unit in France is 1 DPU and the unit in Spain is neglected disease research unit. Those are the only two research facilities we now have in Continental Europe, we are manufacturing in may be four, five countries but not in all of them. So over the years we have relatively small amount of that it’s been absolutely no evidence to me that’s made any more easy or difficult to get things done in Europe it’s just difficult it’s not a lot of obvious examples to me that others you got lots of footprint have any easier, so I don’t think that’s particularly relevant and what is relevant is you have data and the key to the future for Europe will be who can get the incremental access point versus everybody else, whether that means a little bit more price or a little bit more speed or a little bit more open as a volume right, in terms of the opportunities they all comes down to data generation, production of the right persuasive data, but all of that is going to be against a relatively contractionary world.

Right, because I think there is very little evidence to support view, which says that healthcare budgets are going to grow significantly in Europe in the next five to 10 years, I just can’t see how you get there from the macroeconomic situation. So if that’s the background, then it’s all about trying to find that extra point of opportunity within what is a pretty difficult box, that’s why we need to keep looking to see what might be alternative approaches. We’ll see as we go through the year, and as I said, some of those things were already underway, like looking for partners, whether there’s anything more exciting than that, will have to wait and see, okay. Andrew?

Andrew Baum – Citigroup

Thank you, Andrew Baum, Citi. Three questions, first for Simon, you’ve taken a very significant charge £420 million in order to relocate the intellectual property. I’m aware that the revenue is becoming increasingly transparent and have you think about the tax implications for the business. So my question is, given you have now taken this charge, would you like to give us some further guidance that whether that tax rate of GSK long-term is going to go below 20% once the patent box is fully enacted? Second question is to Andrew, if the Supreme Court do not take your case versus Humana what is the risk in terms of liabilities given my understanding under the third appeal circuit decision is your liable for double damages for the double damages for the (inaudible) fraud cases, so perhaps you could help me understand how that works if the Supreme don’t take case, and then the final thing is on continuous manufacturing, could you just give us some idea of when continuous manufacturing for both your existing and new products is going to be introduced, because my impression was its seems a little bit far out in terms of when actually starts to roll off the line and into the marketplace?

Sir Andrew Witty

Let me tell you the last two, and then I will hand over to Simon. I'm not going to comment on any of the cases because as always, we feel particularly today of all days when we've just released our results, we feel fully provided for undisclosed around all of our legal situations. So there is actually nothing to add from what we've got, and as you might know that, I think this might have been the first ever GSK annual results, where there were no new legal observations in the report which if you haven't got to that page, you should have look at it and delve on it and enjoy it, just as I did yesterday. So but nothing to add on that and I think it would make no sense to go further into it.

In terms of the continuous process manufacture, we've already started to deploy so the first units were payment stores last year. The first pipeline assets which have been developed to call are moving through the process. So not the lead ones, but the next wave coming through, for example, in the rare disease space, particularly those have been focused on. But we’ve already started to deploy the first production versions in the U.K. factories we’ll continue to now do that, as we go forward.

And actually I think the biggest level will be so these two, there are really three big areas one I won’t go into today, but two big ones I’ve touched on, one is continuous process manufacturing, the other is enzymatic reaction, replacement of synthetic chemistry. So I’ve said we’ve already started to deploy that as well, and we will continue to implement that as we go through the next few years.

Simon Dingemans

Tax, so I think on the tax front, clearly we wouldn’t have taken the charge or put through the restructuring unless we thought that was more to go for. I’m not going to get into any further guidance than the one we’ve for the we’re giving in other circumstances as well, but we think they are all good opportunities, but remember not everything you put in the U.K. is going to get in the patent box, we’re still going to have a very big U.S. business if the pipeline come through so the tax rate there will remain relevant and so you have to look at the overall mix as to how far we can go, we have already made quite a lot of progress, and I will guidance a year ahead as we can see that within uncertainty, but back to where we started we wouldn’t have done it, if we didn’t think there is big opportunity.

Andrew Baum – Citigroup

Yeah great.

Graham Parry – Bank of America Merrill Lynch

Thanks, Graham Parry from Bank of America Merrill Lynch. And first on your drinks strategic review in the press release, it reads more of a geographic expansion that you’re leaning towards rather than divestment, are we reading that correctly and if that’s the case if you sorted to do in analysis you had what incremental spend would be required to achieve that.

