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GlaxoSmithKline plc (NYSE:GSK)

Q3 2007 Earnings Call

October 24, 2007 9:00 am ET


J.P. Garnier - CEO

Julian Heslop - CFO

David Stout - President, Pharmaceutical Operations


Tim Anderson - Stanford Bernstein

Kevin Wilson - Citigroup

Graham Perry

John Murphy - Goldman Sachs

Michael Costa

Steve Scudal

Brian Walcoff - Deutsche Bank

Andrew Baum - Morgan Stanley

Louisa Hector - Lehman Brothers

Michael Leacock - ABN Amro


Good morning or good afternoon, ladies and gentlemen andwelcome to the GSK Q3 Results Call. At this time all participants are in alisten-only mode. Later we will conduct the question-and-answer session andinstructions will follow at that time. (Operator Instructions). Just to remindyou all this conference call is being recorded.

I would now like to hand over to today's Chairperson, Dr. J.P.Garnier. Please begin meeting, sir, and I will be standing by.

J.P. Garnier

Thank you very much. Hello everyone. I am here with JulianHeslop, our CFO; and David Stout, our President, Pharmaceuticals, and we willgive a brief presentation followed by Q&A as usual.

So, let me start by talking much more about '08 and beyond.Then '07 I think that the situation is clear for '07. If we look at the plusand minuses for '08, you'll see that generic erosion definitely will continue,although '07 is not exactly an easy year for us with Zofran and Coreg and WellbutrinXL. But, clearly the weight of generic erosion was slowdown as we go forward.

Avandia is a question mark. It all depends on how we comeout of the FDA and what physicians feel about the drug. Right now they're verysupportive of Avandia, but clearly there will a change in the label. It's justthe matter of what kind of a change. If the FDA decides to mimic Europe, I think we'll be in good shape. If you recall Europe has come out with a change in label thatreconfirms the value of TZDs in the treatment of diabetes and then has adescriptive on Avandia which we feel is balanced. So, it's more unknown thananything else. A big swing factor for us for '08 particularly.

But then we have growth drivers, which of course helpexplain why despite a significant loss in Avandia, we were able to hold thesales line pretty much even with last year. So, despite the generic, despiteAvandia in '07, the rest is performing quite well and some of those growthfactors like vaccines are really booming. Vaccines were up 50% this quarter.That's probably above the average kind of growth rate, but remember thatdoesn't even include Cervarix and Cervarix is a tremendousopportunity.

I was looking at penetration ratein the target audience and even though Gardasil was probably going to break abillion, all that has been done is 9% penetration. So, the potential out thereis absolutely huge, and I am not just talking US. On top of that, we expect newproducts. Now, there is a bit of a slowdown at the FDA. I was looking at statson NDAs going through the FDA and I think four out of five get an approvableletter now. So, our average for '07 is a little better, we got two out of four.So, there will be delays no doubt about it, we have a very full pipeline and wewill make some very brief comments on that. Because, I think the news comingfrom the pipeline in this quarter were all good.

And then finally, to rebalance a little bit the future, weare now in a position to basically accelerate what we've been doing all along.And you are very familiar with our efforts to reduce our infrastructure andbecome more efficient as a company. Well, now, we have a chance to expand alittle bit beyond the classic G&A and manufacturing to also include R&Dand selling. And the reason we are able to do this is, because we have workedvery hard in those topics to extract additional efficiencies and synergies. Andlet me make a few comments about the first one, the sales force minute. In themeantime I will remind you of our culture at GSK.

Basically, we are good at standardizing and outsourcing whenit's not a core activity that we want to manage ourselves. The arbitrage thatis now available through the global world in which we live is a phenomenalopportunity and we are taking full advantage. And it is just an illustration ofall the programs that we have completed between 2001 and 2007 and all of themhave paid off in terms of savings to the company.

This is an example of those savings. Even in the years wherewe didn't have significant growth in revenues, for instance, a year we lost Paxiland Augmentin, every time we were able improve the SG&A ratio, I expectthis to continue in the future. And this is really what's it's all about interms of this expansion of the Operational Excellence program. We're going tohave an impact on selling, on manufacturing, on R&D and also, and I won'ttalk about it, but it's the one we have been pursing all long on reducingbureaucracy, improving our processes and just being more efficient ineverything we do.

In terms of selling model, the key takeaway is that actuallyit's not just the cost saving program, it's a redistribution program. We areexpanding specialty teams, oncology and vaccines, and if you look at ourschedule of new products, that's not hard to understand.

We are investing and expanding our sales force in some ofthe new economies such as China,and of course, we started to test alternative selling models way back, but moreintensely in the last year. And this test was pretty extensive. We had 15separate pilots in 13 countries. This involved over a 1,000 of our salesrepresentatives and we had plenty of time to see the effect of whatever changeswe made in those various sales and to draw, in some cases, very clear cutconclusion. And that's just an example in two cases at Advair and Avandia where,as you can see there is no difference really between the traditional or the waywe are selling today, and a new pilot that is a more cost effective using fewerpeople and yet you see that we are able to basically stay the course andgenerate about the same volume of business. So, this is just an example to showyou that this was done quite scientifically.

Now, in terms of manufacturing, we are all going to be ableto reduce our network and simplify it. Here the strategy is basically simple interms of the concept. What we want is protect our new products. We don't wantanybody to have control over our new products, for commercial reasons, but alsofor ethical reasons. We don't want people to make our oncology products,because if they go wrong and there is an out of stock, we are killing people.So, for practical reason we tend to want to have control of our manufacturingon all the new products until they become multi-sourced. At the time theybecome multi-sourced, it's less important to us whether we make the product orwhether we buy it. And if we can buy it cheaper than we make it then of coursethat's what we going to do.

