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GlaxoSmithKline plc (NYSE:GSK)

Q4 2010 Earnings Call

February 03, 2011

Executives

Eddie Gray - President - European Operations

Moncef Slaoui - R&D - Global Operations

Patrick Valance - Pharmacy R&D

David Pullman - President, U.S. operations.

David Red fern - M&A operations

Stifle - Chairmanship

Simon Dingmans - CFO

Analysts

Gbola Amusa-UBS

Mark Beards Goldman Sachs

Graham Parry – Merrill Lynch

Frasier Hall- Babenberg.

Kevin Wilson – Citigroup

Alexandra Haber-JPMorgan

Operator

Just wanted to slightly unusual bits of information I want to share with you, the first is just to let you know who is here with me today because you’ll see there are one or two people in here who probably don’t quite look like Investors and Analysts. Although, I can assure that I assure you that you all own GSK stock. So, not in any special order but just to let you know who is here because they may they’ll be available for you to chat to afterwards in coffee room. So, it’s a great chance for you to meet some of our most senior management and the people who are leading some of the biggest bits of the company. So, if I work down the room, Darrell Baker, who is the Head of our Respiratory Development Organization for all of our advanced inhaled respiratory products and you’ve seen some announcements on that today.

In front of Darrell, Eddie Gray who is the President of our European Operations. Just here I’ve got Moncef Slaoui, who many of you know the Head of our R&D Global Operations. Back into the middle here I’ve got Patrick Valance, who essentially runs all the Pharma R&D within Moncef in front of Patrick, I’ve got David Pullman who is the President of our U.S. operations. David Red fern, who runs our M&A operations and also now looks after our Stifle dermatology business and he is also, will be taking over the Chairmanship of other specialty businesses going forward. Because Simon Dingmans, at the front here is our newly announced CFO taking over at the end of March and of course I’ve got Julian Heslop here as well. Don’t think I’ve missed anybody out.

The second bit of news really effects Julian as you know, Julian is retiring of the 31st of March and I just think right from the beginning just in case he will goes horribly wrong for the next couple of hours. And that would be a good time for me to acknowledge in front of this audience who’ve got to know Julian I think very well over many years that this is his last session, he became CFO at GSK on April the 1st 2005, it turned out not to be an April fool’s Joke. And he’s done a fantastic job since and in fact I think this is your 24th quarter. Yes.

Most CFO’s a GSK measure the ten year in quarters. And that’s because of you guys. So anyway it’s obviously a great time Julian here by my side again today but I just thought absolutely important to mark that milestone both for you Julian and for the team at GSK and for the company as a whole. You’ve been a terrific support for us over the last several years both for CFO and of course also as controller before that.

So, let me get on with the rest of the day, let me talk to you a little bit about what’s happening at GSK. And the way we’ll play this I’ll present really for the first half and then Julian will come and give you a summary of 2010 and some sense of margins and things going forward. Before I get into the slides there on, you’ll see the book is mercifully thin in terms of slides. Before I get into the detail of the slides and giving you some feel of going forward. I do want to pick up on one or two key points in terms of what we’ve announced today in the results 2010 was clearly a very strange year in some ways because you had this continue delivery and execution of the strategy we’ve been focused on since I took over in 2007.

But that has been to some degree masked by the events which have come from outside of the company of the sales line the loss of the Valtrex business obviously to generics and the loss of Avandia to regulatory interventions combined with the washout of pandemic vaccine and Relenza. And then at the earnings line of course the legal charge that we took during 2010 in the two slices clearly has a very big impact on that reported earnings charge. Just want to make a couple of comments particularly about the legal charge the rest I’ll refer to as I go through going forward. Clearly what we’re trying to do at GSK’s deal with some very long standing litigation we’ve made great progress on that litigation over the last two or three years and as I’ve made clear before large chunks of our significant ligations being really put behind us leaving behind two significant areas the Avandia product liability cases and of course the federal investigation so called Colorado case which is being running now for 7-8 years or so and covers a period going back about 10 years.

So, what we’ve being trying to do is obviously get crystallization around those exposures for the company, but just like everything else trying to get closure uncertainty as rapidly as we can and of courses effectively as we can from a shareholder perspective. Now these numbers of course are big none of us are happy about the numbers that we’ve had to announce. But it’s important for you to I think understand how we do this we both Julian and I in particular are very focused on trying to insure that in any given quarter we are providing sufficiently to cover all of our legal exposures all cases for what we believe to be the most likely cost of settlement or finalization of those cases and that’s when from time-to-time as new fax come along we have to adjust our provisioning. Now the adjustment we had to make two, or three weeks ago is driven essentially through a change in trend of the number of cases that we’d seen on the Avandia through the period of August-September, October of last year particularly associated with a lot of press in the U.S. a doubling of advertising by plaintiffs’ attorneys and the actions of FDA during the third and fourth quarter of 2010 in terms of restricting the product that of course create a lot of noise and it created a change in the trend of the number of cases which came through. As we said previously we spend the end of Q3 getting those cases validated if you will are they real aren’t they real is there anything or not and that’s what let us to then have to review our provision at the beginning of this year. We obviously understand that was not welcome news by anybody I think though it’s really important to just put it into context, so the context being trying to close-off litigation in the most efficient and effective way possible and we’re obviously strive to do that as quickly as possible.

We have continued to make extremely good progress in doing that on a variety of cases and we continue to make good progress in the Avandia product liability cases. we’re now in a position where we settled more than the majority of the cases that we are aware of and as you know in the provision we set we put in there an expectation of what we thought might come even cases we work currently aware of specifically we thought an expectation in to trying to pick up any potential new cases that might come along.

But it’s fair to say also that it’s impossible for us to provide for the unknown-unknowns we can provide for what we think is there what we know is there and what we believe is a reasonable expectation. So I just want to put that into context none of us are happy about it but we are working very hard and we do think it’s in the interest of shareholders to get this crystallized and result as fast as possible just as we did with all the other piece of litigation in the second half of last year with all the second quarter last year. And I miss some of that and really get into the business and to tell you a little about what’s going on at GSK. Because despite those headline noises which in many ways although substantial are clearly one-off impacts on the business so I think the real key is to focus on what is going on in the substance of this organization. And the substance of these organization things is going pretty well in terms of the way in which GSK is operating. I’m going to very quickly recap where we’re up to in terms of our strategy what we’re building and then I’m going to give you little bit more depth in terms of some of things which have changed to GSK and why we believe we are absolutely well positioned going forward in what is obviously a super challenging environment.

There is no question that this environment is a tough one and you don’t have to look at every other company’s reports in the last two or three weeks and you get very much the same sense of people being under pressure in this sector and its being that way for quite a while obviously. And what’s key is which companies are going to emerge from this period first and which companies are going to get the balance of tail-winds and head-winds back in their favor having had a period where obviously the headwinds of overwhelm the tailwinds for many others in the past. Now three years ago we set out what our view of the environment would be and bluntly speaking very little has happened that we didn’t anticipate. Some of this happened more quickly and some of it might have happened a degree sharper or blunter but very little has happened that we didn’t anticipate in terms of pricing in terms of the development of the emerging market pharmacy businesses all of those things were very much behind the strategy we laid out three years ago strategy focused on delivering the business which would deliver sustainable sales growth. An R&D operation which would fix the economics of R&D and deliver. Products of value to patients and to payers and a strategy, which would simplify GSK take out costs and allow that costs to be reinvested behind growth opportunities all are focused on delivering a greater return to our shareholders as we went forward, that was the strategy that we laid out based on the invaluable track. If we look today at the business that we have what is GSK, so internal of GSK all sorts of labels, actually what is GSK, and it is a company, which essentially has presences of products in four distinctively important areas of health care.

We have differentiated pharmaceutical products, medicines, and vaccines in the developed market our US and European business and Japan of course. We’ve built up a very substantially merging market business by getting the right prices in to the evolving emerging markets and we either are or we are very close to being the biggest volume supply of medicines and vaccines to the emerging markets of all companies, which is really a striking achievement for a branded pharmaceutical company. Our volumes in the emerging markets either are the largest selling or they are much closed to be the largest selling of anybody in the emerging market. And a very broad vaccine business that we built and of course, we have an excellent fast growing consumer health care business.

Those are the four portfolios of this business really have. As a corporation what we look like is essentially those businesses of growth we have today, where we have been invested in consumer in Japan a developed businesses all of those businesses delivering new growth surrounding a core farmer operation, where the future obviously depends on the pipeline. So we talk about the pipeline and GSK being an option because you have got all of the growth coming from these other businesses, and we are in the centre of the organization is this reengineered R&D operation delivering a stronger pipeline as you have seen today with great potential very much coming to the front of our minds in terms of the timings when these products have the potential to come to market.