And secondly in the release in your, see your initial comments it talks about margins improving over the medium term, just wondering if you could define medium term is that two to three years and previously you’ve talked about potentially capping margins at about mid-30s, are you still thinking that’s an achievable level given the environment you are facing in Europe. And then on the £1 billion savings, could you split that out a little bit more between how much is R&D, how much is Europe, and where the R&D savings come from and if your new manufacturing technologies included in those savings of the enzymatic manufacturing for example.

Simon Dingemans

Great. Okay. So as far as the drinks is considered, I think you are probably slightly misread in the – there is no signal in the press release that is going to be one thing or the other one, what the press release signals to you is it currently a geographically ban. I think you can interpret from that either, you might conclude we should invest significantly, trying to globalize or maybe somebody who’s got global distribution capacity a better owner, so you could end up either end of the parameter based on that observation, so you shouldn’t necessarily read anything into that specifically.

As far as margin is concerned obviously we have moved to give you EPS guidance we are not going to get into detailed discussion of the various line items, I think the bottom line for all of this in the short term, we are not really expecting anything dramatic to happen up in the margin structure, but equally we are not going to spend another year talking about 20 basis points here today, so we thought it probably better today all of our lives easier and more enjoyable and just focus on one number of the bottom.

In terms of what I defined as mid-term I would say the 3 to 5 years is mid-term in this industry, I continue to have exactly the view I’d always held which is the margin as the function of sales growth in this business, and the pace of margin expansion would correlate with sales growth and the more the sales growth comes from the higher margin U.S. Japanese business is the faster role of that we’ll play together.

So for me that’s really the piece. Is it possible we could end up in that situation of 35s entirely possible. And obviously it’s something that we want to strive towards over time, but in the short-term we are focused on delivering this EPS growth for this year, and retain in the freedom to maneuver, it expands up and down the P&L to get the best possible return rather fixate on how do we get within 20 bps or 10 bps of any given number, which I think it actually ends up being totally the wrong tail wagging the dog.

R&D break up of the strict no, we’re not going to give you that sorry, and in terms of where is the R&D saving are going to come from. That would really come from modernization of infrastructure actually, so going from some of the again we’ve taken a lot of infrastructure out. We now have the opportunity to modernize as particular as we adopt some of these new technologies, so a lot of it will be around modernizing infrastructure, reduces some of those costs, reducing cycle times, all of that kind of things.

So we think R&D, I won’t give you a big breakdown, but R&D is the smallest part of that total billion, it’s more manufacturing in Europe.

Graham Parry – Bank of America Merrill Lynch

(Inaudible)

Simon Dingemans

The first part of it all, but not all of it. Next question, yeah.

Unidentified Analyst

Thanks. (Inaudible) from Morgan Stanley. Just a few topics, Andrew, we’ve seen one of your competitors in the UK trying to launch major products while restructuring and not doing a very good job of it. I was just wondering how you’re thinking about that, given the importance with compared to 2% of big launches in Europe or should we be thinking about it as other companies to get a good price in Europe for the reference opportunity internationally. Then on to vaccines, could you just refresh on that, when you look at the portfolio, the technology that you got in vaccines, any gaps that you see I think in the past for a few years you did open to potentially entering JVs with a lot of vaccine players. And then lastly just on diabetes, I think your introductory remarks hint to what you might be thinking, the diabetes base is getting more competitive, just whether you feel you’ve got that resource to potentially launch and support? Thanks.

Sir Andrew Witty

Yeah. So in terms of the last one first, albiglutide diabetes we’ve begun a process of looking for commercialization partner, particularly essentially a co-promotion partner for the U.S. and either co-promotion or a marketing partner in Europe, so that processes is underway, we’ve been upfront about that. I think it’s of the lead pipeline that is clearly the one drug where we don’t have established infrastructure sufficient scale, and we don’t necessarily have the portfolio to really playing there on our own. So we want to explore whether or not there’s a good proposition there with somebody, and actually judging by some of the interest that it looks like there probably is, so that absolutely we are looking at vaccine technologies. One of the things we really wanted and we’ve been looking at for a long time and we secured last week was a low-cost scenario of vaccine opportunity particularly for the developing world, and that’s why we did the deal last week with BioLease, so actually feel like we plugged what was really the last significant gap within the mix. The rest of it we continue to do small acquisitions of technologies here and there and you will see but those tend to be a bit below the radar, but end up being important, but beyond that, I think we are in decent shape.