We think that over the next three years we will be able tomake significant inroads. Which means that first of all the percentage of ourprimary cost is going to be different in three years in terms of outsourcing,we have an internal target. But, the point is that outsourcing is going togrow, particularly, when you look at the share of the multi-sourced business weare still manufacturing and we have a number of products going generic, whichare now fair game for potential outsourcing. So, that's what it's all aboutwith manufacturing, more efficient network at the end of the day.

In terms of R&D efficiencies, we have to talk firstabout where we going to super invest. Of course, we are maintaining many thingsin place, but we want to accelerate our investments in a number of directions.First is of course the late stage pipelines particularly oncology which is anexpensive area, but also the neurosciences and alike.

Then we will continue to invest in vaccines as we have areally first class pipeline. And as you have seen we are building biologicals,first of all with some in-licensing but also with our own molecules. We justannounced the in-licensing of an anti-CD-3 agent. And I want to remind you thatDomantis is a potential game changing technology. It could absolutely reinventthe monoclonal antibodies field. That's a great opportunity we want toaccelerate the effort and continue to invest, so that this promise becomes areality.

Of course we will accelerate also our establishment ofR&D in China,this is going very fast. So those areas require money and of course we have todo less of certain things. For instance, because we have new technologies suchas prices in place we are probably able to rationalize some of thoseactivities.

We are also looking for faster and better quality decisionmaking everywhere particularly in development and we still have very complexorganizational networks, that's understandable because the process itself isvery complex. But we think we have found ways to simplify and reduce someunnecessary complexities and facilitate decision making, making sure it'sspeedy and high quality at the same time. And we'll have some savings comingout of support functions as well.

This is just a reminder that there's a lot of activity onthe pipeline. We have started to make some good launches in '07. We've filed anumber of products, David will give you a little more on this, but the bottomline is this is a very time in terms of new products. Remember we are lookingat potentially 25 launches over the next three years. We have launched alreadyfive NCEs, but we have more coming and we need to be very focused on deliveringthis flow of new products. That will come right on time frankly to replace whatwe are losing to the generics.

We are announcing a neurosciences R&D seminar. If youlook at the spectrum of diseases in CNS, it's quite remarkable because wehaven't talked to you about this for quite a few years now, but we have beenvery busy and today I think we are the only company with at least a clinicalcandidate. A candidate in clinical trials in every single disease that islisted on this slide and for eight of them our clinical candidate is already inPhase II or III.

So we have a number of bets and some of them are veryexciting, you'll see some first-in-class in terms of science going afterapproaches and demonstrating proof of concept with an entirely new approach.And you'll see also some best-in-class molecules like in schizophrenia thatseem to have a very competitive profile. So this is going to be a good day toshowcase what our two sides have realized over the last few years.

Then just one word on consumer, John is not with us todaybut I will give him all kudos for another exciting quarter with sales up 16%,everything is booming. I am particularly happy with the acquisition we made of BreatheRight and FiberChoice this is turning into a very good bet that we placed a fewmonths ago. This business is small but growing very quickly, 24% and we havenot even started to expand it throughout the world, we're just getting started.So, there is more to come here.

Then of course, we have new launches of line extension andnew variations, which have helped all our business, we're gaining share, with Sensodyne,Aquafresh, Lucozade Horlicks. Not bad for the less core items that are part ofConsumer Healthcare, but overall an excellent performance.

Then, in terms of the future I think it's fair to say thenews of this quarter has been very good on the global portfolio. It shows thatwe have products ready to take over from the generics and from the Avandia loss.We have an extensive pipeline, the reload is very good, the flow of products isgoing from proof of concept to Phase II to Phase III is very satisfactory tous. We are launching an extension of our operational excellence program, whichI think will help and we will make the company even more fit for the future andwe need to be.

Last but certainly not least, we have now designated AndrewWitty as our new CEO and you will get to know Andrew in the near future. We aregoing through the transition together and I think you will be very excited bythe quality of leadership. I also want to pay tribute to David Stout and ChrisViehbacher. They have shown class and character during this very tough processand it shows that there is a great quality of management at GSK, at the top andalso throughout the ranks. So, on that note I am going to now pass on to ourCFO, Julian Heslop.

Julian Heslop

JP, thank you. You will see if you look at the first slide,the turnover in the quarter was up 1%. Pharmaceuticals was down 2%, adverselyimpacted by generic competition in the U.S. and lower Avandia sales.

Consumer Healthcare as JP has just shown you was up 16%,reflecting the strong performance from the core business including alli andfurther growth in the CNS products acquired last year. The cost of goods marginof 22.5% was not distorted by one-off items and reflects the reduction inrelatively high gross margin U.S.sales of products such as Avandia, Zofran and Coreg. It also reflects fastergrowth in the relatively lower gross margin Consumer Healthcare business.

SG&A costs were 3% higher than last year and within thisfigure, Pharmaceutical costs excluding legal and restructuring charges weresome 5% lower. And Consumer Healthcare costs were 18% higher primarilyreflecting higher advertising.

R&D expenditure was 9% lower than the previous year dueto low restructuring costs in the quarter and excluding these expenditures was1% lower than last year.

Other operating income includes £57 million of royaltyincome and £22 million of asset sale profits, partly offset by £32 millioncharge on the Quest collar. Last year, other operating income benefited fromhigher asset sale profits of £63 million and a profit on the mark-to-market atthe Quest collar of £22 million.

If you move to the next slide, you can see that earnings pershare grew 1% compared with a 1% decline in operating profit, which reflectedthe benefit from the lower tax rate and the share buyback program, partlyoffset by higher interest charges. You can see that the quarter was adverselyimpacted by currency with a hit of 5% and this reflected the strength of Sterling against theDollar. The dollar being $2.03 for this quarter compared to $1.88 last year.

Moving on to the cash flow slide; you can see free cash flow£1.4 billion, and you may recall that last year's free cash flow was adverselyimpacted by payments made to the IRS under the U.S. tax settlement. You can seethe cash returns to shareholders in the quarter comprising dividends and sharebuybacks amounted to nearly £1.8 billion, an £850 million increase over theprevious year. We concluded the quarter with net debt of £3.7 billion.

