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GlaxoSmithKline (NYSE:GSK)

Q1 2012 Earnings Call

April 25, 2012 8:30 am ET

Executives

Andrew Witty - Chief Executive Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Simon Dingemans - Chief Financial Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Analysts

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Brian Bourdot - Barclays Capital, Research Division

Graham Parry - BofA Merrill Lynch, Research Division

Jo Walton - Crédit Suisse AG, Research Division

Kyle Rasbach

Florent Cespedes - Exane BNP Paribas, Research Division

Mark Clark

Naresh Chouhan - Liberum Capital Limited, Research Division

James D. Gordon - JP Morgan Chase & Co, Research Division

Jeffrey Holford - Jefferies & Company, Inc., Research Division

Nick Turner - Mirabaud Securities Limited, Research Division

Andrew Witty

Thank you very much, and thank you for joining me on this call. I'm here with Simon Dingemans. And what I'll do is make a few introductory comments and ask Simon to make a few comments, and then we'll open up to Q&A, as we normally do.

I'm very pleased with the first quarter performance, which provides more evidence of the sustainable business that we're building here at GSK. And importantly, we are delivering exactly what we said we would: reported sales growth, gradual operating leverage, good cash generation, enhanced returns to shareholders and continued positive R&D asset progression. You will see we are now reporting core earnings for the first time and this gives a better indication of the operating performance of the business. It also brings us into line with our peers.

On this basis, sales grew 2% and EPS grew 7% in the quarter. In terms of the 2% sales growth, it really demonstrates a resilient performance, given the continued economic pressures and challenging political environment we face in many markets. As is always the case in any quarter, there were some one-off factors which affected reported performance, and this was particularly acute in the emerging market region where sales grew 2% and were impacted by ongoing instability in the Middle East and the phase-in of some vaccine tenders. There was also an unfavorable comparison to the first quarter of last year, which you’ll remember was a very strong one where we grew at around 20%. Looking forward, however, we remain very bullish on our prospects in emerging markets and continue to invest behind our objective to grow ahead of the market in this region, which we think at the moment is running at about an 11% growth rate.

Elsewhere, we are seeing continuing progress in the pro-innovation markets of the U.S. and Japan. And I'm also pleased with the performance of our Consumer Healthcare business, sales of which grew 7%, excluding the non-core OTC brands we have identified for disposal.

GSK's momentum is being fundamentally underpinned by excellent late-stage asset progression. Since the last update in February, we have received positive Phase III data on 3 assets: our HIV integrase inhibitor, albiglutide for diabetes and our BRAF inhibitor for treatment of melanoma cancer. We also filed our quadrivalent flu vaccine in the U.S. and Europe during the quarter. And we now have 4 products with sufficient data in-house to file in 2012 and another 4 products which we expect to complete Phase III registration studies for this year.

Visibility of GSK's pipeline will continue with data on multiple assets planned to be presented at key medical conferences throughout the year. We are also clearly setting out our strategy in terms of an increased focus on delivering enhanced returns to shareholders. Today, we confirmed another 6% rise in the dividend to 17p per share and increased our expectation for share repurchases for the year to the range of GBP 2 billion to GBP 2.5 billion.

All in all, I'm pleased with the progress we've made this quarter. Our strategy is on track. And despite the external pressures we face, we remain confident in our outlook for 2012.

With that, I'd like to hand over to Simon to give you a little bit more detail.

Simon Dingemans

Thanks, Andrew.

2012 marks the beginning of a very different phase for GSK, one that's largely clear of the headwinds of the last few years and one where we believe the changes and investments we've made to shift the shape of the group will really start to deliver much more visibly against our objectives of delivering sustainable sales growth, improved operating leverage and stronger free cash flow. And our performance this quarter is very much in line with these objectives. And this is despite a number of expected pressures, including continued European austerity measures and tough year-on-year comparisons this quarter particularly in EMAP and vaccines but also for Japan and our consumer business.

Additionally, in the quarter, we also saw our Middle East business down 6%, affected by the ongoing instability in the region. And remember, this is a sizable business for us with over GBP 250 million of sales this quarter. Inevitably, there were also a number of specific factors that impacted revenue in the quarter both positively and negatively. But together, these largely offset each other, leaving the 2% reported sales growth reflective of the growth of the underlying business over the quarter.

Turning to the results in a bit more detail. All of my comments will focus on growth rates at constant exchange rate and will now also focus on core earnings measures.