In terms of respiratory, yeah we are very focused on that question, which is one of the reasons why I mean you see absolutely no reference to restructure in the U.S. in this conversation today, because it’s all about the U.S. getting ready to launch products and clearly the front-end of the commercialization curve has to be about America, so America is all about stable locking what we have got, locking what we are doing, no more changes, no re-organization exactly to your point.

Europe, yes, it’s a risk but what we are doing is what as I mentioned some of the job in Europe is to reallocate as well as reduce and respiratory as a beneficiary of the reallocation, so actually the respiratory organizations in many countries will be getting strengthened rather than necessarily reduce, so I can’t say there is zero risk there, but I also recognize that although we should get relatively Europe is a relatively rapid primary regulator if all goes well, it’s a very slow price negotiator so we have a reasonable amount of time before we practically have the challenge in Europe, and we are not everywhere, but in large number of places the respiratory business will not be affected negatively or that should be affected positively because we obviously that’s the one of the key pieces of future opportunity everywhere in the world, but including of course Europe. Next question?

Alexander, two probably may be six. Go ahead.

Unidentified Analyst

Okay. Okay, so two…

Sir Andrew Witty

You’re going to ask the same question.

Unidentified Analyst

Promise that it will be different.

Sir Andrew Witty

Okay.

Unidentified Analyst

One question just on run rates, in terms of different geographies, firstly, on Europe would it be fair to say you are talking about 2013 that we are going to have pricing mid single-digit, and then 0% to 1% volume headwind, so the 6% down that we saw in Q4. That is a possible run rate for this year. And in the emerging markets there was an acceleration in Q4, but then there is the issue that you had some vaccine tenders, what were run rate actually look like there for this year plays out, and would that be a fair run rate?

Simon Dingemans

So as far as again I don't want to get into the huge amounts of very specific kind of guidance, but clearly for Europe we expect some in mid-single digits. As I said to you, we've seen basically over the last year Europe for us B+ plus 10 minus 1, that type of territory. Obviously, we’re focused on making sure that volume moves backing off where exactly why I said, I think we should be moving results back into some areas, not just reducing. So our goal is to improve the volume profile in Europe, there’s not a lot I can do about some of those price pressures, although at the moment we would expect it to be a tad lower than it was on average last year. Given is what we think ought to be a little bit better outlook for Europe initially, but still negative, right.

As far as the emerging markets are concerned, I don’t think Q4 run rate is a run rate you should project, absolutely not. I think you should continue to expect lumpy quarters coming out particularly from Em, because it is particularly influenced by vaccines. I do think that high single-digit, double-digit annualized run rate is – I think that is a reasonable kind of place to be looking for as we go forward.

And if you look at the way in which many of our peer group companies are falling short of that, I’d be very happy, if we can continue to click along at those sorts of rates. But to do that, we need all those geographies to keep running in the way I described, we need to keep winning vaccine tenders year-on-year et cetera, et cetera. A good news is I think we’ve taken a clear view on things like price cuts in India and China, I think they’ve come out more or less where we have no surprises, so we’re not coming into the year feeling like there has been a big negative surprise in any of the Em effect, pretty much the opposite. And that leaves us reasonably confident, and I think around being able to maintain a decent clip, you’ve heard me say before, there will be a disaster of currency devaluation in the queue somewhere in the Ems, just I have to hope it’s not a big sum.

Unidentified Analyst

The other one I want to ask is R&D, I got that R&D to be flat this year, it is the cost savings within R&D, I mean it could stay flat for a while or should we think that that’s maybe one-off and it’s still going to creep up?