Turning now to the Operational Excellence restructuring; thenew £1.5 billion Operational Excellence program would take approximately threeyears to implement. Approximately 30% of these charges relate to non-cashwrite-offs.

As you can see some 60% of the one-off costs relate tomanufacturing, 20% to SG&A, with a balance of 20% to research anddevelopment.

The next slide shows the phasing of the cost savings, andyou can see that over three years we moved to deliver £700 million by the endof the three-year period in 2010.

Moving on to look at the accounting for this; with effectfrom the fourth quarter of this year, we will introduce a 3-column approach tothe income statement. The first column will show the business performanceresults, excluding the one-off costs from the restructuring program of £1.5billion. We will include in the middle column the one-off restructuring costs.Finally, in the last column, we will show the total statutory results for thecompany, including the one-off restructuring costs as required underInternational Accounting Standards.

The company will provide earnings guidance in future on abusiness performance basis, which excludes the one-off costs of the newrestructuring program.

In conclusion, we expect 2007 EPS growth of 8% to 10% atconstant exchange rates, excluding charges relating to the new £1.5 billionrestructuring program. We remain on track to complete our £12 billion sharebuyback program over two-year period and since the beginning in August torepurchase £1.7 billion worth of shares.

Lastly, we've announced today that we expect to pay a 2007dividend of 53 pence a share, which represents just over a 10% increase overlast year.

I'd now like to hand over to David.

David Stout

Thanks very much, Julian. If you move to the first slide,you'll see sales of pharmaceuticals in the third quarter were £4.6 billion and2% below last year. Pulling sales down in the quarter was really a combinationof the anticipated losses due to the generics Zofran, Wellbutrin XL and Coreg,along with the unanticipated declines in Avandia which combined totaled about£460 million.

Now to give you an update on what's happening with Avandiasales if you move to the next slide, you'll see here that since the publicationof the NEJM article, shares for new Rxs and total Rxs have declined by slightlymore than half, with some leveling in the last two months.

And if you want to see the impact on sales moving to thenext slide, you'll see here the 48% decline in U.S. sales corresponds to the shareloss that we just saw. We are now waiting of course for the final decision onany labeling changes from the FDA.

Conversely though outside of U.S., the impact hasn't been asdramatic. In fact, the 11% decline that you see here in Europeis really more impacted by a sales callback by one of the EU countries. If youactually remove the impact of this accounting adjustment, sales in Europe grew by 4%, which is consistent with prescriptiontrends and our stable market share.

In the international markets, you really have an average ofthe groups of countries that are more like the U.S. and experiencing a similarsituation and those that are more like the European situation.

Now, of course, offsetting all of the generic Zofran,Wellbutrin XL and Coreg impact, and a part of the Avandia decline, is thegrowth in our key assets.

So if you move to the next slide, you can see that we'vepicked up just under £400 million in the quarter from some of our other keyassets.

If you move on, you'll see some of this in more detail. Ihave removed Avandia from the slide for obvious reasons and I've also takenCoreg off the list as the initial loss of the IRR sales to generics will begreater than the Coreg CR growth. Although I expected Coreg CR will be addedback to the list as we get it more established in the hypertension market. Theremaining group of products still contributed over £2 billion pounds and grew21%.

I'll cover Advair and Vaccine in some detail in a moment.Just let me say a few words about some of the others. First, Lamictal growthcontinues to be driven by the bipolar indications in U.S.despite generics in Europe, and for Valtrex,growth is coming from our indication for reducing the risk of transmittinggenital herpes. And of course not all surprises are bad ones I continue to bevery personally surprised by Requip's growth, which is being driven by therestless legs syndrome indication.

Moving down to Avodart; sales are growing very strong as isthe market growth in the U.S.which was up 17% in the quarter. Our DTC campaign has been very effective withpatients and physicians who identify with this shrinking the prostate message.We are also making headway with physicians, based on the results of the CombATstudy, and if you recall, this is a head-to-head study versus Flomax, which waspublished in August, and demonstrated superior symptom relief over thelong-term.

Boniva continues to show very strong growth in the U.S. datashowing the impact on bone mineral density with once-a-month Boniva isequivalent to the once-weekly Fosamax, which, as you know, itself show to bebetter than the bone mineral density impacts over Actonel, and this is helpingto drive the growth.

And I of course also now added Tykerb to the list, which isjust getting started, but will be a big contributor for many years to come, andon an annualized basis, is now running above a $100 million a year, despitethis fairly narrow initial indication which will expand overtime.

Now, if we turn to Advair which of course is our largestproduct, with third quarter sales were £835 million with a reported growth of7%. The U.S.sales reported growth of 5%, but this is below our estimate of the real worldgrowth, which was 8%. And if you remember at last year's third quarter, we'vereported 17% growth in the U.S.,but we noted that the growth benefited from the stocking patterns and from areverse adjustment in the Tricare business. So this year, there is a reverseimpact on the growth rate.

Europe meanwhile continued its trend of high single-digitgrowth for the brand, and international growth with strong 15% growth isstarting to benefit from the launch in Japan.

Key driver for Advair's growth has been the use in thetreatment of COPD. We know there is still a lot of growth opportunity in thismarket and we are continuing to work with the regulators in the further expand the Advair label around the COPD indication.

Now in U.S., Advair's growth in the asthma hasn't been asstrong as the COPD, but there are new NIH guidelines for the treatment ofasthma that were just issued and they are positive for Advair and we hope toget a boost from this.