That is essentially the business, all of those business rapped in a set of discipline around efficient allocation of capital and resources to our growth businesses, a really strict discipline I am looking from improve in investments and a real commitment to make R&D efficient and to solve the problem, which is oblige to the industry for the last 10 or 15 years. So what has actually changed that’s the kind of the story what we are. A lot changed in the last two and half and three years. The slide just gives you a little bit of sense of that and that obviously a variety of measures, and I am just quickly touch on them, turnover these number exclude pandemics so we are not trying to big up our performance through the pandemics impact of the last couple of years, excluding pandemics sales turnover for the group up from 22 to just over £27 billion in the same period the group lost £5 billion of turnover to generics and to Avandia sales because of regulatory intervention. So that net number of 5 billion actually hides a gross number of 10 billion which shows you the strengths of the organization sales capacity, but it nearly emphasizes the degree of having Toe wins that we have been dealing within the last few years so a good sales gross performance of course muffled by the impact of generics and Avandia but those impacts now rapidly rain in and you could see during 2010 the underlined sales performance only exclude in a Avandia Val tricks pandemic products plus 4½%. We set out right from the beginning to make this business a more sustainable business less exposed to volatility of pattern to explorations.

What does that mean? It means we need to have less exposure to the classic businesses in the high priced develop markets the wipeout rest of markets so you can see over the last three years our exposure is going down from 40 to 25% I will talk more about that in a few minutes.

We have been reallocating resources rapidly across the organization 51% of our SG&A now spent in the investment areas emerging markets Japan consume more vaccines rapid movement of money and investment away from the developed businesses and to the developing businesses that’s what the restructuring program is done. Huge reductions spend in the developed markets big investments in the growth markets. You might be interested to know that 62% of our pharmaceutical sales force is now outside of America and Europe, A vast majority now of our sales force organization for pharmaceuticals sits in the fast growing markets both Europe and America have reduced their sales forces over the last three years by roughly 50%, very significant change in the structuring of our primary sales operation.

Our head count down you can see that what that hides is that the actual gross headcount for GSK has come down by 22,000 people and we hired back the delta here so this is a consequence of very significant headcount reduction in the developed businesses or traditional businesses and the (inaudible) country operations and then a higher back program in vaccines immerging markets in consuming. So pro-functions completely transformed we used to be a company of hundreds of subsidiaries each with their own operations we now accompany moving rapidly towards a single central core support organization. We just created now a formal core business services in which all of our transactional operations go we are well on the way to putting in place all of the systems to facilitate that, and as you can imagine that has a capacity to drive out not just cost savings because you do things once instead of a 100 times but also drive standardization efficiency greater control eliminate risk in the organization.

A massive cultural transformation well on the way to being completed. Sales of new products dramatically up 1.7 billion in 2010, 2010 over 2009 up 36% significant increase in rate again just to make sure you don’t think I’m exaggerating this, this excludes any contribution from pandemic vaccine which obviously was about a further billion pounds but this is the ongoing sales number up 36% for the year. If you adjust by-the-way for the Rotarix temporary suspension which is a major new product of course then that plus 36 would’ve been plus 54. So there is a very good growth behind our new products pipeline it continues to look very strong. I’ll talk more about pipeline shortly but what you can see in the pipeline is a very significant strength, advancement, progression low rates of attrition high rates of novelty, high rates of differentiation, high rates of potential not just to improve patients well being but to meet payrolls needs in the way that they are currently being expressed. You could see a big shift in terms of how we emphasize both internal and external discovery operations you can see here the number of external biotech companies we collaborate with in our discovery operations today about 50% of what we do in discoveries outside of the company about 50% of what we do is inside of the company. And you can see very significant continue cash generation before the legal charge the legal payouts in 2010 £ 8.8 billion times of cash generated by the company both through robust operations but also obviously through the impact of a very focused working capital program which allowed us to reduce our working capital by 1.3 billion or by 700 million if you simply exclude the pandemic receivable over the period nine to ten very significant allowing us despite all of the various outflows the dividend acquisitions and paying 2 billion out of legal last year we were still able reduce net debt by 600 million.

Various good evidence I think of the organic cash generation strength of the company and also the impact we’ve had on being able to be much more efficient in terms of working capital and now of course I’m very pleased that we’ve been able to continue to increase our dividend today by another 7% to £65. Now let’s just look at one or two of these investment business because I think it’s worthwhile just focusing on exactly what we’re doing in these market places so emerging markets, it’s a place where we identify great growth opportunities a place where we’ve invested and this is what’s happened so over the periods ’02 to ’06 we averaged a CAGR growth rate in the EMS of 7% we’re now averaging 14. As you’ve seen in the results today we’re actually now much faster than that so we’re seeing a continued acceleration of our emerging market business broad based across all the geographies and we’re used the bolt-on acquisition strategy to fill out the gaps that we had in key bits of the geography around the world particularly in Latina somewhat in China and particularly in the Middle-East.

Those have given us now a very, very good platform for the emerging markets strong growth coming from all of those businesses very nicely balanced across the world. In terms of how we look at where we spend money interesting to look in the emerging markets the on an ongoing investment basis if we look at our businesses in the EMS we range from for every pound spent from worst case £1.50 return within 12 months to best case £3 returned within the 12 months depending on how developed the business is. So the bigger our business the bigger our platform like in India where we’re able to invest on the back of great presence and leverage we get very high returns even in the markets where we have not got that strength necessarily, you can see you still get extremely healthy fast returns.

Stifle obviously the most significant acquisition we’ve made makes us the world’s leading dermatology company we’ve been very pleased with this acquisition we’re ahead of our targets we’re ahead of our targets on taking cost out of this business about 60 million ahead of where we’re expected to be at this point in time. We are absolutely in line with our expectation for the return rates of this acquisition I guess also may be a surprise to some of you when I tell you that the operating margin for this business is actually 42% and when you exclude amortization is 47%. So this is a very robust part of the business it’s a profitable part of the business growing part of the business and of course it has great application not just in the developed world but also particularly in the emerging market and as you know we also believe in the future in the consumer space. U.S. farmer probably a part of the business we have haven’t talked about so much in the last few years the U.S. farmer is absolutely return in the corner in terms of its future what we can see in that business first of all like everybody in the U.S. we’re having to deal with tremendous challenges from the environment. U.S. is changing is very rapidly the way customers are structured who owns the customers who controls the customers where decisions are taken is changing extremely rapidly.

The whole industry is trying to figure out a new model to fit with that. I think we’ve made progress on a number of the dimensions of that model so our new pay role model how we work with payers how we contract with payers how we price protect payers all of those dynamic the change in the way that we’re able to acquire business in the U.S. Our specialty organizations already deployed and we’re in the process now I’ve deployed a new general pharmaceutical approach. This business last year underlined only excluding pandemic Avandia and Valtrex grew 3%. That includes the impacts of healthcare reform $470 million. So, you can see that the U.S. business is back to grow, it’s under, it’s under reported because of those same big hits I described earlier. And if you look at the 80% of the business which are the promoted products the places we actually invest our energies that business was 8% during 2010. So, the U.S. business is turned in the corner, it’s clearly still on marketplace where innovation will get rewarded and we are starting to see competitiveness pickup.

I was particularly delighted last year when GSK was voted by the physicians in all the surveys to be the number one sales force and I think given all the changes and all the obvious noise about whether change is going to demoralize or destabilize the organization. When we’ve changed the incentive come system for our U.S. sales force to then be credited by the customers as being the best sales force, I think gives a real vow of confidence to the leadership in the U.S. And also the way and which we’ve been to able to develop this organization into a much more mature thoughtful organization fit for the future.

Our consumer business, as you’ve seen continues to perform very well same analysis is the emerging markets before we start to ramp in up investment growing of about 3% since we’ve ramped up investment growing in a CAGR of 7%. Again rate of returns here fantastic, 20% rate of return on R&D that’s what we’ve been ramping up our R&D spending consumer to give you an idea during 2010. The amount of money we spend on project R&D in consumer was up 17%, very significant increase because we know innovation drives this business forward would good at it and we get great returns when we make that. So, our return raising consumer absolutely demand that we continued to ramp up our investments in this area. Great example of that will be the new Sensodyne product as you know Sensodyne is one of our fastest growing products is actually our biggest product in consumer grew last year 18% worldwide. It’s really taking the fight if you will to the Oral care joint companies some of whom are try to compete with their own versions within obviously try to compete back with new improved versions are Sensodyne like Sensodyne Rapid Relief and it was a very impressive last year to see that we were able to launch Sensodyne Rapid Relief in 50 countries over a period of six months, it shows you the global scale of this company in terms of consumer healthcare innovation great brands and when we get that all lined up together we do a terrific job in the consumer business.

That’s why we have made the decision to find a way to make that even more focused if you look at our current consumer business 90% of the current turnover is in the top 15 or so global brands and the emerging markets that’s where all the growth is in this business. You are either in a big global brand like a Sensodyne or a Panadol or a Lucozade or a Horlicks where you can really leverage platforms across multiple countries or you are in India or a China where the growth is just for nominal and you are able to access great distribution synergy with our pharmaceutical business. That leaves 10% of the business that 10% of the business is basically very nice brands but they tend to be more regional, or may be one country or two country or three countries. And they tend to be OTC they tend to be smaller, and they don’t have for us the focus which would give you the growth somebody else I am sure could make that business grow better than we could. We’ve got a better place to focus our attention on those priority brands and on the emerging markets, that’s why we announced today our intention to divest ourselves of this portfolio of 10% of the business plus or minus £500 million with the sales our goal is to get that transaction done obviously as soon as we can some time hopefully before the end of the share depending on buyer interest and then the intension is to return the proceeds of that transaction to shareholders as soon as the transaction is completed.