Sir Andrew Witty

Well, I think we should, so R&D has done I think a phenomenal in GSK of delivering huge output for essentially a full in investment, because within the overall R&D number, we’ve seen increases in areas like dermatology, HIV, consumer vaccines and basically all funded by reductions in pharma and most of the pipeline has come from pharma. So you’ve got a very significant achievement there. I don’t think that’s going to continue, and I’m not pushing them to make that happen. So my brief to R&D now is don’t over-fixate on reducing cost, totally focus on delivering pipelines, all about quality of pipeline and sustainability of pipeline. Now they will of course, continue to do that at a sensible level, we are not out there looking to disrupt R&D. We feel like we’ve got a good model, and I would say that while I think as Simon does, that there is not going to be anything very exciting going on around the R&D lines. I’d tell you right now, if Moncef and Patrick came to me this afternoon and said Andrew, we need £200 million to do project X, I’d say yes, right, and I wouldn’t lose a minute sleep about making that decision, even if it meant the R&D bumped up, and I think that that’s exactly the right way to think about the business. So no big drama, nobody should be expecting this to get into a steady growth. It probably is going to be more or less where is, but it might bump up and down if it does, it will be opportunity driven. and I think that’s the right signal to send to the R&D organization.

Unidentified Analyst

Thank you.

Sir Andrew Witty

Alexandra, do you have another one.

Unidentified Analyst

Three.

Sir Andrew Witty

Good.

Unidentified Analyst

When I look at your second slide, which has put these categorized your businesses into four different boxes. so that seems to, that seemed to neatly fit into the sort of good old ECG metrics of the stars and the dollars and the cash goes in the rising stars, and the way you touch on some of the potential strategies for what seems to be the dock in the portfolio. Europe seems to also sort of confirm that this metrics, the good old metrics actually shape the thinking. so is Europe actually at risk to have some true doc features as a no gross and potentially at risk of no longer earnings across the capital as Axit maybe the only solution. so albeit that there was just relatively unattractive, but that’s still the good return business. Second question is for Simon, what, how have you amended your planning process at the end of last year, so that this year we will – you can allow that you’re not going to be surprised by an environment that is more negative and you planned for. And the third question is I’m really surprised that nobody has asked that yet is what catalyst are you most nervous for in this year?

Sir Andrew Witty

Okay. So in terms of Europe, for me it’s our own growth. So Europe is a very high return business actually, it remains a very profitable business for us, a good business for us from that perspective, and obviously, it’s a very significant volume business. so even on a bad day, you look at Europe and you size if people had businesses this size with this kind of structure and this kind of cash production, you’d say this is a great business, the challenges around growth. so we know that almost every other part of GSK, not withstanding, we make a huge mistake, or there is some unforcing torpedo that’s said to go way is set for growth.

and Europe is that one place where it’s very difficult to get superconfident and that you can create scenarios. But if you start your analysis in macroeconomics, it’s quite hard to convince yourself that Europe is going to become a strong growth environment, and that is very hard to do that. And so I think it isn’t, oh my god, this is a room through which we’re going to believe today, which I think as you’ll kind of, you must exit, it’s most subtle in that. it’s more around all the strategies where you can absolutely hit the suite spot of maximizing your overall growth position for the company by doing things differently in Europe. I’m not maybe accessing the pipeline without any incremental investment by using partners in the albiglutide scenario.

So that’s one scenario. it may be other more dramatic approaches, but that’s the focus is around how do you, all the smarter ways to deal with the challenge of Europe been a low-to-no growth environment against the backdrop of 80% of the rest of the group being a very healthy growth proposition. and what are the pros and cons of how you do it, if that’s really the case not the return model is fine, it’s much more that impact on growth, which in reality, this sector is a growth rated sector. and we want to make sure that we’re really asking the tough questions and maybe there’s nothing we can do, and maybe the best you can do is organic, supercharged housekeeping, which is what we’re doing, plus sensible partnering and investment minimization. And that’s it, maybe that’s all that’s available. but before we conclude that, we want to make sure we’ve covered the broad parameter and not excluded things, just because nobody has never done them before. Okay, planning?