Let me give you a little bit more detail there, and just togive you a little background. The NIH guidelines for asthma were first issuedin 1991, and there have only been two full updates since then. Now, theseguidelines carry a lot weight in the medical community. In fact, it was thesecond full update that led to inhaled corticosteroids becoming the preferredtreatment for asthma in the late 1990s. Now, at the end of just this pastAugust, we received the third full update of the guidelines based on thecomplete review of the scientific information available. And after reviewingall of the evidence the guidelines have reaffirmed that the combined use of alow-dose inhaled corticosteroid and our LABA, which is basically Advair, is apreferred initial therapy in the treatment of moderate or severe patients.

The guidelines are also emphasizing the importance ofpatients maintaining control of their asthma. They have also recommended usingtools such as the asthma control test that we've talked about before and theGSK developed in collaboration with the American Lung Association, just to makesure that the patient's asthma is under control. You can see examples in thisslide of how the new guidelines have already been incorporated in our aids.

And if you are wondering just how much weight physicians puton these guidelines, you can see here some of our own market research completedthis past June, asking just that question. You can see that more than half ofall physicians indicated that they referred to the guidelines to determinewhat's an appropriate treatment for their patients. And of course, our sales organizationis doing their part to disseminate the guidelines. And here again is anothersales aid, pointing out that the asthma control test which we featured in ourDTC campaigns and our reps have been preaching to the physicians, is directlyaligned with the NIH guidelines for determining if patients have their asthmaunder control.

The initial feedback from our sales force has been verygood. They've been very positive. They feel like the guideline lines have giventhem some credibility in the eyes of the physicians.

We would move on now to the Vaccine business. In the secondquarter, if you recall, we pointed out that growth of this business wassignificantly improved during the second half of the year, because of thetiming around our tender business and our flu shipments. And of course, you cansee that that is now been proven true by the 49% sales growth that you see inthe third quarter and sales of almost £600 million.

You can also see at the very bottom that the year-to-dategrowth is 21% and much more in line with the recent history and ourexpectations. Also remember moving forward, we will now start to see sales fromCervarix, as we roll out our launches in Europeand in several other international markets.

You can see from the slide that the growth, though, wasstrong across all parts of the portfolio, our hepatitis business grew 29%,helped in large part by US, where Merck had manufacturing problems with theirhepatitis A vaccine. The Infanrix business had a really strong quarter, especiallyin the US,where it grew 40% in the quarter and year-to-date growth is now 34%.

Moving down the list, I am going to come back to flu salesin a moment. But, Boostrix performance this quarter was helped by someshipments that were delayed in the first half and the year-to-date growth nowfor the product is 33%. Next year we are expecting to file in the US toexpand the indicated age group for Boostrix to include adults.

Rotarix with sales of £23 million for the quarter isbuilding momentum. We expect some new very compelling data for Rotarix to bepublished before the year-end. And in the third quarter, of course, the FDAaccepted the company's file for Rotarix, so next year we will be lookingforward to a late end of year launch.

And of course our portfolio of other vaccines benefited fromthe completion of many of our tender orders.

Now, let me give you a little more detail on the flufranchise. Our seasonal flu vaccines, Fluarix and FluLaval had sales of £120million this quarter, versus only £55 million last year. Now, big part of thisincrease is due to our ability to ship earlier this year than we did last. Ifyou recall, last year sales were delayed in to the fourth quarter, because ofdifficulty producing one of the strains and because we didn't get FluLavalapproved until October.

So this year we are getting a much earlier start. Now thatbeing said, we are also getting better pricing on the flu vaccine this year,because we are shipping earlier, and we have also increased our production sothat we still have the majority of our doses to ship in the fourth quarter.

In the third quarter, we also recorded our first significantsales for the pandemic flu, where we had £21 million of sales. Most of this wasfrom selling the first tranche of the H5N1 vaccine to the U.S. Health and HumanServices. In the fourth quarter, we expect to ship more to HHS. We should alsoship our pre-pandemic vaccine to the Swiss before the year-end. Of course, inthe third quarter we also announced an advanced purchase agreement with U.K.government.

And I mentioned Cervarix a minute ago, so let me just giveyou an update for the quarter where Cervarix achieved several major milestones,including most importantly final European approval, followed by very rapidlaunches during the first week of October in the U.K.,Belgium and Germany.

Outside of the EU we also received approvals in Norway, Mexicoand Philippines.And we shouldn't overlook that we filed Cervarix in Japanin September. This was not only the first cervical cancer vaccine filed in Japan, but was also the first vaccine for GSK tobe filed in Japanand hopefully that's the start of a new trend.

Following the EU market authorization, we have alsosubmitted Cervarix to the WHO for pre-qualification.If you are now familiar with this, this is the first step of our process thatwas put in place by the WHO which allows the approval from a recognizedNational Regulatory Authority such as EMEA to speed the delivery of newvaccines to developing countries. So, group such as the GAVI Alliance andvarious UN agencies will use this status for their vaccination programs in thedeveloping world.

Finally we'll be presenting some new analysis on costprotection tomorrow at the ACIP. And well I'd love to give you the data aheadof the meeting, I can't, but the bottom line is we are very confident in ourvaccine. It maintains the antibody responses over time and we believe this willbe a significant advantage for Cervarix. We believe that the healthcareprofessionals will understand this especially as it relates to the HPV 18antigen and its related HPV types.

So for my last slide as JP indicated earlier I have includeda recap of the significant regulatory activities for this year. We've launchedalready four new products in the U.S.along with Advair in Japanand now also I just mentioned more recently Cervarix in Europe.These of course will be very important for 2008 and beyond.

We also have nine additional new near-term opportunitiescurrently in the hands of the regulators and the final word from the regulatorsand several of these is until next year, but it's certainly nice to know thatwe have a lot of shots on goal. I am not going to go into each of these now asyou've seen the press releases before and I am sure you are very aware of them.

During the third quarter we also received three approvableletters and we are working on filing responses to each of these. But mostimportantly there are two very critical filings that we expect to make beforethe year end.