Overall growth at -- of 2% for the group reflects a broad base of contributions from Pharma, up 2%; Vaccines, up 1%; and Consumer, up 1%. Although, excluding the OTC assets identified for disposal, the consumer business delivered over 7% growth in the quarter. These performances were largely driven by strong contributions from new products and innovation growth in newer geographies which more than offset the macro pressures in Europe and the Middle East.

The U.S. reported growth of 9% for Pharma and Vaccines, benefiting from new launches particularly in oncology and gains from a number of other key products alongside the contribution this quarter of GBP 146 million of additional Vesicare revenues as the current co-promotion arrangements were concluded. These factors more than offset the drag on U.S. growth from the tail end of the Valtrex and Avandia headwinds, along with a number of other generics and the loss of Zovirax revenue following the sale of the brand in North America last year.

In Europe, pharma and vaccines were down 6% primarily due to price cuts, which reduced total sales 4.5%. These measures impacted most of our brands and we're seeing continued erosion to several older products lines in the portfolio as well. On the positive side, a number of products delivered encouraging growth, including our new oncology portfolio which, even after absorbing the loss of Hycamtin to generics, grew 14%, and Avodart, which was also up 14%. Derms was also a strong contributor, up 6%.

In EMAP, pharma and vaccines grew 2% this quarter, with growth in the region for all of GSK at 5%. As we've already highlighted, the pharma and vaccines business faced a tough comparator as the business grew approximately 20% this time last year, boosted by the phasing of vaccine tenders and new bolt-ons. The tender phasing effect left vaccine sales in the region this quarter down 9%.

The disruption to our Middle East business clearly also had a material effect, but we continue to see strong growth in a number of other EMAP markets, with particularly strong contributions from China and Latin American pharma as examples, giving us confidence in the growth prospects for our EMAP business overall. This quarter's growth rate is not indicative of our expectations for the year as a whole, and we will continue to invest behind our objective to grow this business ahead of the market over the longer term.

In Japan, we grew 4% for the quarter versus last year's phenomenal performance when the business grew over 50%. Cervarix was again a strong contributor as the third phase of the catch-up national vaccination program completed. We still see encouraging prospects for this product in Japan, but clearly, the comparators going forward for the rest of the year will be demanding. We also saw good contributions in Japan from recently launched products including Avodart, up nearly 50%; and Lamictal. And while Advair grew 2%, total respiratory sales were down 7% because of a much weaker allergy season.

For Consumer, as Andrew has highlighted, this was an outstanding quarter with good growth across the business: oral care, up 11%; nutrition, up 11%; with Horlicks in India maintaining its momentum at 17%. Lucozade in Europe also recovered significantly on the back of a number of new product launches and new promotional activities. The portfolio of brands in our wellness category grew 4% despite a relatively mild flu season. And the ongoing business also performed strongly across all geographies: the U.S., Europe and rest of world.

Turning to profitability. The new financial framework we introduced last year is starting to deliver, and we improved core operating margins by 20 basis points compared to last year to 31.2%. This is in line with our objective of improving operating margins gradually this year. Our restructuring program delivered over GBP 500 million of incremental savings during last year, which are continuing to contribute to improved margin performance and greater flexibility in managing our investments.

This quarter saw OE benefits and a better operating performance contribute to lower costs of goods that allowed us to increase SG&A behind a number of higher-returning growth options in EMAP and consumer while still delivering operating leverage to the P&L. The OE program remains on track to deliver an additional GBP 600 million of annual savings by 2014 on top of the GBP 2.2 billion we delivered by the end of last year.

We are clearly also monitoring closely the challenges we face in Europe and EMAP, in particular, and managing our costs tightly, but we are carefully balancing these short-term pressures with our commitment to invest behind the future growth platforms that underpin our longer-term prospects.

On R&D, due to the phasing of spending on our late-stage pipeline, this quarter's core R&D was higher than last year's, and this was a negative 0.4% from the margin this quarter. However, our expectation remains for core R&D for the full year to be broadly flat at about GBP 3.7 billion versus last year.

As we've also said a number of times, we expect financial efficiencies to contribute more to our profitability and earnings growth in the very near term, and we're making good progress in delivering on our targets here. We reduced our funding costs in the quarter by over 50 basis points relative to last year and we reduced our core income tax rate further at 25.9% in the quarter versus 27.2% this time last year. We continue to expect that we can achieve a core tax rate of 25% by 2014. Together, operational and financial efficiency, as well as a reduced share count, have enabled us to deliver total core EPS, up 7% versus last year.