I think again it’s a absolutely appropriate thing for us to do to try and find ways to really release and visible release the fast growth that sits inside this consumer business and this is and improve myself to do. Now, if you just look at 2010 for the overall business I have mentioned already that the underline sales growth for the business last year exclude in Avandia Pandemic and Valtrex was 4.5% positive and this just shows you where the hits and the gains are you can see the first three columns on the red columns coming down on waterfall basically show over three products which are I just mentioned if you look then to the right you can see the impact of other generics so this is all the other rats and mice generics going on around the business and then you see where the growth is coming from I want you to just note we have not excluded price from this remember last year we took $470 million of price hit in the US through healthcare reform and in Europe we took about 2.5% price through the various businesses usual stroke our austerity price cuts which the European governments inflected on us. And you can see despite that we go very good growth across the rest of our business not really that underline 4.5%. And as you’ve said in the release, we expect we have to continue underline sales growth during 2011 as we go through toward the end of 2011 obviously the washout of the three discontinuing business comes to end and obviously the underline sales growth will start then look like reported growth going forward. So, we clearly come into point where visibility on the future of the company becomes clearly we’re able to be a little more confident about how things we’re going lineup as some of these big pieces drop out of the mix.

If we look at some of the key pieces of that global performance particularly the pharma business. I think the first thing I say on this slide as you go Europe delivered a very solid flat performance, but very solid against a lot of price pressure remember a low single-digit growth environment in any case. Good solid performance looks at the rest all other regions growing an underlying level. I’ve already talk about the U.S very good performance very encourage by the initial launches of the new products two which are in the specialty oncology area voucher in particular start in very well Jalyn our combination product tamsulosin, and Aveda start in very well certainly in the top-five or six launches that we’ve seen in the U.S from whole industry in the last two or three years. So, encourage by that American business as I said already start into strengthen has been able to deliver that performance well observing tremendous price hits from the governments healthcare the Reform Act.

You can see in the emerging markets 20% up 3.3 billion that growing ahead of the marketplace strong growth particularly in areas where we’ve been able to adding businesses I just saw I mentioned the BMS and you see (inaudible) acquisitions these are now growing on annualized rate not so this is on proforma basis if you will at 28%. You can see those business, we’ve acquired and we been also drive really superior growth for them as they come into the business very strong performance on volume excellent evidence of our price sensitivity where the we’ve being doing we’ve been able to cut prices and drive absolutely impressive and dramatic improvements of volume vaccines across is a key part of that business.

Japan as continue to be a tremendous delivery in it this across excludes the enormous pandemic contracts we run in Japan and we delivered during the year, but even so very strong continued performance let us series of brands which double them market share during the year and we continue to be in position we’re able to deliver very significant innovation to the marketplace. We launch Xyzal this is the new Anti-Histamine.

Levocetirizine license from UCB that we market in Japan, we launched in October and by December, and we already had a 11% market share. A very effective company gain in share. Three years ago I stood up and said that we are going to launch somewhere around 40 products in the next three or four years, we have launched the vast majority of that of course some more to come, I am delighted to tell you that today we expect to launch another 42 products in Japan in the next four years, so that bolus of products that we talked about two or three years ago actually isn’t a bolus, it is a level, which at least at through 2015, we expect to be in a position we can launch somewhere between eight and nine new products or major indications every single year in Japan, that is the perfect movement to be doing that because the pricing regime in Japan has many of you know has changed to be much more pro innovation, we are in a very good position to benefit from that and during 2010, the inflicted price cut from the government in the normal binomial system, which was influenced by the new scheme was only 50% of GSK took the price reduction only 50% of the average pharmaceutical company because of the innovative profile we have. So all regions performing well, all performing well against their environment and underline level and as these three businesses washout those performances we expect to reflect through. We told a lot about trying to create a business, which is not so vulnerable to some of the volatilities the non-white pills western market, obviously business in the emerging markets has a different emphasis but just look at where the business is coming from in terms of form and formulations, you can see here 60% of that business now comes from nonwhite pills add on to that businesses you have in the emerging markets that will get you to the 75% of business which is non-white pill western market, you can see here continued sustainable growth in all of those areas. Pipe line, pipeline continues to be a major focus for us, this is an area where we’ve continuously emphasized the efficiency but also the quality of decision making. I’m delighted during 2010 we were able to put 10 these 10 new assets in to Phase III development. Of course we continue to have around 30 assets in for the government, we had no attrition last year in our advanced development, we just terminated our Merixa in last week during 2010 we had no attrition in the 12 months period. That very strong performance and maintenance of that advanced pipeline looks very, very good we’ve 30 in Phase III registrations 20 out of those 30 are new chemical entities of novel vaccines, so very significantly differentiated and during the next two years 15 of the 30 will report out in important phase three data, that is a drug business, so we know some of these drugs and vaccines will make it. But you can see both the scale, the progression, the differentiation and the novelty of this pipeline really adds up to potential that really hands up to something which over the next couple of years, I hope we will be able to crystallize into well that potential truly is.

All of that performance has not come by throwing more and more money into the mix as you know R&D is a percent of sales is broadly stable around 14% would expect that 14% to carry on into the future. But if you actually look it was going on in this part of our organization where we’re actually doing is we’re spending less in our four pharmacy R&D operation more and more efficiency we’re releasing that money to increase spending vaccines, increase spending consumer, increase spending dermatology. So, pharmacy gain more efficient both nominal and then a real terms probably substantially a head of the numbers you’re seeing. How we doing that very sharp focus on rate of return, very sharp focus on the levels that can drive that their rate of return.

Can we drive down attrition? Can we made better high quality decisions early being more ruthless at the beginning so more accountability on decision making through the smaller units that we’ve created. Some of the output to that almost a third reduction in headcount for R&D over the last few years downs to about 11,300 a third reduction in space. We closed six R&D centers in the last 12 months alone, late-stage development where most of show most of the values sits in the advanced pipeline 60% of our resources now go to the late development much less spent on earlier discovery of course we still have a good discovery operation but we want to emphasize the delivery of the late stage pipeline.37 internal discovery performance units that Patrick created and build and led and 54 external biotech companies here we have optionality over that drug development programs and assets. And in last three years something Moncef Slaoui we very proud of Biopharm now accounts over 20% of our clinical pipeline as we’ve really come from nowhere to have a very substantial biopharmaceutical set of assets both in advanced medium and early development and of course they represent very different profile of risk.

So, that’s a quick summary of where we’ve been in terms of how we see the future going clearly from a sales growth perspective underlined sales momentum we said we expect to continue during 2011, it’s obviously going to be masked by the Avandia and Valtrex in pandemic events particularly in the first half of the year. But as they wash through that underlined sales growth is going to shine through in the business we fully anticipate. We of course to explain that to translate through reported growth in 2012. Operating and financial leverage, we continue to focus on ways we can drive that no savings 1.7 billion already save on track for the 2.2 billion target in 2012. Strong cash generation I have already mentioned clearly very effective working capital program and we’ve already see been focused on how we can divest non-core asset because loss point of GSK holding assets which are adding to our growth on adding to our machine. So last year for example we divested well return we divest in American, we divested by avail at last year as well. This year you seen are divesting Zovirax cream rights in America and it also seen is divest our remaining shareholder in Quest. All of those things absolutely part of what we think is the right thing to do when the value looks good when we think the value is right then we going divest our sales of those non-core assets and that’s exactly what we’ve been focused on doing.

I think just on the operating of financial leverage was also important to make just couple of comments about margin if we go forward into 2010 two things I think one is because of the effect of pandemic fuel, Valtrex and Avandia actually quarter-to-quarter margins we going be bit over the place because some periods were on year-to-year basis you going see some very strange sources of number. So, I think they will be probably a bit more volatility the normal. And then as general point because you got this block of sales washing out from 10 to 11. We expect a temporary dip in the operating margin in 2010 of about 1%. Now that’s not because were increase an investment is because those sales disappeared didn’t have any cost to touch. So, as though sales drop of the mix you left with two choices you either let them drop of the mix we have temporary dip in the margin where you have to go taking cost out somewhere else which has nothing to do with the business as you have lost that would clearly not make any sense if you believe those other investments drive in your growth make no sense tool to cut investments in consumer simply because of Avandia not better in 2011 was there in 2010.

So, that’s what drive that 1% reduction in operating margin with then expect in 2013 or 14 for the operating margin quite well going forward into future as everything I’ve just described start to click in. Of course sales growth leverage drive of cash dividend return to shareholders I think many of you and I have certainly have loss of conversion to the investors where loss of people were quite sure what they were progressive meant we feel our progressive dividend may know everybody else quite new exactly what we meant by progressive I think we try to shop in the up to day by the saying our priority is to grow the dividend year in year out.