First as promised Promacta, which is oral drug for patientswith low blood platelets will be filed in the U.S. before year end and secondSynflorix which is our pneumococcal vaccine designed to protect against the tenmost pneumococcal serotypes worldwide will be filed in the EU and internationalmarkets. And remember because of Synflorix's unique design it also providesprotection from acute otitis media caused by non-encapsulated H flu. So, theseare two very important products and will be big contributors to the future ofGSK.

So, with that I am going to turn the call back over to JP.

J.P. Garnier

Thank David, thank you, Julian. And we're going to now openfor Q&A.



Our first question comes from Tim Anderson. Please state yourquestions sir, announce the company name and location please.

Tim Anderson -Stanford Bernstein

Thank you, Tim Anderson at Stanford Bernstein in New York. Couple ofquestions. On Cervarix, can you update us on how you plan to position through Cervarixversus Gardasil. If prescribes or purchasers were to as you, why they shoulduse your product versus Merck. I am wondering what your answer would be. Andthe second question refers to your reference to new selling models. I amwondering, if you can give us specifics on what exactly you are doing with yourpilot projects in primary care areas and develop major markets like the U.S., Western Europe.In terms of what you see as working and not working in the future. I think alot of companies are trying to figure this out and change is probably immediatehere. So, again my question is specific to the big primarily care areas?

J.P. Garnier

Tim, I will take the second question and let David, talkabout Cervarix. We do not wish to share the details of the conclusions andpilots. Suffice to say that, we tested a number of alternative variations onthe theme of face-to-face selling and suffice to say that what works bestvaries per geographic area. There is no universal answer here, not that weexpected one and then it also is important to relate this to your product line.Certain product lines, we could still increase sales force and get someincremental benefits.

Some product lines have passed a point where intense effortis no longer required, even in the high noise level environments. So there is alot of complexity I think what works well for GSK, may not actually betransferable to directly towards the companies. But we are not going to givelectures on this, because a lot of it we consider is propriety. We have donevery good quality testing to get to those answers. So that's where we are goingto stay.

So, David on Cervarix please.

David Stout

If you remember Tim, from the beginning, we have said wedesigned Cervarix to be a cancer vaccine and we think that’s the most criticalparticular. As you develop any kind of vaccine, you recognize the more antigensyou put into a product, the more chance you develop for problems withinterference among the different antigen types. We think based on our unique[agilent] system, along with the fact that we focused on these two antigens,the data will continue to play out that we have better cross protection as weget to the related serotypes and the 16 and the 18. And that we'll have alonger duration of protection and we can build economic models that will showthat if you can get even a 5% better cancer protection covering greaterserotypes types. That this more offsets any cost advantage which is basically acosmetic issue with [Genetovas].

Tim Anderson -Stanford Bernstein

Thank you


Our next question comes from Kevin Wilson. Please state yourquestion and also announce your company and location please.

Kevin Wilson -Citigroup

Hi, thank you, guys. Kevin Wilson from Citi in London. Three questions ifI may on Advair. David, you talked in the past about COPD the larger driver orthe key driver. So the question there is what will happen with the 250/50 CRPdata that I think you published recently? And how do you relate you commentstoday on the guideline change for asthma, so that goes patent for Advair. So myfirst question is, is that growth and are the new guidelines going to change?

Secondly, on Avandia in Japan, where are you with thatprocess. In the past, you've talked about its importance given what's happenedthis year. Could you update us on that?

And finally for Julian, what level of charges for this newOperational Excellence program do you expect in the fourth quarter?

David Stout

Okay. I will take the first two and then pass it over toJulian. So the Advair on the 250/50, this was the study that was just presentedin an abstract this week. It was a post-marketing study that we had done in a part of the regulatory requirement. And again, it supported the idea thatit's a broader label. It would indicate a broader label as appropriate forAdvair around the COPD indication, where again we showed a significantreduction in exacerbations.

Now if you contrast this to the TORCH study, TORCH wasreally a very different study that looked at mortality as a primary endpoint.Of course, we picked a higher dose because we wanted to give the patients agreater opportunity for that.

So in terms of the COPD, we think it's still going tocontinue to be a big driver for us. There is a lot of opportunity there and nowwith on top of it, we have the asthma guidelines, which will give us more fireon the asthma side of the equation. So we don’t give specific guidance abouthow Advair is going to grow, but we do firmly believe that it still has a lot ofgrowth in it.

In terms of Avandia in Japan, we continued thedevelopment. We've done a lot of the work that the Japanese regulators haveasked. We expect to file sometime in 2008-2009 timeframe I believe. And ofcourse the Japanese regulators -- it's a little bit slower over there so wedon't expect approval. There were some additional studies that we had to do andthat will be sometime probably in the 2010 timeframe.

Julian Heslop

And Kevin, in terms of what charges in 2007 quarter four,this is all subject to consultation, any number I give you will be wrong, so Iwon't. I think it will be significant, but I don't want to give you a numbernow which will mislead you.

Kevin Wilson -Citigroup

Thank you.


Our next question comes from Graham Perry. Please state yourquestions sir and announce the company name and location please.

Graham Perry

All Right, thanks for taking my questions. Firstly aquestion on the margin outlook for 2008 given the restructuring program. If welook at around to £250 million that's about a 150 basis points on operatingmargins that you have to offset some of the off patent exposure. Do you expectany of that to emerge as incremental on your margin over 2007, or is this justall going to offset the operational de-leveraging from patent loss and Avandiadeclines?

And second question on the timing of your restructuringannouncements, and just with this coming ahead of the Avandia label, and towhat extent, does this reflect your pessimism over the labeling outcome and theinability to stabilize market share once it's issued?

And thirdly on TYKERB, it's annualizing not only GBR64million, this imply still limited penetration even to the approved indicationssecond-line is that tumor refractory patients. And so what do you see as yourpenetration now and what are you doing about enhancing it further?