Finally, on cash flow, we generated approximately GBP 1 billion of net cash from operations this quarter. And in addition, we received in the quarter the gross proceeds from the sale of our North American tail brands which completed at the end of January. The net proceeds of GBP 240 million were distributed to shareholders in April.

Our cash generation during the quarter funded dividend payouts of approximately GBP 850 million and a little over GBP 200 million of share repurchases, leaving net debt broadly unchanged at GBP 8.9 billion. The strength of our cash flow has also led us to target the upper end of our previously announced range for the ongoing share buyback program, and we will now look to complete GBP 1.5 billion to GBP 2 billion repurchases this year. And in addition, we've decided to return the GBP 450 million of net proceeds we expect in from the European and international tranches of the OTC disposal program as a buyback, taking the total for the year to GBP 2 billion to GBP 2.5 billion. We have elected to use a buyback to return this tranche of proceeds to maintain the overall balance between dividends and buybacks in our returns to shareholders.

So in summary, we're confident we've entered a new phase for the company, with sales growth, operating leverage and continued strong cash generation delivered this quarter. We've also delivered a further increase in returns to shareholders. And despite the challenges we've clearly faced this quarter, we expect to deliver sales growth and gradual expansion of core margin over the year as a whole.

And with that, I'll hand you back to Andrew.

Andrew Witty

Simon, thanks so much, and very happy now to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question. It's from the line of Tim Anderson from Sanford Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

A couple of questions. In the press release, you talk about operating margins expanding in 2012 and then expanding further over the next 2 to 3 years, and I'm wondering about the latter part of that comment and why you'd call out a period of 2 to 3 years specifically. Is there something downstream to that period that could begin to hit the financials? And then on emerging markets, it seems like we continue to hear many companies talk about difficulties in a given quarter, followed by a reaffirmation of the long-term growth prospects. And I'm wondering if it's a risk that, every quarter, there's going to be something new that comes into play that compresses the overall results more on a continual basis. And last question is on your LAMA pipeline product: Do you remain confident that, in the U.S., that will likely be a once-daily medicine?

Andrew Witty

Okay, Tim, thanks for those questions. Let me ask Simon to answer the operating margin question, then I'll address the EM and the LAMA question.

Simon Dingemans

Thanks, Tim. And I think, as we covered at the full year results, we do expect the profile of margin progression to be relatively gradual this year. We've indicated a few tens of basis points and then more next year and the year after. And the reason we drew the line at that point was really a question of overall visibility rather than identifying some particular issue beyond that, other than to say, I think at a certain point we expect that, if we're moving the margin too far up, we're not investing in the long-term prospects of the company. So there's a balance there to be struck, but we certainly think there's room for material movement over the next 2 or 3 years from the same issues I identified.

Andrew Witty

Thanks, Simon. As far as, Tim, the other 2 questions, the emerging markets. Obviously, nobody can predict the unexpected event in future quarters. But if you just look certainly from a GSK perspective at what's going on inside our business and you look at the markets such as Latina where you can see our pharma business, excluding the vaccine phase-in issues, growing very strongly up 11%; China, up 27%, what you've really got within our portfolio is a couple of issues, one of which has got nothing to do with performance at all, it's just phase-in. So that vaccine issue is a complete -- it's just simply a timing issue, not anything to do with the external marketplace. The issues which are to do with the external marketplace really boil down to 2 things. One is the upheavals in the Middle East, and obviously we have an exposure there, given our leadership position in the Middle East. And I think, to some degree, while that could get worse, I mean, we've now -- that's beginning now to move into the annualization of the run rate, actually. So I think that, while you can't rule out, unfortunately, these things getting more difficulty, actually, an awful lot of the impact now will become annualized as we move into the next quarter, and particularly the quarter after that. And then the other big issue in terms of the outside world affecting us is really the absence of infectious disease consultations around the world, which you'll see and across the board, not just for GSK consumer and prescription business but across all of our competitors. Now again, we've all been in this business a very long time. I don't think anybody thinks that infectious disease agents have been beaten and we're not going to see a return to growth in that marketplace. We are. It's just we've gone through what has been a prolonged cycle of relatively low disease. So I think, from a GSK-specific perspective, I feel pretty confident around our expectation that this is a one-off quarter as far as the EMs are concerned. I think we -- will we be growing again at the kind of 15, 16s that we saw a year ago? Possibly not. Will we grow at or above the market rate of which we think today is about 11? Then, yes. So I think that's pretty much where we see it. I think we come out net-net pretty confident around our EM future. As far as the LAMA is concerned, listen, we're really confident. We've got the molecule here to give us once-a-day, which is obviously important, not -- and I'm sure behind your question is it’s not just important as a monotherapy but is also going to be critical in terms of the creation of a once-a-day combination of a LABA/LAMA. We've done an extensive Phase IIb program, Tim. We've done 3 Phase IIb studies, which have all come out where you'd hope them to be. There's absolutely no evidence within any of our studies which shows that you'd be better off going twice-a-day versus once-a-day. And we've begun to see some Phase III data on the LAMA only, which reassures us even further. So I would say we are at a very high level of confidence on this. I know that might not jive with what you hear elsewhere, but we are very, very confident on that element of the question that you ask.