So, hopefully we’ve taken any progressive means and our commitment is to grow the dividend and today as well we’re announcing the start of the new share buyback from a long-term steady share buyback program which we believe is on appropriate moment to do it. Now, why we’re doing this now very simple one we’re starting to get real clarity about where we think the future of the group is. Two, we’re generating our level of cash and 2010 was a great example of that. And three, was it clear that there are less both on acquisitions to meet our financial hurdles that know where two years ago. Last year in 2010 we spend about a third on acquisitions of what we’ve spent in 2009. There wasn’t because we were looking for loss of acquisitions but the one acquisitions which fitted our goal, our targets and met our financial hurdles. So, our anticipation is that they’ll be less acquisitions there for more cash available to return to shareholders and hence now is the right time to start this program and I think is exactly the right thing for us to do.

So, obviously what we’re looking to do is now come through this period it would be in for the last few years it’s a new face for the company, it’s a face where we’re starting to see that underlined sales growth come to the surface over the next year or so. We believe we can continue the very good track record we’ve got of operating and financial leverage and disciple. Of course that’s going to drive dividend and now will making a clear it’s going to drive further superior returns to shareholders through the cash generation that we have and the shareholder return that we believe we can deliver.

With that I’m going to hand over to Julian to give you more detail of the performance in 2010 and then we’ll have Q&A.

Julian Heslop

Thanks. Thank you Andrew and good afternoon. I want to start by looking at summary of the financial performance 2010, you can see the sales were down 1% to constant exchange rates of intend to focus on CER all the movements I talk about. Although will be of actual rates sales are pretty much the same as the previous year. You can see if you look an EPS although we clearly suffered from the £4 billion legal charge and that compared to just under 600 million in the year before. Where we have done on the line below is to show you the impact of eliminating that legal charge and to the right you’ll see the 11% decline in earnings on that adjusted basis. That a 11% reflects 6% just points of lower other operating income and 5 percentage points which reflect the sales to (inaudible) the slightly higher cost of good margin and lower SG&A cost but then it will average doubt at about 5 percentage points decline. You can see the four legal settlements so we generated another £1 billion of free cash flow and that free cash flow was enough to pay there was legal settlements to payout just about 600 million on acquisitions to cover the dividend and also to reduce net debt for the year.

If you look at that chart it emphasizes a diversified business that we have and if you turns the left you can see good growth from the emerging markets from Asia-Pac and from consumer healthcare and if you eliminate as Andrew has done flu pandemic Avandia and Valtrex. You lose about a couple of percentage points of growth or emerging markets in Asia-Pac clearly no impact on consumer healthcare. The decline in ViiV reflects competition to material brands only partly offset by both the acquisition of the size of brands into the joint venture and also organic growth from those brands turn to right of that chart, you can see the clients have a 11% and 6% in the U.S. and Europe and as Andrew said to you again stripping out pandemic Avandia and Valtrex that becomes plus 3 in the U.S. despite healthcare of platform and despite the loss of Boniva and broadly flat in Europe.

I think this chart shows nicely the impact of those three products that we keep referring back to I think the number of points on this chart first of all the underlying growth we strip those three out gives the 4.5%, I think that’s the first point. I think the second point is £1.4 billion of sales lost in 2010 from those products. I think the third important point is in 2011, we expect minimal pandemic and Avandia sales that we expect a further significant decline in Valtrex sales. Overall a 4.5% underlying growth, if you switch to pharmaceuticals and we focus fairly on pharmaceuticals and exclude consumer healthcare we see a 4% underlying growth compared to our product categorization that you see above. Advair 2% up overall are flat in the U.S. up 2 in Europe, up 16% in emerging markets, up 10% in the rest of the world. If you turn to vaccines up 10% half that growth came from Synflorix most vaccine brands grew during the year probably the only exception being Rotarix because temporary suspension clearly caused to decline as it recovers. You can see strong growth in dermatologicals, that’s organic growth and 6% stripping out the acquisition effect really reflect in the broader product portfolio but also really disciplines skill management that the Stéphenne people brought to us improving our overall portfolio. You can see strong growth from Avodart, Lovaza and Arixtra and even encouragingly from brands like Tykerb and Veramyst newer products who each quarter grow and are beginning to be quite significant in terms of the overall sales mix, inevitably we have a portfolio here down 3% which brings the overall growth down from net 4% overall.

New products are vital to both the pharmaceutical business of the consumer healthcare business, it’s obvious to state that the pipeline is critical Andrew is taking you through that but you can see these products make it increasing contribution to our business and importantly its quite a diversified contribution we’re not talking about one or two products here we are talking about a number of products and that diversification makes the business much more robust in the future and much less vulnerable to surprises. Look at the consumer health care business you can in the left see strong growth in our international markets you can see the impact of challenging economics time in our US and European businesses, if you look to the right, you can see category analysis, you can see strong growth from nutritional health care and from oral care.

Oral care, strongly driven by Sensodyne, nutritional health care strongly driven by Horlicks in international markets. Slightly lower growth in the OTC area and good growth from analgesic business (inaudible) to give 3% overall. Now to the Phenyl custard goods 26.1% pretty much in line what I told you a year ago and our expectation is that we’ll deliver round about 26% custard goods in 2011. If you look at SGNA that will make two points. Firstly, SG&A causes aggregate down to 2% and that is just slight increase in amortization arising from that position, which get reported in that line by that $80 million during the years that $80 million adds another 1% to growth so 2% saving despite that. However, margin 29 and 1/2 slightly above where I guided you, really the denominator was slightly larger than that we usually thought, we were depressed clearly by that and another matters. We are looking forward to 2011 I expect SG&A excluding as percentage of sales there around 30.5% of sales. Legal 24 billion much higher this tracks on the left 2009 actual on the right 2010 actual, $578 million of costs taken out of the business that is slightly flaccid by about 20 millions of currency benefit, but that is pretty immaterial. So took a lot of costs coming out of GSK, in America we took 11% of cost cut, in Europe we took 11% of cost set. We have reinvested behind investment markets $176 million there and we also clearly had a full year we also reinvested in our failure. So, I think we in a sense had best of both worlds save money for reinvested for the future, but also return profit to the bottom line at the end of the day. Turn to our R&D; R&D tracked very much in line with expectations 14% of sales flat year on year, guidance for 2011 14% broadly around the 14%. If you look at our operating income, remember in 2009 we had sales. We had this slightly odd accounting gain on the formation of $296 million noncash gain that we talked about last year. We had a much lower level of other operating incomes in 2010 about just under 300 about 493 is royalty sort of sustainable royalty stream we seen over the past few years.

Looking forward to 2011, I expect around £600 million of other operating income in 2011 excluding the consumer healthcare divestment best in that number. Our overall operating profit to press as you can see by the legal judge.

We’ve expressed operating margin excluding legal and excluding other operating income we do believe that’s probably the way we look at the business legal clearly very high in 2010 very low in 2009 up to of 2010 and therefore just starting the margin. Other operating income reflecting whether it could non-core assets to sale it doesn’t really make sense talk about margin including given is volatility strip them by felt 2009 to 2010 1.3% drop in the margin this is the margin that Andre talk about what you said express one percentage point drop in that margin in 2010 is that margin there. Interest as you can see from chart (tready) study year-on-year run about 710 million buck. And important point here, where we have cash on deposit we earn in today’s financial environment very, very low rates of interest, so sadly it doesn’t make much difference as he was just that cash balance in terms of the interest payable. My expectation for 2011, as you will see again a broadly similar interest charge for 2011 much as you did in 2010 and 2009.

Profit on disposal of interests in associates high in ’09 when we sales some Quest shares low in 2010 we hardly did in 2011 we report approximately £600 million profit all the dispose of the Quest take which we execute few days ago. With it we’ll come £350 million of tax because the base value for tax purposes is much lower than the book value for accounting purposes hence what we seen to be a very high rate of tax on the book profit. Net impact on earnings 250 million. Share of associates joint venture profit you can sell Quest on the one hand on associate he come from the profit on of the into the future 79 million was report is part of that 81 from accounting for our Quest equity stake that’s got.

Profit before tax exactly as you said. Tax rate 34.3% high in 2010 because we had the low tax relief on the legal charges of about 15% that brought the overall tax rate up. If we look at 2011, we expect in effective tax rate of 29.1% this two elements of that effective tax rate first of all is 27% on the underlying business that what we would call our underlying tax rate and then because we sales the question because we have this relatively high profit on book profit, the tax on the book profit that I talked about because of that – that brings the effective tax rate up to 29.5. So, core business tax rate 27%, 29.5% the 2011 because of the Quest shares. This chart shows you the impact of restructuring charges we’ve had these charges for number of years, 2011 will have them again but I expect that will be last year that you will see significant restructuring charges in GSK. And if you look from the summary on track to the total program cost of 4.5, three quarters of the way through, 1.1 billion to go and exactly in line in terms of overall cost savings.

Cash flow, cash flow clearly impacted the top that total operating profit impacted by 4 billion of legal charges but of course you say 4 billion of legal provisioning doesn’t have any cash effective to does it. So we already adjust for that so if you go that four lines down increase and decrease in other net liabilities the 1,480 we bring back the provisioning of 4 billion into that line so that will give you a 4 billion positive. But we have paid out 2 billion of legal settlements so that has to be deducted from that 4 billion to give you 2 billion. We’ve paid another half a billion just under half a billion to our pension funds in respect of deposit contributions. So, hopefully I’ve made what is used a very complicated line a simple is that can that’s the 1,480.