Julian Heslop

Okay, on the margin, clearly there will be significantimprovement in terms of the cost saving program, if you look at themanufacturing cost savings. Now they come not at the beginning of the threeyears and that's what I think you have to pay attention to. There is a timingelement. There are site closures and some of the elements of the cost savingcome toward the end of the cycle. But I would say that the picture is thatchange in mix which is a change in a product mix and also in geographic mix,after all this quarter not growing as fast as Europe andinternationals. So therefore we also suffer a negative effect there. Butoverall that kind of effect will be compensated by some of the moves we aremaking and also the introduction of new products, which are typically highprofit products. So you have to look at beyond '07 and even into '08 wheregross margin will be a negative, a slight negative and then making a come backas we go forward.

On Avandia label, no we were going to do this program simplybecause we were looking for the programs to be executed, particularly inmanufacturing and selling. So we were a little bit dependent on when the pilotswould end and where we could draw the conclusion that has all happened, and infact if you wanted to get an outlook on Avandia. I mean the European label is apositive. It restores the value of those medicines in diabetes, it profilesAvandia in a way that is I think fair and make the product still competitive.

So if I had to pick, I would say well that's should be anoptimistic fact, but the FDA is very unpredictable, and frankly I'm not goingto try to guess, but regardless we were going to do this OperationalExcellence. And then whatever label we get then we'll make an assessment ofwhether we can really get Avandia going again and that's why I presentedearlier a question mark on Avandia for '08, because I think nobody could guesswhether it's going to go the way CRESTOR did which is they've made a turn aftersix, nine months and were able to in fact grow back to where they came fromafter a pretty significant safety scare, or whether its going to be a productwhich really stays where it is and becomes a bit of a slow erosion typeproduct. We don't know that. We will not know for a while. And then on the lastpoint, TYKERB, I will let David answer.

David Stout

Yeah. I am actually surprised the negative comment on it. Ithink right now at £64 million, remember this is only the second full quarteron the market and that £64 million were actually running ahead of consensus andwere most people thought that this was a very narrow indication that wewouldn't even do a $100 million a year with it, and already we are in thesecond quarter, we are ahead of that run rate. So, I remind you that, when Herceptinfirst launched, its sales were quite slow at the beginning. In fact, we are notrunning too far behind where Herceptin was, despite the fact that they had afull pool of patients sitting there and waiting. It wasn't until they had adjuvantindication. And adjuvant data that really the sales took off. So, we're verypleased.

J.P. Garnier

Yeah, I agree David, I think the TYKERB, you can't reallymultiply two quarters and get the year. It's in full growth and we're gettingmore importantly very good quality feedback from oncologist and we can't waitfor Europe to be fully labeled and fully readyto go, because there is a great appetite. I mean in very restricted territory,in Europe we are already generating £5 millionand we don't even have a formal approval, it's just that the product isavailable. There is a real demand in Europe,because the system is different. They don't have infusion chairs in very privatepractice, oncology office in Europe and theyare much more likely to send the patients to the hospital. So, I expect a goodpickup there, but future will tell. But, Graham, I think you are a little bitof pessimistic here. We hope to prove it to you more clearly next quarter.

Graham Perry

And just one quick follow-up on the comments on the Avandialabeling, you previously talked about an expectation as class labeling for bothAvandia and Actos. Has anything changed during your discussions with the FDA relatingto that expectation?

J.P. Garnier

Well we don't have any expectation, because we really don'tknow and we can't really influence the FDA beyond what happened at the AdvisoryCommittee. I think its fair to say that if you read the Advisory Committeeproceedings, you can see that the bottom-line is there is an enormous pool ofdata on Avandia and very little on Actos. We have 90% of the data generated,they have 10%. So, we can see a lot more in a picture, it was 90 pieces of thepuzzle that are magnified, then in a tiny puzzle where not very much has beendone in long-term clinical trials.

So, I cannot predict what the FDA will say on Actos andwhether there will be class labeling. That was the wise thing to do to give aclass labeling on congestive heart failure and future will tell again, I can'tmake any predictions. Nobody can do it, no, not even the Wall Street Journal.

Graham Perry

Thanks very much.


Our next question comes from John Murphy. Please state youquestion then announce the company name and city location please.

John Murphy - GoldmanSachs

Yes, good afternoon. It's John Murphy, Goldman Sachs.Jean-Pierre, can you just pick up on the last question linked in to margins.And I mean, you talked about the tough quarter you had, but in pharma you had afantastic margin of 37%, for many companies growing very, very fast they can'tget close to that level. So, just wondering again whether the cost savingsprogram announced is going to allow further expansion from that level or justto offset some of the pressures that you foresee over the next couple years orso?

J.P. Garnier

Well, I think for '08, as I said, I would not give anindication that gross margin is going to improve. Simply because you get thefull impact of some of the generics, you get the full impact of -- it dependson Avandia. If we make a bit of a comeback let's say in the second part of '08with Avandia then all the bets are off on margin, because that has a bigimpact. But I am just taking the more conservative route that let's say we staywhere we are on Avandia, so there is still a net loss '08 versus '07. I amtaking in to account the generics, but I am taking into account the fact thatin '08 you won't have the bulk of the manufacturing savings.

So, that's for '08, and then in '09 everything turns aroundthe right way for us. So, I think you have to look it as a sort of cyclicaleffect on the gross margin. We have always been able to improve the grossmargin. When I look at the products that are going to be introduced, some ofthem are pretty high margin some of them are more middle of the road likeCervarix. But all in all I think '08 I would be conservative and '09 morebullish.

John Murphy - GoldmanSachs

Thanks, just had two quick product questions as well maybefor David. Can you give us any update at all on where things are with gepirone atthe moment? And any anecdotal comments perhaps around Coreg CR and the sort offeedback you are getting from docs on that?