Operator

Next question is from the line of Andrew Baum from Citi.

Andrew S. Baum - Citigroup Inc, Research Division

Three questions, please. First question, on your melanoma franchise. There are already 2 agents approved with much larger trials and with a primary endpoint of overall survival. Both your agents have PFS as a primary endpoint and are much, much smaller. What's your confidence levels that this is not going to be a regulatory hurdle in both the U.S. and Europe? Second question is, perhaps you could give a breakdown of volume and pricing within the Pharmaceutical business in U.S. and Europe? And the final thing is perhaps Simon might care to revisit the guidance on the tax rate for the group by the end of 2014, given both the reduction in the U.K. corporate tax rate as well as the introduction of Patent Box from 2013. Is it possible that the guidance could be actually enhanced?

Andrew Witty

Thanks, Andrew. As far as the melanoma programs are concerned, there's 2 aspects to this. We've got 2 individual drugs which have got an extremely impressive performance in the trials. All of the dialogues we've had lead us to believe that this is absolutely filable and, we believe, approvable. And also what's much more exciting, I suppose, is the potential for us to now move forward with our combination studies. And as you well know, the potential additive role, synergistic role, essentially, that the MEK inhibitor can play to BRAF in terms of dealing with the mutant or the resistant behaviors to BRAF, I think, is very exciting for patients and clinicians. So we feel very confident about this based on our interaction with regulators. We feel good about what we have here and we think we can go forward. As far as pricing impacts in Europe and America, well, Europe has been about a 4.5% price impact, so you can see that volume is off, just more or less flat, maybe plus or minus flat. And in the U.S., pricing overall is around about -- gross pricing is around about the 3.5% type of level. And as you also know very well, that won't be necessarily the same at -- in all the accounts, but that's been more or less the level. And Simon can talk to you about the tax [indiscernible].

Simon Dingemans

And I think, Andrew, on the tax front, we've clearly got an objective out there of 25%. We continue to look for opportunities to improve on that. I think, before we put any quantification around that, let's get to 25% and then we'll revisit what the right targets are, given that, as you say, the corporate tax rate here in the U.K. is declining. But that's still only a piece of our business. We're also looking at the Patent Box to see what opportunities that might give us. And there are a number of other areas we're looking at. But let's get to 25% first and then we'll take it from there.

Operator

Next question is from the line of Seamus Fernandez from Leerink.

Seamus Fernandez - Leerink Swann LLC, Research Division

So just a couple of quick questions maybe on the BRAF-MEK potential combination and then the data that we could potentially see. I believe the hope would be that we'll see it at ASCO. Can you help us understand how you see the competitive environment evolving in that space? Would you see really the combination as critical to potentially displacing the current BRAF inhibitor? Or do you actually see your MEK inhibitor independently and the BRAF inhibitor independently actually being effective and substantial head-to-head competitors versus the current BRAF agent? And then separately, for Simon, can you just update us a little bit on the thoughts behind the proposed acquisition of Human Genome Sciences and, again, if there would be a willingness to consider a higher price, given the fact that the company has already rejected this, and if that would be specifically dependent upon incremental due diligence on the company?