Simon Bicknell

We made a number of changes actually back in 2011 in terms of how we integrate the plans across the company. I think there is kind of two elements of this, which is how you develop the plan in the first place and then how you monitor it. And so I think what we took away from last year was really a monitoring question of how do we improve the visibility, and that was quite challenging in the middle of the year given the way in which some of the austerity measures we’re playing out. But we now have improved our feedback loop, so that it’s not just quarterly, it’s obviously multitimes during a quarter that would check in that we’re on track without burdening the business, because you can kind of suffocate the business with re-planning if you’re not careful. But we can get that now through the finance organization very quickly, because the finance organization is much closer to the business than it was historically. So there is much better monitoring going on.

But fundamentally, it’s much more about the drill down of the plan process we went through at the end of last year to say, okay, what is much more real, what is the realistic target that we have from the different regions, how is that built up from a product-by-product basis, and that’s not something that’s being done before at that level of detail. Where are we allocating resources from the return’s point of view back to the European differentiation we just talked about.

So I think that’s the reason we feel more comfortable about the position we’ve laid out for you in terms of 2013 is that we’re starting with a more robust place in the first place, and we have better alarm systems in terms of what we then might need to do to reallocate.

Sir Andrew Witty

I think that’s why it’s fair to say we drilled much harder on the downsize.

Unidentified Analyst

Yeah.

Sir Andrew Witty

And if I think back to 2011, I think probably that budget was more or less locked in October, November and the European budget for GSK 2013 was locked last week. So we really, whereas the last year, we carried in some assumptions, which we’re already on a day before we started. this year, we’ve been a lot more cautious in terms of trying to load in what we think of the downsize, we may not be pessimistic enough who knows, but I think we’ve tried much harder than last year. and by rating until a very, very, very last minute to try and maximize all in all if we could, which is sort of obvious in hindsight. but clearly, when you not really, historically Europe has always been something very exciting, but it’s always been reliable. and then suddenly, you get a change where it really significantly stepped out of this trend for us that clearly is not something we want to happen again. so that focuses have been much more intent.

Unidentified Analyst

(Inaudible)

Sir Andrew Witty

No.

Unidentified Analyst

(Inaudible)

Sir Andrew Witty

Finally enough, are confident – actually we’re slightly optimistic by interesting that. And so if we’ve done in the other way, right, if we carried on the old practice, we probably would have had a lower number for Europe, not for the group necessarily, but we’ve probably been slightly more pessimistic in October and beyond now, I wouldn’t say it was materially different, but a little bit different.

Simon Dingemans

In the checks that I talked about to give you how accurately are you forecasting and are you delivering in and I think we feel a lot better about the visibility we have compared to the middle of last year when not basically disappeared?

Sir Andrew Witty

In terms of catalyst’s nervousness. I mean one level I’m nervous about the mole, right. but I think for me, it really is a story of the portfolio on the pipeline, and I said what makes me most nervous despite five years of talking about it, is that people watch as that you guys don’t look at the portfolio, and you look just at one asset. so the whole strategy of the group from the first day I took over was this is not about recreating a blockbuster dependent business, it’s about chronic rate of portfolio of assets, which then complement the portfolio of geographies and portfolio of businesses.

we’re right on the verge of doing that. and the only thing that makes me nervous is that people obsess watching one event in a portfolio of events, because I think that would be, is a complete misread of how we’re viewing it. so we’re viewing this as the first six, if you will definitive readouts will start to happen at regulator’s review. we’ll get two huge readouts around those three and the repletive, which we’ve always signaled a highly binary and risky, but nonetheless pretty interesting to get. and then we’re going to get 13 other sets of data rolling through the year, ‘14 I would say, the date rolling through the year, which underpin the next step of drugs.

and for me, it’s all about what is the total composite yield from all of those catalyst, that’s my nervousness is, can I generate or will the Company generate a good yield. I’m nervous that other people watching us will fix on one event and it will be a big mistake, because that’s not what we’re trying do, it’s never been the goal, it’s always been about chronic produce the portfolio, and I hope that as we go through the year, we can keep everybody focused on the real goal, which is the yield from the portfolio rather than one particular event. but every single, there is nothing more exciting right, that knowing that you’re going to hear tomorrow whether the trial work, the drug goal approved or it didn’t, and some days, it goes your way, and in some days, it doesn’t, but it makes it interesting. Next question, yeah.