David Stout

On the gepirone we are still waiting for the FDA, so it's intheir hands, we have heard nothing. So, I can't tell you one way or the otheron that one. In terms of Coreg CR, there's a few dynamics with Coreg that aredifferent than some of the other switches. This is a market where the incidentnumber of patients is much more than the prevalence. So, we are having to waitfor the new patients to come in, but again the feedback is very positive fromthe physicians. We just have to be a little more patient than say we were with WellbutrinXL, where you have very rapid patient switching, where patients go on todifferent antidepressants very quickly. So, I am not concerned at all withCoreg CR over the long-term.

John Murphy - GoldmanSachs

Thanks a lot.

J.P. Garnier

Okay. Thank you, John. Next question please


Our next question comes from Michael Costa. Please stateyour question sir and announce your company name and city location please. Mr.Michael Costa your line is open. Once again, Michael Costa your line is open.

Michael Costa

Are you able to hear me now?

J.P. Garnier


Michael Costa


David Stout

Yes, we can hear you.

Michael Costa

Okay good, thanks, sorry about that. Two questions first onthe HIV franchise. Can you talk about what's happened with the pricing sincethe generic introduction of AVT and what will happen with subsequent genericsand also whether the royalty burden that you currently bear on 3TC willcontinue after '09? And also I am wondering if you can comment -- I have heardsome other companies [in your absence] software companies and consumer productcompanies were quite slightly weaker sales in the third quarter and to theextent that you've got mature consumer products in Europe. Have you see anychange in pattern to say that would suggest any impact on the European economy?

J.P. Garnier

Okay, thank you. On the European Consumer Healthcare front,no we are having a very dynamic quarter. So we can't say we would confirm that.It varies but oral care and OTCs are strong, so that's the answer to yoursecond question Mike on the.

David Stout

On the first one on the HIV pricing we have seen nodifference in the pricing just because of the introduction of generics. This isno different than when we see generics being introduced in to other therapeuticclasses. So things are going well and in terms of royalties beyond 2009 on 3TCI really don't know I'll have to get back to you.

J.P. Garnier

Okay Thank you next question please.


And our next question comes from [Steve Scudal]. Pleasestate your questions and announce your company name and location please.

Steve Scudal

I think while you said about Avandia and the [CRESTOR]analogy, the release clearly says lower Avandia sales in 2008 and I am confusedas to why you would say that now particularly ahead of the label? I mean yourcomments really do suggest that the company has no new studies or initiativesto turn things around anytime soon so I am really perplexed as to why you wouldcome now ahead of the label?

Secondly on Lamictal when we should we anticipate generics sin 2008 and will you launch an authorized generic? And then lastly on HFA albuterol,the company has claimed overtime that it would increase its efforts but it'snot at all evident has Glaxo abandoned that effort? Thank you.

J.P. Garnier

Okay on the Avandia remember we were full blown sales thefirst five months of the year, that's the only reason that if you look at thefuture and you said okay let's say the label is not a case of theirs it'swhatever it is and we start to go back to the marketplace. By the time thesales go up even in a fairly realistic scenario mimicking other examples thathave happened in the past you have to build yourself a back to where you werein the first place that is the May high point level. And then exceed itpossibly while if you do that trust me to on this the simulation shows you thateven in this fairly positive scenario you can't quite compensate for the factthat for five months we are going to look at sales, which are double of whatthey are today. So that's the only reason, but listen we've been wrong beforeon forecasting product sales so I hope you are right I hope it -- we canexecute a even more optimistic scenario but I can't take that as a mainplanning hypothesis and therefore Lamictal and so forth.

David Stout

Lamictal, in the release, we stated that in mid 2008 youshould see generics and Lamictal and we don't comment on our authorized genericstrategies. In terms of the HFA albuterol, we had manufacturing issues. So, wehave been planning catch up, but this is still a very important opportunity forus and we haven't given up on it.

J.P. Garnier

And we haven't given up and in fact, if you look at ourshare, it is from a small base granted but it is growing. So, we're definitelygoing to be back in this market.

Steve Scudal

Thank you.

J.P. Garnier

All right, the next question please.


And our next question comes from [Brian Walcoff]. Pleasestate your question sir, announce company name and city location please.

Brian Walcoff - DeutscheBank

Deutsche Bank, calling from London. A question on the operationalexcellence program please. You told us that you expect to deliver total annualpre-tax savings about GBR700 million by 210 in different parts of the business.I just would like to ask, is that all cash or are there some accrual elements,some cash outlines that would normally have been expensed that might becapitalized and the state of my thinking is related to the move tomanufacturing changes and a move to multi sourcing? Any thoughts there please,thank you.

Julian Heslop

Yeah, the non cash element of the 700 is under 10%. So, it'sa very small proportion of it.

Brian Walcoff - DeutscheBank


J.P. Garnier

And this is basically an extension of a program but muchlarger and because of site closing and the like there was need for a provision.

David Stout

Next question please.


Our next question comes from Andrew Baum, please state yourquestion sir, and announce the company name and location please.

Andrew Baum - MorganStanley

Hello, it's Andrew Baum from Morgan Stanley. Just onequestion and answered. Perhaps Julian you might like to have the guess, as tothe outlook for legal costs, anticipating a rash of Avandia (inaudible) as wework into 2008. What do you think is reasonable for us to include within ourforecast?

Julian Heslop

I never predict legal costs, Andrew, because I would alwaysbe wrong. They will be what they will be. We believe in Avandia, and we willcertainly contest in illegal actions on it. So, we don't see that as aparticular issue at this point in time. But it's impossible to predict what itwill be. As you know, it's been coming down over the years, but I can'tpredict. No reason to think it will go up, but who knows.

J.P. Garnier

The good news is, our book of outstanding litigation isgetting thinner, it's still thick, but it's getting thinner after years ofefforts and many cases which were settled. If you look at all the patentlitigations on Paxil and Augmentin and so forth, which contributed to some ofthose costs. But on the other hand, again, we will take it as it comes, andeven though we have no particular concerns, we don't want to make a specificforecast at this point.

Next question please.