Andrew Witty

Seamus, thanks so much for the questions. Slightly frustratingly for you, we're not going to go into much detail on the BRAF mix strategy. We think we've got 2 great molecules. They clearly have a potential role to work together. For various conference embargo reasons, we can't get into too much detail on this, but it was not unrealistic to expect this to be published more fully kind of in the time frame that you were alluding to. In terms of -- I'm going to just jump in and let Simon back me up in a minute on the second question. I think very clever of you to try and ask Simon that question. As far as HGS is concerned, listen, we think we've made a very full offer for HGS. We think it really covers and incorporates all the key drivers of value. We know this company probably better than anybody else, except the people who run HGS today. The premium we've offered at the open of 81% versus the unaffected price we think is a really full, compelling premium and puts this very fairly against any other takeout prices which we've seen in the sector. I think it's very clear we're the compelling owner for this business. And that's essentially where our position is on this transaction. What we hope and believe is that the HGS shareholders will come to the conclusion that this is indeed a very full price, very fair price, and come to realize that this is in their best interest as well as the GSK shareholders' best interest. We are very much guided by the same financial criteria and discipline that we've used over the last 4 years on every transaction in the way in which we allocate capital, and that's how we're going to continue to go through this process. I'd note one final point, which is that, essentially, we have no need or interest in doing any due diligence. And so that notion that due diligence might somehow change our view isn't going to happen. Simon, do you want to add anything to that?

Simon Dingemans

No. I think that's covered the point.

Andrew Witty

Great. Thanks, Seamus, great question. Thanks. Move on to the next question, please.

Operator

It's from the line of Brian Bourdot from Barclays.

Brian Bourdot - Barclays Capital, Research Division

Thank you very much for your presentations. I'd just like to come back to your offer for Human Genome, and rather than sort of trying to get into what you would pay or would not pay, I'd just like to understand the strategy a little bit more, please. You have been working together with HGSI for quite some time. And you do know it well, so maybe that explains at least partly the strategy, but could you please explain the timing of your offer? Why are you making this move now, and what has changed in your mind, if anything? Secondly, is your rationale for making this move, at least partly, an issue of freedom to operate? Would it give you any advantages in -- or flexibility in being able to, for example, develop Benlysta for additional indications? And just lastly, on darapladib, I think you've made some comments to news media about the progress of the Phase III studies for darapladib, comments around results not being known perhaps for 2 years and comments also suggesting that only the first interim analysis has taken place. Could you clarify those for us, please?

Andrew Witty

Yes, sure. So -- and I'm sure, if I don't answer this fully, 20 more of your colleagues will pick up any pieces I leave behind, so if I -- if it takes a couple of goes, I apologize for that. Listen, in terms of timing and strategy, we had a great relationship with HGS -- we still have a great relationship with HGS as we go through this process. And as a consequence of that, we've jointly brought a very important drug to market in the shape of Benlysta. We have albiglutide now coming right to the very end of its development cycle. And we have the possibility of a drug in the shape of darapladib in the future, and I'll come back to that in more detail, as you request. It's been a great process, a great partnership, and within that, of course, GSK has essentially the majority of the economics of that portfolio of assets. They vary. We have the majority of the economics and we have essentially the majority of the decision-making right particularly for albiglutide and for darapladib. And in the case of Benlysta, all of the kind of key commercial decisions that have to be taken, if there is a disagreement, ultimately, the view of GSK most likely most often prevails. So from that point of view, we think we have developed a very strong effective partnership. But there comes a point in these sorts of partnerships where, actually for both sides, we have to also act for what's in the absolute best interest of our shareholders. And as we came to the last few weeks, it became clear to us that, first of all, the share price of HGS had seasoned, if you will, over the last several months at a level. We believe that we had confirmed for ourselves the potential of Benlysta within the marketplace over the first year of its launch, so we feel that we have -- we've always had, continue to have, the same view of Benlysta, but good to have that confirmed in the real world of performance. And we took the view that it was time for us to make this a more efficient relationship, take some of the costs out of the relationship. By having 2 companies involved here clearly for the pool of shareholders creates a cost drain. We think that can be taken and it can be released as a synergy to the GSK shareholders, partially shared with the HGS shareholders through the premium. And it's really as simple as that. So it's -- we think this is a somewhat natural consequence of where things are at. Could it have been done now, could it have been done 2 months from now or 2 months back? Yes, maybe, but it's one of those things where you -- the moment comes and you feel this is the right time to move ahead. We think that makes all the sense in the world. We think the offer we've made is very fair and we think we are the compelling owner for the business. Now as far as darapladib is concerned, big picture, we essentially know nothing more today at GSK than we knew 2 years ago. So we started 2 big trials, STABILITY and SOLID. Those trials are underway. Since the initiation of that Phase III program, we have done a couple of things. We've been able to achieve full enrollment of those trials, as you know, and we publicly disclosed this. After the first 6 months of the first trial, we checked blood pressures to make sure that there wasn't a dramatic safety issue from a blood pressure perspective, and that essentially gave us the confidence to trigger the start of the second trial. So that happened a long time ago. It's in the public domain, you're all well aware of that, and the only thing that was looked at was the blood pressures. Since that point, the trial has carried on under the guidance of an independent data monitoring committee who have interim analyses triggered by events, not by dates, not at a certain schedule. But as certain numbers of events get triggered, there is an obligation on the independent data monitoring board, not GSK, to look at the trial from a futility and from an extreme efficacy perspective, i.e., has the trial already either demonstrated complete failure or remarkable efficacy, as you would expect in any kind of trial like this, which would require the IDMCB [ph] to stop the trial prematurely. One of those interim analyses has occurred. All we at GSK know from that analysis is that we were told to carry on with the trial. So all you can conclude from that is that neither of those conditions were set, and as you would expect and you see in many, many clinical trials, that's exactly the norm. And trials run to their endpoint at which point you find out whether the drug works or it doesn't work. That really is where we're at. What we would expect is the earliest that the first trial can finish is sometime in 2013, and the earliest we think the second trial could finish is sometime in '14, which is why I would say it will be 2 years before anybody can really call a judgment of whether or not this molecule is actually capable of being developed into a drug. And I hope that gives you a clear sense of the high degree of uncertainty that still exists around this particular molecule. Thank you. Next question.