Working capital 1.3 billion of cash generation, you may recall last year I told we reported a 100 million adverse I told you but that’s not really fixed we got 600 million of receivables in respectively pandemic sitting that simply is the result of the facing a few pandemic sales. Well, if he was unfair last year’s totals the one fair this year an essentially other way around to get a better view of our economic progress, you should move about 600 those receivables into 2009 so such a really show 500 million of progress, they should take that 600 of this year to show 700 million of progress bottom-line over those two years whichever way you do it about £1.2 billion to generated for the business. Now if you want to know what would have happen if we done nothing the general trend of the business moving sales into emerging markets taking away from the U.S. would have probably increase working capital by 250. So, if we done nothing would be selling you’re 250 going out every year with on one a lot of things out there to bring that over working capital debt CapEx 1 billion, 1.1 billion again lower than the previous year again helping the cash line. Bottom line excluding your settlements a billion extra free cash flow clearly having paid 2 billion out this year compared to 250 last year that’s the reason for the free cash flow decline as you see that.

This chart shows you the working capital summary, the encouraging thing on this chart even if you strip out that’s 600 million of receivables from the total of 905 it’s each part of the working capital number is improving.

We’ve talked many times to you about a lot of work being done on inventory a lot of work but every time I presented that to you and told to you that I have never shown you an inventory saving, hopefully you had faith because even I may have lasted on occasions. But inventory is driving savings though the work that is going on in our manual factory is going to continue I will now starting to see the benefits what I think probably even I failed to recognize takes quite a long time to deliver but once that starts to work it starts to continue to deliver. So what that stock chart shows you is action in each of the key areas and I would be fooling you if I was to suggest anything other and that’s thousands of individual actions throughout the company people have bonus to our working capital, they think about working capital, they talk about working capital is the only way to stop it going up, it’s only way to get it down. Free cash flow 4.5 billion as you can see from there, we paid an increasing dividend, we did acquisitions of 633 including equity interests we basically finished up by reducing debt by £600 million and net debt ended the year and if you would look at the 8.8 billion of net debt what you would see is about 6 billion of cash and you see the rest being gross debt and as we settle the legal matters in 2011, you will see that 6 billion of cash come down its impact on the interest line wouldn’t be very great because this is not done very much interest but you will see that cash come down. I’ve told to you about returning cash to the shareholders in the past. I’ve told to you about the importance of increasing dividend but they say actions speak louder than words so over the last five years that’s what we have done, that’s the dividends we have paid over the final dividend we have announced 8% compound growth over that period. And with that I will hand back to Andrew.

Andrew Witty

Right. Thanks Julian. So, that really brings to an end in the presentation just to remind you really of the summary of the business and particularly in terms of how we are viewing the business going forward in terms of underlying sales growth continuing to drive operating and financial leverage allowing us to make a priority of growing the dividend and then support your new long-term share buyback program as a way to deliver returns to our shareholders. With that I think what we will do is go to Q&A now may be Julian, if you want to come and join me up here I am very happy to open up the floor to questions, I may elect banks questions to other members of their Executive Directors who are introduced for the beginning and so if I see any of them looking widely distracted they will be the person to get the question I suppose, let me open up the first question. Yes Michael? Just wait for Mike yeah Michael go head.

Question-and-Answer Session

Michael Adler

I just want to in terms of your R&D you have said that comes down to 11,300 within research, I wanted how many people you have actually got working for GSK either internally or externally you are actually focusing on generating innovation that you can then use in the future. So, not just the R&D headcount, but what is bit of the innovation headcount.

Andrew Witty

Okay.

Michael Adler

Done over the last few years.

Andrew Witty

Great, question. We will also our last Patrick, he is obviously built, run an obviously continues to have oversight of that, in a second. Just very quickly, one of the key things we’ve done structurally and strategically is to try and strike a balance between in-house and out-house. I know there is kind of ideological debate going on that drug companies either should be massive do all them not themselves. I think we are very much in that middle space, where we think there is a tremendous economic and creative leverage to be gained from working with the networks, the Biotechs, academics, spin-outs, all of that if you look at who our partners are on the outside is very diverse, very diverse in how they are structured where they come from, what turns them on is a very interesting set of different partners. But we truly believe it’s important to have real excellence in your own discovery operations both in terms of applied discovery, so in focused drugs DP, discovery performance units, but also in platforms, we do believe there are certain dimensions of research where there is real opportunity if you are right to capture whole sways of potential novelty in the future. So, we do that inside what that means obviously you have a nice balance in terms of mixed control you keep balance of what you’re future exposures there are going to be. Because can remember, today you pay for internal R&D on the P&L you pay for your external R&D through milestones in royalties, which will appear in the gross margin 10 years from today. Things really important to keep those things in balance right now having said all of that let me ask Patrick to give you more specific questions to the people.

Patrick Valance

Yeah, so we’ve 37 discovery performance unit they are the research innovation engines of GSK with the number of externalities as well as Andrew said mix with academia that is 37 discovery performance units represented decrease in headcount in research specific part of GSK over the last few years of several hundred individuals, we now so its relatively small group, 37 groups ranging from the small as being about 10 people, the largest being about 70 people following this philosophy of integrated groups in much more Biotech like environment pulling on the big platforms of GSK to allow them to innovate and develop it into products and being focused and having chosen specific areas to work in. So, we have reduced that at the same time going as Andrew set about 50% internal, 50% external and the way that’s run and of course those engines built on the platform support as well.

Andrew Witty

Okay, thanks Patrick. Next question Frasier Hall in the middle. Thanks.

Frasier Hall-Babenberg.

Thanks, Frasier Hall from Babenberg Andrew, a couple questions. Just firstly in the context of margins, you have obviously indicated some of the issues leading to margin pressure in the short-term in 2011, but your remarks seem to imply not only a return to growth in margins in 2012, but clearly beyond that, i.e., that margin growth is something you’re looking for over the medium to longer term so I just wanted firstly whether you could talk about some of the moving parts around that. And second question just in context of the share buyback that you’ve announced today this is at point in time where you’ve got massive legal charges to pay significant cash outflows and going forward from here those are we hope I’d like you to be repeated. And at the same time you’ve talked about this possibly being the last year where we see major charges associated with restructuring and consumer disposals are to come and can you just talk a little bit about going forward how you look at free cash flow in a context of returning parts of that in the form of a share buyback and what the outlook might be against of a longer term?

Andrew Witty

Sure again I’ll ask Julian to comment on that in just a second I think overall in terms of margin pressure and where we’re going I just think it’s we spent so long putting together the right strategy for this company and the big structural changes I’ve described to you and we’ve talked previously. But I think you can really see crystallizing both in terms of substance and then in delivery of different parts of the business. We’ll make absolutely no sense at all for us to react to all be it the big change in portfolio that these businesses represent. But it wouldn’t be the totally the wrong thing to then react to that by cutting from areas we know deliver value for the business which is why I think it’s appropriate not great but it’s appropriate that we have this temporary blip in the margin. The other thing by the way which contributes to that blip is the need for charges in the U.S. the new tax pharmacy tax in the U.S. which obviously comes in for the first time. Going forward as that underlying sales growth starts to come back through reported sales growth. And as you continue to focus on cost in the way we are doing that’s what gives us the confidence to say what we said about the future on the margin. So and I think I used the phrase in the letter very carefully that structurally we don’t think was any kind of issue with the margin

I mean it’s a temporary issue we do think it will start to recovery. Let me give you a couple of very specific examples if you think back to, let’s go back a long way 15 years when the industry was growing. What did the industry do when it was growing it built massive R&D facilities big office building all sorts of attributes of a fixed infrastructure as not going to happen again right? So we’ve restructured operation we see ways where we can operate much more efficiently and actually we think the opportunities for financial leverage in the P&L once the sales growth starts to kick in and be reported much higher than it’s been in the past. Because of all the changes we’ve made over the last few years moving from 100’s of decentralized finance organizations to a single finance operation is a good example right. I mean it can give you real control in the last two years we’ve taken £330 million of costs while support structures finance, HR, real estate, security services that’s on this way to the full end of 2012 target where we (inaudible) 20% of our total support costs of the company we’re already fall down the road on that. But doing that isn’t just by squeezing it’s by completely change the way we provide support in the organization much more efficiently much leaner. We have a goal even after that reduction that the support operation of GSK has to keep inflation every single year as a minimum standard for year and year our efficiencies. So you can imagine as that if you start to model what that looks like against an expectation of underlined and then reported sales that’s what give you some confidence that over the years 12, 13, 14, 15 you would anticipate improvement in margin on the cash flow let me ask Julian to talk about how we’ve viewed cash flow obviously we’ve been very thoughtful about where we came out of 2010. The kinds of liabilities we’ve going to need to do within 2012 before we made the decisions we made but let Julian talk you through in more detail.