Our next question comes from [Louisa Hector]. Please goahead with your question ma'am and answer your company name and your locationplease.

Louisa Hector -Lehman Brothers

Hi, good afternoon. It's Louisa Hector at Lehman Brothers.Two questions please. I just wonder if you could comment on Advair and whetheryou are seeing any impact from the Symbicor in the US. And then, really going back toJP's earlier comments about the FDA with four out of five drugs getting anapproval letter at the moment, I just wonder if you could give us an update onyour views, the late dilatory environment, clearly seems to be getting tougher.Would you expect that to remain the case for sometime in the future? Thank you.

David Stout

Okay, thank you. I think Symbicor is just getting startedbecause right now they are not making much of an impact. If you add all the Symbicorprescriptions to the Advair business this quarter, Advair would go up oneadditional point. So, it's not very much.

In terms of the regulatory environment, well, you know asmuch as I do, but in our contacts with the FDA, in the tone of the letters wereceived there is clearly a super agenda item called safety and I think itplays differently in different divisions. After all if you are approving lifesaving drugs for people who are in very bad shape, the safety risk and thesafety concern might not be of the same intensity as if you are on the verge ofapproving a drug that's going to be used for chronic disease, which are notlife threatening.

So we are going to see that the hurdle has been raised.There is no question about it. What is unclear is exactly how should we modifyour drug development plans to meet this higher hurdle and we hope that therewill be clarifications. And this is more of the FDA than any of the otherregulatory agencies. And we find that the regulatory agencies throughout theworld most of them use science and clinical data to make decisions and therethe lobbying and the political around the agencies is minimum.

And in the USthe difference is obvious to everyone who read the paper everyday. So we hopethat the FDA will be left alone to do their job and if they do we will be fine.But I would say from a practical pragmatic standpoint what does it mean for ustoday as we speak? It means that as we are working on 25 launches over the nextthree years some of them will be delayed that probably wouldn't have beendelayed if we had those 25 products even two years ago. But such is life and asfar as raising the bar we are absolutely ready for it and particularly insurveillance.

I think it's very important now in every file to have a verydescriptive risk management program. I think that's a good thing personally andI think that companies such as GSK are very ready for this challenge and havebeen working at this for quite a bit. So on that note, I am going to ask I’mgoing to ask one more question and take it as a last.


Our last question comes from Michael Leacock. Please stateyour question and answer your company name and city location please.

Michael Leacock - ABNAmro

Thanks. Thanks a lot for taking my question. It's MichaelLeacock here at ABN Amro in London.Two questions really if I may firstly on the, JP, and I think you said in thepast you are looking towards R&D as a percentage of sales in the long-termrising I think up to 25% was the figure that you hinted at. And as we have seenthe R&D costs stable minus 4% down for the nine months, I just wonderedwhether you are not tempted to put some of your operational expense savingsback into R&D and whether your view on that has changed at all.

And secondly for Julian, in the past you have takenrestructuring charges they have been running I think it about a 140 million,200 million I think last year on an ongoing basis. Are all of those charges nowgoing into the clearly delineated operational expense charges or will therestill be an underlying background and change going on?

J.P. Garnier

Very good question, Mike. On the R&D again theaspiration is that we should be more R&D intensive. Now there are severalways to get there. The first way is to reduce SG&A and reinvest in R&Dand that's what we've been doing all along and even though right now and in theimmediate past R&D as a percentage of sales has not gone up, that is, weare doing far more with R&D than before. We are placing more bets. We aredriving more products through the pipeline.

If you think about it we nearly doubled the pipeline sizeand we certainly haven't doubled R&D since the merger eight years ago. Thereason this has been possible is because we have made significant efficiencyimprovements within the process of R&D. So, we are doing more for less.Remember the first company to export clinical trials in a big way, firstcompany to do data capture. I mean all those programs have saved remarkablelarge amounts of money. If you look at next year by the way, even though we aresaving money in R&D and we are saying so that we are doing this program ofeliminating duplications and so forth.

That's going to raise some money for us. We are alsoinvesting in some parts of the R&D at a faster clip than sales growth. Forinstance the R&D China, the biological space, oncology programs and soforth. So it's a mix of the two and I would say flat-flat, average I would sayflat on sales for a little while but I think that the environment is going toforce pharmaceutical companies to raise their [game] in R&D and if we havea productive R&D and we are still working at improving that why not investmore. So, it will be at some point if we are successful in shrinking a littlebit our resources used for selling and reinvesting them in R&D will be in avery good shape.

Clearly an inspirational statement, but one that I hope willbecome a reality in the future and there is very good science out there that wewould like to buy and if you look at the extension of our balance sheet, intothose kinds of deals what you see in terms of R&D expenses isunderstatement of the effort. We are actually having access to more programthan simply the R&D line seems to indicate. On the other hand, in terms ofyour second question?

Julian Heslop

Michael, you are right. The operational excellence ofexisting programs have averaged between 100 million and 200 million every yearand I expect to take further charges against business performance earningsthat's the first column in quarter four in respect to the existing programsthat are still running. They will carry on and being charged into that firstcolumn. However, the new program is so significant, hence the introduction ofthe middle column that's the ration for it. It would distort our performance ifwe weren't to do it.

And as a consequence of focusing all our efforts goingforward on this new program, I would expect that it will be negligiblechallenges in the first column. We will focus our efforts delivering this newprogram and it will take all those efforts. But certainly as far as the fourthquarter of this year is concerned, there will further challenges in the firstcolumn in respect to programs still running. They would decide on it beforethis new program was implemented. Does that answer the question?

Michael Leacock - ABNAmro

Thank you very much.

J.P. Garnier

Yes, and Mike just to complement and that [tale] of costs,related to existing programs, will go over next year as well.

Michael Leacock - ABNAmro

Thank you.

J.P. Garnier

Thank you.

David Stout

Thank you very much for attending this conference and wewill talk to you in a few months.

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