Mark Basile – Barclays Capital

Thanks. It’s Mark Basile from Barclays. I have four questions. the first questions, the first one is on Advair in the U.S. I wonder if you can help us understand the current dynamics of that franchise. You really have a positive price effect and a mixed volume effect. is this because you’re giving up the low sort of valued business to price cutting competitors such as Laryn and Symbicort, and if you can sort of guess in terms of assuming pretty early successful how the pricing going to make that franchise could change going forward. The second question is on pricing in Europe. I wonder if you can help us understand of the minus 5% drag, what proportion is coming from austerity measures or industry measures and what proportion is coming from pricing pressure from the competitors. I’m thinking here, particularly with the respiratory, we hope that you understand what happened in Germany on Seretide. I don’t understand what’s happened in other countries. I’m just wondering whether a component of the drag is based on value brand, reference pricing of this approach and I’ll just start unless going forward. The third question is on your U.S. sales force, I just wonder if you could comment on the relative productivity of the sales force post the changes you’ve made in multipractices is a question I don’t think, if I’m difficult to answer. And the last one is just on the monomer assets. I think the six month action days have passed, I just wonder if these drugs have been reviewed with the standard review by FDA whether additional submissions have treated extensions to, this is finalized in most of assets that’s BRAF and MEK inhibitors.

Sir Andrew Witty

So on that one, they are both under standard review. In terms of sales force productivity in the U.S., actually all the metrics we’re seeing show improvement or better on things like service levels, customer engagement access, huge increases in access to physicians who didn’t use to see us. Access to an accounts who never saw us before. So integrated systems as an example, and significant improvements in product performance, and particularly in those areas where we have not accessed. And we’ve seen very, perhaps no evidence of any negative from a tool actually. As you will also see, our U.S. business is stabilizing, right. So it’s stop rolling and it’s beginning to look a bit more encouraging in terms of its overall performance. And I think all of that together the performance of Promacta, Votrient and other newer products, also I think reflect nothing lost in terms of the sales force changes at all.

So I continue to believe, I know there’s an awful lot of people who want to see this sale. I continue to believe this is totally the right things we’ve done in the business, in the industry, and it sits absolutely, perfectly with way the Affordable Care Act is going drive changes and behavior in the volume side of the healthcare economy. And I think it’s met with a lot of positive engagement, particularly from the integrated healthcare systems, which now are increasingly dominating in leading edge of the market.

So I think from that point of view, it is fine. EU pricing, and last year, there was probably about two points, which was kind of Seretide special pricing, almost all of it coming out of Germany, and almost all of it in the first three quarters of the year. Remember that the German price got referenced to about 24 other countries. So unfortunately, it’s one of those gifts that keeps giving, and keeps turning up in different geographies, simply because of the effect in Germany and personally I think this Intra-Europe reference price is probably the single most dangerous piece of policy that exists in the European environment.

As we go forward, and as of now, we’re not seeing a lot varied, so if you look our price pressures, you see general price which is everybody. And you see parallel trade price effects. So there is a quite a bit more parallel trade, also some theories about why, one of which is that because governments aren’t paying some pharmacies and wholesalers, maybe they’re trying to liquidate assets on a cash basis, which allows to trade more than they would normally have done who knows whether that’s true or not, but it’s a possible theory, but that costs us something. and then the increased generic subsidization, which is not a Seretide issue, but an old product issue. so as you know, GSK has had for a long time and pretty well actually with quite a big tail in Europe and that has come under more pressure in the last two or three years as you’ve seen more accelerated generic substitution in France for example.

As we go forward, I think we will see more price pressure on Seretide. it’s now the biggest or the second biggest brand in Europe. There are going to be mass generics. it’s going to be sporadic generics and I think it’s entirely possible that in return, if you will for maintenance of big volume positions or ends up being some price negotiation, I wouldn’t be at all surprised to see that and it’s one of the reasons why again, we don’t necessarily see Europe has been a very vibrant place, because Seretide itself will attract some of its own pressure. That isn’t a terrible deal for the company, because obviously, if we maintain a bulk of that business on our own generics and that’s obviously a good result even though it hasn’t got necessarily the growth.