Julian Heslop

Yeah. In terms of cash flow I mean clearly we have the 6 billion of cash which we will use as we come to settle that (inaudible) hands of liabilities of a closing balance sheet. But I more your question as restructuring falls away as we get more cash generative. I think our focus is very clear number one an increasing dividend we’ve done it in the past, we’re going to do it in the future. I think number two repurchasing shares will giving by cash to shareholders and whatever form is the most efficient or if the return is higher I emphasize almost like underlining if the return is higher we will make selective acquisitions. But we’re in the business to making other people shareholders rich when the business is making our own shareholder rich that’s our strategy. So, I think that balance between the two is I think they’ve pretty fairway for you to look it.

Andrew Witty

I think there is a question toward the back.

I miss UBS, thanks for taking my question. Couple of questions first on legal you made the comment that you’re plan to close out controversies efficiently and effectively and we see is in would you comment on the timing of closing that one out. And whether it could be another tip of a big legal iceberg and secondly on R&D just given comments this week. Clearly there different organization but there is similarities in your D&A for example the ability to in Western vaccines R&D assuming that their decision might be right for them. What about Glaxo’s different that makes keeping a 14% margin the right thing to do?

Great, good question. As far as legal is concern I mean I think what I would say. Is that it U.S litigation and legal environment often leads to loss of subsequent cases. If you look at many of the areas of litigation we dove with over last several years is not simply one case with one plenty you often have puerperal cases, so in the commercial field for example you can have cases which involve also its classes of consumer its wholesale, retailers, payers you gap proliferation around the core whatever the core issue wasn’t clearly the same as potential through an areas like federal investigation way you start to see states begin to go involve. Obvious, I said at the begin its impossible for us to give you certainty on unknown, unknowns of how things can evolve. But the general pattern of expectation is that the source of things typically do not lead to very substantial further issues now, we have to result the primary issues and get all of those settled us with signaled, but generally peaking as been clearly as things are only just starting we should be little cautious to B2 preservative one way the other. But I reiterate, what I said at the beginning what we required to do unlike some of our U.S competitors because of different rules and guidance’s we required to provide what we realistically believe is the most likely number to settle all of our litigation, so the legal provision we have is now we just look at legal provision say we let just have provision just case and case B. So, its legal provision which is built up every single case that the company as and that’s what deliveries the number okay. Now that’s the view we took for these results now if loss effect change hopefully they don’t if they do of course we have to review and I think we try to make that very clear that is risk as of today we think the provision we have is absolutely the appropriate one for all the facts we have our disposal today, which of course laid out in let you’ve got today.

Gbola Amusa-UBS

Okay.

Andrew Witty

Please yeah. Actually sorry second question on Pfizer I should have respond its main first Pfizer in the U.K, so just today. It’s really good question actually I mean I’ve always been very resistant we got have target that which will spend 14% to sales that’s no we do it happens to work out to be 14% to sales what we actually is very bottom up approach to what we thing is if invested in all different R&D operations. And on to giving you some sense of actually we end up 14% of sales, but we’re spending much less today in pharma we use to was very much more vaccine is getting much more in dermatology is getting much more in consumer. So, the mix he just happens to come out 14 is no actually a target that we go for he may go up and it may go down a bit this not the way we are managing it. I think what we have done at GSK, and listen, we will either win because we may great choices on molecules and they turn out to be winners or we won’t because that we end up with setbacks just like others have had. But what we have done as we bitten the bullet on fundamentally change in the structure of R&D on several dimensions. So, we’ve already dealt with a lot of big fixed infrastructure in the operation, which was drive in huge amount of fixed cost. We’ve dealt with the reduction as have heard, in our discovery operations internally versus externally, which makes much more flexible to be able to move resources around the operation. We’ve been much more focused and creating accountability the whole point of the discovery performance is nothing cleaver about putting only 30 people in a lap what’s cleaver about as you know who is in charge and actually you can choose whether he is a good scientist or not whether he or she nice good decisions and you can actually get much greater clarity rather than lose in the inside this massive facilities where who is making decisions is anybody making a decision. So, that is really I think what we have bit the bullet on I think it’s been driven through in a very disciplined way and I think it has made us a much, much stronger operation we will run in the former business is doing more work than it’s ever done its more productive than it’s ever been is got a more developed pipeline is ever had its more novel than it has ever we will see whether it ultimately makes it you know all those molecules make it to the finish line. But in terms of the substance of what it is doing is dramatic and its free it is up to invest in all source other places and so just happens to add up to 14%. Yeah, Joe

Andrew Witty

Oh sorry you will get a Mike I will let you get it first.

Mark Beards Goldman Sachs

Thanks, Andrew. Mark Beards from Goldman Sachs. A couple of questions, one on margins, but in terms of emerging markets where you are pricing for volume, how should we think about the pressure on margins in those markets? And then, secondly, ongoing legal costs that obviously have been a significant part of SG&A. How should we think about that in 2011 and beyond as we model that?

Andrew Witty

Okay as far as margins are concerned as you have seen actually our margins in emerging markets continued to be very robust during that 36% rate I think that continues to surprise a lot of people that is as robust it is. I think what it reflects is we’ve got tremendous built leverage going on in lots of those markets. So, India is our lowest-priced marketplace. One of our best businesses, because we’ve got such a massive platform right the efficiency in that business is absolutely phenomenal. So, we’re able to compete and actually deliver great margins at very, very low prices very, very low price I think now we actually have products we are selling at Re 3. So, you can’t get that means we are actually selling products in the slums and I am very proud of that I am very proud we’re able to be a company that can bring brand to people at every income level in a country like India.

So I’m actually pretty confident around our margin structure we’re seeing very good responsiveness to price flexibility. But we’ve been able to drive great efficiency in those businesses as well. So at this point in time I think that’s a pretty reasonable estimate for those businesses the only thing I would watch out for an emerging market is a little bit is of course there are one or two of them which are more, look a bit more like a Southern European like a Turkey. And those are the ones to watch out for because you’re significant one of price pressures which of course will have an effect but putting that to one side I actually think margin is pretty indicative the way you want to be. I personally don’t think you want to be too much higher than that in these high growth markets. Because it would tell me we’re not invested enough for share in growth but I think that’s a pretty reasonable position. In terms of the legal guidance Julian why don’t you pick that one up?

Julian Heslop

Giving my usual answer which is the you can’t predict legal charges which I guess history will prove to be right we continue to work hard to resolve the legal cases we have we do everything we can to ensure that we don’t have future legal cases. I think that’s all I can leave you with I can’t predict them.

Andrew Witty

Yeah great well Joe and then Gray sorry I did promise Joe the next one brand.

Mark Beards Goldman Sachs

And the three quick ones can you tell us a little bit about the outlook for Advair it was flat in the U.S. down in the last bit of the year is this is a reflection of the new label I’m sort of biting. And do you have any visibility on generic Advair in Europe coming through. And the second question was just for Julian if you have 300 million or so of ongoing royalties why is your expectation 600 million for other operating income what’s the other 300 million and is it sustainable? And the final one which is probably that the meat of it is R&D productivity you say you’ve got 15 or so assets that will give you phase III results by the end of 2012. Are these assets ones that were put into phase III with the new sort of harsh realism in them and therefore will be a good guide of success rates going forwards or realistically are there some legacy projects that did already been started. Because I think investors need to see something better than the typical 50% phase III success rates.

Andrew Witty

Okay I think it’s about 5 questions there Joe I’m going to give it a go and I’m going to ask Moncef in a second to answer the R&D question and obviously on the OY as far as Advair is concerned in the U.S. yes I think there has been an effect from the labeling changes from FDA clearly as FDA’s intention to see a reduction in the use of combination products in asthma continue to see good performance in COPD. But there is no question that has been an impact from the labeling that’s the first thing to say, the second thing to say, which I think is much more just one of those things is clearly of Q4 ‘09 the respiratory market in the U.S. is very high and Q10 ‘09 isn’t so, there is also just a pan, if you look at all products, all products growth rates are down. So, some of it is specific to Advair and it is I think it is the label; some of it is much more general. The other thing I would say though, which is easy to miss is actually our script market share for this is the category of Advair plus Flovent went up July to December. So, yes we’re losing some growth and some share not much, but some share of Advair, actually, we’re picking up that share very rapidly on Flovent which as you know, is the market leading monotherapist. So, yes Advair is not quite where we like it to be, now going forward, I think the biggest issue is really where is the respiratory market is going to go. So what it what kind of impact that we’re going to see in the respiratory market. In terms of generics, we see no sign of anything at all in America and I think 2010 was a very positive year for GSK in terms of clearing some of those clouds out of the way and flushing out the truth of what was really going on. So I think that U.S. side is good, we don’t see any aerosols in Europe, which is important for the UK business because it is a very big aerosol business. There are we think competitive filings for DPI’s, but we don’t know where they are in that process. And whether they get approved or not we have to wait and see, but I would say, if you went back a year there is a heck of a lot less out there now than there was a year ago being talked about and in the US it’s very hard to see anything. Gray.

Andrew witty

Its Julian and then Moncef.