As far as Advair dynamics are concerned, sort of the price effect obviously. there is a mix effect within the trends and there is a strip size effect all of which are growing positively. so we’re seeing better value of mix of the trends we’re seeing better value of strip size and of course, price is there although as you all know a lot of that list price gets knocked back down through the discount structure. You’re absolutely right, we have less business today than we had previously in the very deep discounted federal markets, which are now running really, really dramatic discounts.

and so you lose turnover. you don’t lose very much on the margin, and actually you’ll see that in two or three places in the U.S. So you’ll notice none of you really look at this, but if you look at something like Levitra, we essentially walked away from the whole class of federal contracts, had a big maybe a 130 million on the top line, basically zero on the bottom line or close to zero. So you’ll increasingly, we took a view over the last 12, 18 months that we were going to not be chasing that business unless it brought with a decent return. and for sure, that’s happened to some degree in Advair, so yes to some of that going on.

In terms of what we’re seeing in the general strip market. we’ve seen a sustained acceleration in the combination market over the last seven, eight months. we’ve seen our shares hold steady and more importantly, we’ve seen the dynamic share stabilized. so what does that mean, it means that the Laryn’s dynamic share, Symbicort’s dynamic share are plateauing, Advair’s share has plateaued, holding on to a much higher share than we held on to in Europe, looks like we’re moving into that stable, this is what market is going to be, that’s good for us before hopefully the next generation of products come, also very good for us as is, we’re starting to see this market grow again. obviously we’re a very beneficiary of that. So we’ll see how this year plays out, but I think I think there’s some quite reasonable calls for optimism for us on the U.S. respiratory market.

Unidentified Analyst

(Inaudible)

Sir Andrew Witty

Yeah. I have nothing to say on that. let’s take on day time with the new products. Thanks. Yeah, please.

Mark Clark – Deutsche Bank

This is Mark Clark from Deutsche Bank. Just you have us a little bit warning on the first quarter revenue growth, because of the vesica issue, is it likely that we’ll see quite a little volatility on the earnings line through the quarters, because I know there’s some quite large one-off gains in Q4, if I recall correctly, the same is true in Q2 or will you be sort of seeking to just move as it where through the year. and the second question is about emerging markets and it’s about Duncan minimized group, what proportion of the emerging markets business does that now represent, it’s obviously wonderful as that sort of corporate asset in terms of reputation and so on. Is it actually growing faster than the overall emerging markets group and what proportion is it up to now? Thank you.

Sir Andrew Witty

So as far as the least developed countries, it does grow faster than the average. and it is a very small proportion of the total. so it’s less than, I think I’m going to say it’s less than 2% or 3%, the Ems, it’s a small part. the Ems are dominated by Middle East, India, Latin, China, so the LDC group is small, very fast growing, doing a great job I think actually, but not a material element of the overall Em business. Simon?

Simon Dingemans

On the quarters, I think a kind of the principle issue takeaways we don’t manage the business, the quarters, and we don’t manage the cost base of the quarters, as we did this year in 2012, we’re holding quite a lot of cost in the business to support the ongoing growth drivers as well as get behind the pipeline. and so as the revenue takes that comparative hit in Q1, I think you should expect to see quite a lot of pressure on the margin as a result, which will then roll out as you go into the balance of the year, and I think just to pick up a point on the emerging markets that we touched on earlier, remember that is also quite a lumpy business even in its ongoing mix.

So the visibility we have obtained today would suggest that Q1 on the emerging market side is kind of relatively thinner than last year, quite a lot of that volume shifts to the second half of the year from a trend point of view, say that’s sort of doubled impact of managing Q1. But we’re not going to pull the cost back, just because of that, we’re going to continue to invest.

The rest of the one offs that we’ve highlighted, and I think as I said in my presentation. yeah, there are one-offs, because they’re lumpy. it doesn’t mean that we’re not continuing to look for similar opportunities and we put those in the overall positive value that we’re releasing from the company that we can reinvest or drop to the bottom line. And they again will not be managed to the quarters, though come when they come.

Sir Andrew Witty

And obviously, that’s all taken into account in our overall wrap up guidance. With that, we’re going to bring it to a close. We’d certainly welcome any more conversation over coffee outside. but in the meantime, thank you very much for your attention. Thanks.

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