Julian Heslop

Yeah Joe I mean 300 million just under 300 million from royalties 190 million from the sales of Zovirax I mean which we just announced it pretty much of really 110 million short. We do what we always do we look for non-core assets where we believe is greater value in divestment and in retention, it is greater value in retention we will keep them, if divestment gives a greater value we’ll sell them. So that’s our estimate today and obviously Simon will update you to the extent that changes, but that obviously excludes consumer health care.

Simon Bicknell

And actually I think more or less that number is probably sustainable, if you look plus or minus over the last few years and I suspect over the next few without royalty income is a very high quality flow of income and I think it is pretty unusual for us not to have, a collection of assets what we know one way or another, which it’s time to get rid off, so, I’d be a bit surprised if it went substantially below that may be a little bit here and there. Moncef.

Moncef Slaoui

Yeah that’s a very good question and so when we started to do with R&D strategies we sharpened discovery as Patrick explained. Decrease our infrastructure cost and fixed cost to give us more flexibility and critically allocate capital for late-stage development to the high as possible standards and in fact what I say is we shouldn’t fail for reasons we could have predicted after the fact. So, in 2006, we actually clean the pipeline quite dramatically for those of you who remember, every single asset in the pipeline today by the end of 2006 we had 8, we have 30 programs in Phase III they’ve all being selected according to these criteria. Can I be sure that they will succeed no they should not fail for reasons we should have predicted. Things may happen we could have deliver signal we could have all the totally unpredicted their observations but that’s the fact today.

Andrew Witty

I mean I thing the big difference that Moncef and the team have really gone to is we’ve gone from the business which up until that point was working on the basis of it’s possible then will do it to our business which if it is probable then we believe we’ve made that move there is a counter balance to that Joe which is everybody wants the friendships as everybody knows that if you want to have a high margin sustainable pharmaceutical business in the future you need to be differentiated otherwise you’re not going to get reimbursement and you’re not going to get listed. Almost by definition differentiation starts to ratchet up the risk again on the other side because you are of course going into more novelty or maybe less areas and that you just going to bear their mind. So, what Moncef organization is try to do is to really raise the burden the hurdle for making those choice you just need to be realistic that you want to have the highly differentiated product you probably could do and at least something nobody‘s have the dump before that’s exactly what the markets telling us they want because they say and if you just given me what somebody gave me five years ago(inaudible) not going to approve it because FDA will take the view as why take any incremental risk for something which brings no new benefit or you will get no price. And so that you just got be realistic about that came to balance in the system. Graham?

Graham Parry – Merrill Lynch

Thanks it’s Graham Parry from BOA Merrill Lynch and couple of Avandia and then one on consumer divestments and so just on a Avandia is I just wondering if you could give us a sales how many in your Avandia cases you actually received versus or you predicting when you took your provision for fourth quarter so the proportion of that which is actually announced and within that if you can includes then warehouse\ cases as well. And second just going back to this argument of the statute limitations potentially having passed from these cases remember there was a quite a lot of disunion about that last year and with the discovery of then possibly the initial pay for in 2007 is that fact but actually seeing cases make it through to core they having to settle now inductive of the fact that that no longer applies or is that something that would just be rolled up in a judges final ruling anyway. And then the third question on consumer divestments I just wanted to clarify when you say about retaining capital to share holders as quickly as you can from these divestments and are you referring to funding the share buyback or you have been thinking about special dividend here thanks?

Andrew Witty

So on the later just very quickly that would be either further share buybacks so not the current so the share buyback we have announced today is independent of the disposal of the consumer products when we transact the disposal of the consumer products we will return that that to shareholders either through further share buyback or another vehicle like a special dividend depending on what we think is in the best interest of the majority of the shares I know disgraced tremendous controversy but obviously we have a lot of shareholders who end up paying tax on dividend both in the US and small shareholders other shareholders are very interested in special dividends. So will obviously take some time just to try and figure out how to make the least number of or loose the least number of friends and whatever decision we take and we driving to the fact that I won’t keep all my friends. And as far as Avandia is concerned we’re not going to talk about the numbers of cases for a completely obvious reason that’s part of the negotiations that are going on but it’s fair to say I think that when we look at all the cases that we are aware of whether they are in-house or whether they are putatively out there in the ether, we believe we have settled the majority of those or more than half of those so far.

So I think we are making a very good progress on that I just think we need to be this is a dynamic and we has proven in the past to be a dynamic situation just need to try and get things resolved as quickly as possible we have some very made some very good progress in the last couple of weeks, feel good about that the statue limitations is a very complex it varies all over the U.S. according to state, it’s not a kind of simple yes or no actually and that’s the reason why you kind of not seeing it have a bigger impact in the where you might have anticipated. There are however other aspects of the U.S. system which is beginning to reduce in some areas in number of cases, so you know it’s a rapidly moving environment or it has been we are keen to get it closed off as soon as possible its exactly what we’re doing and we think we have made a sufficient provision for what we can see and what you could reasonably expect based on the trends we have seen over the last six or nine months, if that trend suddenly changed obviously you can’t guarantee that but within the context of the trend we are seeing that we think we have got the right number. Yeah, please go ahead.

Good afternoon few quick questions first on the respiratory can you give us an idea of when you anticipate or submit. U.S. and what is your view finally could launch the big safety trial I have almost few days ago and now in Europe respiratory on the generics side could you may be give us some flavor on which are the most risky countries for new generics a competition on Advair in Europe. And last question on margins and as we understand that the emerging markets margin should remain flattish or improve slightly as you anticipate going forward for the group as a whole an improvement of the margins where we should see the improvement in Europe in U.S where you already have some pressure there. Can you give us some flavor thanks?

Andrew Witty

Okay as far as Relovair is concerned may be last I’ll Daryl in a second to make a comment about this issue of whether or not big safety studies are going be needed or not Daryl has been involved in the development of Relovair right from day one when we were. How many B22S did we have in the pool and how many steroids?

Graham Parry – Merrill Lynch

Eight drugs and four steroids.

Andrew Witty

Yeah, it’s quite important just this guys has managed 12 molecules to the two which are in Relovair is been (inaudible) take long a time over this, but we’ve been doing properly. I ask him to comment in a second on in terms of projected file we looking for 2012 filing for the product I am sure you want to know which day. I am not going tell you. So, just a generic sere tide in Europe there is already a generic on the market in Greece not doing very well, but there is one either there is I wouldn’t say there is any particularly higher risk place any of and we just have to wait and see if anybody got a product which is actually register able in Europe by anybody there are all by definition using new devices so they have to prove that their device works and they have to prove similar to us. As I mentioned we’re now aware of any aerosol products so that means in area where we have very big aerosol businesses that’s obviously going be a little less vulnerable and that means the U.K in particular. Deir what you address the safety question safety study question comment on margin progressions.

Deirdre Connelly

So, the safety study question which has come up recently is in the context of LPD and we’ve consulted as we’ve moved Relovair in LPD through to the point that is reached is now a in Phase III and also over the LAMA/LABA the beginning of Phase III which was announced today. So, we’ve had ongoing consultations with the FDA on that we did the programs we have designed to completely aligned to their advice and we just don’t have to same importance from those discussion is the influence which relatives through about the need for large safety studies prior to approval in LPD.

Andrew Witty

And Julian you want makes comment on margins.

Julian Heslop

Margins our strategy clearly is sort of combination of pipeline success and emerging markets consumer healthcare to drive sales growth as fast as we can and we believe that will lead to that improvement that Andrew talked about we don’t want to be any more specific in terms of segments at this stage (inaudible) okay and next question please and then we’ll go and Kevin and then I think Alexander you had your will give you hand up for the back. Go to three.

Graham Parry – Merrill Lynch

Thanks very much.

Julian Heslop

Do we have time? You’re okay.

Yes.

Mark Purcell- Barclays Capital

Okay. Thanks Mark Purcell from Barclays Capital. Just on the LAMA 719, I just wanted if you could help us to understand how you face is going to be positioned in terms of its clinical profile and prices versus Spriva and MV837. Second question how much of a disadvantage, if there is at all is there not having an in house component diagnostics business in development you talked on oncology agents. And then lastly the CHMP guidelines do not explicitly demand a sort free 500 patient clinical study for exposure generics but inline of the setbacks we’re seen in Europe over last 12 months. Do you believe that it’s going to be very tough to get approval of respiratory generic without such a trail?

Julian Heslop

Okay. I mean generics everywhere is very tough I mean to be honest as I have said repeatedly that’s their problem to figure out. And I’m we’ll see whether anybody is able to sort this out, I think what we’ve seen over the last three years is that most people who say they’re going to do and it’s easy fail. And we’ll have to see whether anybody is able to thread the needle and U.S. is clearly very, very difficult, Europe isn’t easy I’ll put it that way. And as far as diagnostics are concerned in the phase III program and related programs in our vaccine organization. We are very active in that field obviously we don’t own, and we have no intention of buying a diagnostics company but we have we do own some very substantial IP around a suite of diagnostic tests which would be associated with this we have put in place various partner solutions so that those diagnostics are generated in a timely manner for availability with the vaccine if it’s successful obviously we are going to get data on that over the next couple of years. So, I think we are in very good shape to make sure that either we will be a diagnostic or it will be very important there will be at least two layers of critical diagnostics to get to the perfect patient for the vaccine. I think we are in good shape for that we’re in good shape to capture the economic benefit of that. And the last thing, I want to do is spend billions of dollars buying the diagnostic business I know absolutely nothing about and may or may not have the technology. I was thinking diagnostics you have very high chance of buying betamax. You know what I mean. Kind of looks sexy and great and turns out everybody wants A VCR or VHS I’m not so sure. So that was that one and 719 Darrell you’re probably the best person to talk about 719 although we’ve only announced today the start Phase III of combination of the products?

Yes, the Phase III program that will go forward is based upon the data that we have generated in Phase IIB with 719 alone we also have a valuator that’s the same piece of against that’s in the relevant development and the Phase III program (inaudible) we will look at the individual agents and we will include in those Phase III pivotal studies comparisons would lot of patients in COPD who require bronchodilator and perhaps don’t need steroid are appropriate for these bronchodilator agents and they will respond variably depending upon the extent of sort of bench response (audio gap) they have in the extent of so what would be we think in the population (audio gap) overall in the combination we will expect to see patients who benefit better from the combination from and that’s a very (audio gap) obvious a rude trust to go in terms of further development. The question is to whether the LAMA although in 719 alone has a role, I think we will be established when we see the data from those Phase III.

Okay Kevin.

Kevin Wilson – Citigroup

Kevin Wilson from Citi. Andrew in the context of the drug industry generating a lot of cash and EBITDA showed how you improved your cash generation today and governments being very short of cash I’m trying to access the cash that you have. What comfort can you give shareholders if the environment is not actually going to get worst from where we are today and also I am interested in your perspective with a three years or so you have been in charge does it got worst and how should you lead us to think about how it’s going to be going forward and where are you in that continuing of the companies giving cash back to government in a variety of ways. But I’m trying sense of whether the industries about to get clubbed if you like and you have dealt quite a lot of your issues, should we worry in the broader sense more of this to come or is it just part of doing business in the drug industry.

Andrew Witty

To the last one of questions we are almost whatever I say you are going to be back in a year say you said. Its particularly very difficult question so if you think about the overall stance of governments there is no doubt I’m absolutely sure that in the last three or four years we have seen lots of governments think I have lets customer prices rather than make it tough you know down size and decision of the government department or can we ramp it up investigative services to train yield greater fines and if you look at the ratio of all fines paid in the U.S. how much comes in the drug industry is pretty striking what’s happened in the last three or four years from no doubt about that. I think the closure bluntly, I think the closure yesterday of Sandwich is a pretty clear signal to governments has nothing to do with the science base of the UK I think it has everything to do with the pressure that’s been brought in the industry mostly by government and I think that gradually governments will start to realize that constantly cutting prices limiting access reducing patents and raising fines has somewhere down the line there is a breaking point right where things don’t happen we should go by this government. And I think actually files a decision yesterday seems to be completely rational decision in the context of all the pressures that come as live fires and we are under. So I do think that actually governments of particularly in the current macroeconomic environment governments are more and more thoughtful about this and I think we are beginning to see a little bit of growth may be we need to just be a little more thoughtful.

We’ve seen that in Europe where initial very draconian price increases quite often get road back or redirected to all innovative products or re-titrated slightly I think we may start to see some improvement there. I don’t know about things like litigation where everybody sits because other people have different provisioning standards to us you know our obligation is to tell you in advance what we think is the most likely number we’re going to have to pay so before we go to settlement we make a provision that’s what we do every quarter as you know particularly companies in the US are obliged to make a provision within a range of possible outcomes in the range of outcomes could include zero. Which is why quite often in the states a company announce settlement and the member on the same day without having previously had a inner provision. So it’s almost impossible for me to tell you where everybody else sits having said that you know you look at even our the things we have been talking about when you compare that to other companies in recent past you know there is plenty bigger numbers out there the numbers we’ve been dealing with so hard to say where it’s going to go going forward the governments need to be very careful not to overdo it. Because I think this is an industry which has very long cycle times incredibly difficult to rebuild the capability that’s quite easy to shut down actually and there is a danger that governments or different elements of government have a kind of free ride assumption that everything they do has no impact. But the cumulative effect of hundreds of free riders is very significant and I think there is a risk of that where we are in all of that I think we are have as a general point I think we are at the better end of the spectrum why because we’ve certainly borne the brunt of the a lot of the loss of exclusivity impact we’ve gone from a being a business which was dominated by exactly those sorts of products where you could no longer depend on the patent being upheld in a court room and you had surprised in validations of patents we’ve gone from that to a business which is predominantly by far not exposed to that risk by design of geography and by design of geography and bit by design of where we focused our R&D investment. So, that I think is a big shift and so I think going forward our potential exposures there are diminished rapidly I think to the extent which governments have more pressure on you on pricing, you want to be more differentiated not less and I have just described while there is a risk in that from an R&D perspective because you are unprecedented it’s clear that we are committed to be in a more differentiated business and therefore we should have more pricing influence would otherwise and I think that’s moving us into a much more positive place. We focus very hard on how we interact with payers so Eddie has finally figured out how to get deals done with nice and you’ve seen the Votrient deal done with nice and in the US did was put in place price protection contracts with payers which has had a significant impact on our ability to get access in the US so we worked on that front I think we are starting to make very good progress. The litigation piece I mean I said everything I can say about it which is we are doing everything we can to clean up a lot of historic litigation nobody is happy about it but we are getting it done we’ve got a lot done we’ve got a couple of big pieces still to get done and then if you look at how we are operating our business we are absolutely focused on making sure we are operating a business which is in step with current expectations and that’s why we are the only company to we are the only drug company I think still not to give political donations to politicians in the US. We are the only drug company to not reward our reps based on generation of prescriptions and we go on and on and on all of these different areas where we have over the last three years absolutely had a commitment to get ourselves in a very different place that I believe puts us in relatively better position does it make us immune does it mean there isn’t something else I don’t know about in the past which is going popup no I can’t promise you that does it mean we are in control of building a stronger company which can we stand that risk absolutely. Alexandra

Alexandra Haber-JPMorgan

Alexandra Haber from JPMorgan. I am looking for some color on the Relovair COPD outcome study which you have announced today. Things like size, competitor’s timelines, but also how it is different from TORCH? And then the second question I just have is, since you are saying there will be fewer bolt-on acquisitions, do you still think even with fewer bolt-ones you can live up to your forecast that you made in the third quarter that you’re going to grow your emerging market line at least in line with the 14% forecast of IMS for that region?

Andrew Witty

So, I think on the later one I do feel very good about our emerging market business in terms of its organic potential to grow. And actually think because although we’ve got UCB is a terrific acquisition, Phoenix in Argentina is the terrific acquisition, the BMS business in Pakistan and Egypt terrific acquisitions. The real core of what’s going on in that business is we’re pricing our products right in all the different categories and what we’re seeing is much greater volume movement on our classic brands Ventolin, the Augmenting all of that as well as our innovative brands and some of the biggest responses we’ve had of being on products like Avamys, products like Tykerb where we just getting those positions right in the marketplace. So, of course we’ve had some help from acquisitions but as we think while last one going on we’ve really got our organic competitive modeling great shape there as well. So, I’m pretty confident we’re going to be able to continue to grow at will better than the marketplace in those that part of the world. And next Darrell talked this and again in addition to having dealt with all the full (of) molecules he also was involved in the design of torch as well as the new trial so I think probably the right person to answer the question.

And I will stand up so I can answer this way. So, the relative mortality study which again is starting this week is the large study will have 16,000 patients and we look at Relovair and its components compared to usual care in COPD and the primary outcome that will be looking at is ViiV. The difference from torch is important because this is a moderate population of COPD patients was torch was really more moderate to survey and these patients have be chosen because there are at cardiovascular risk they have either have existing cardiovascular disease they have had cardiovascular events while there are other indicators that involved (inaudible) risk of cardiovascular events. And there is a lot of signs in the literature to suggest that there is a very clear link between COPD and cardiovascular risk smoking is obviously the common link to that and the effect of smoking in many cases is through the lungs. So if you can improve the COPD control the hypothesis issue can actually effect cardiovascular risk and we’ve looked very carefully at the historical data that we have both from the torch study and another very large study which we did which was called inspire just also to generate hypothesis later test the hypothesis is to do this large outcome study and that’s the study that we started today.

Well 16,000 patients we have to select those patients we need to go to a very large number of probably over we will be over a thousand centers around the world, the design of the study is such that the duration will be driven by the number of events that we see so it is very difficult frankly for us to we will be following up the vital status of all patients to get recruited into the study patients might be on the study for varying lengths of time and we also have to recruit that large number of patients so it really makes time wise difficult for us to predict.

Thanks a lot we got time maybe for one or two more questions and then I think we are out of time are there anymore questions. No, well in that case let me say thank you very much for your attention I very much appreciate. I know I am seeing many of you for lunch tomorrow. I look forward to get another chance to then and obviously in various meetings over the next couple weeks in the meantime. Thank you for your attention.

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