Operator

It's from the line of Graham Parry of the Bank of America Merrill Lynch.

Graham Parry - BofA Merrill Lynch, Research Division

First, I was just trying to get more of a feel for how much the headwind on vaccines differs from EU pricing versus the emerging market tenders phasing, if you can quantify that in any way. And perhaps, give us a feel for what you think the underlying growth in emerging markets vaccines is. If we try and strip out the tender phasing, was it still down? Clearly, it wouldn't be down 9%, but is it still down? Or do you think you're actually still seeing growth underlying that? Second is if you can just talk through the phasing of margin growth through the year and whether you think the 20-basis-point year-on-year growth that you saw in Q1 is representative of the full year. Or are there other moving parts that could allow for more margin improvement in later quarters? And then thirdly, on Human Genome. Presumably, this is just a fairly simple NPV calculation for you, plus synergies, in terms of what you think you would pay. If you end up in a position where the price asked is too high relative to what you think you can pay, can we presume that the excess cash there goes into the buyback or are there alternative M&A candidates on your list that you could still be looking at this year?

Andrew Witty

Graham, thanks so much for the questions. I'll let Simon start with the margin question.

Simon Dingemans

Thanks, Graham. In terms of the progression during the year, as we've said, we expect for the year as a whole a few tens of basis points in terms of margin improvement. We put 20 on in Q1, so you can see that’s sort of indicative of the kind of territory we talked about in setting that guidance. So I think that -- from a trend line point of view, I think we're kind of in the right place. And let's see whether we can make some further progress during the balance of the year. But I'm not sure there's more I can add at this stage.

Andrew Witty

As far as the vaccine question is concerned, I mean, it's really -- EMAP in particular is primarily entirely phase-in related, Graham, so I would expect to see a year -- annualized level growth rates along the lines of what we've seen in the past. In Europe, there is some austerity still flowing through, mostly from Germany. If you remember, Germany made some quite significant price cuts in the middle of last year, so that's still rolling through and won't annualize until the middle of the year. So I would guide you that you should continue to anticipate that for the next quarter, but then that will start to cycle out during the second half. But the majority of the adverse, if you will, year-on-year for vaccines is clearly phase-in and it's clearly to do with the emerging markets, primarily. Can you just repeat the question on HGS? I just want to make sure I absolutely answer it correctly.

Graham Parry - BofA Merrill Lynch, Research Division

Yes. Essentially, presumably in terms of what you would be prepared to pay, it's a simple NPV calculation for the business plus the synergies. And if we go over that, given your strict cash allocation criteria and returns criteria, you would be prepared to walk away. And in the event that you did do that, should we assume the excess cash would then just go into the buyback? Or is there an alternative M&A candidate that you would also be looking at this year?

Andrew Witty

So good question. So first of all, you're right, we're looking at this from a very financial perspective, and we think it works to help make our business work more effectively and simpler. But of course, the primary driver of the analysis is the valuation that we believe. We think we've made a very full and fair offer. We think this ought to be enough. If in -- for whatever reason we didn't end up being the acquirer of HGS, then clearly, that would give us more capacity to either pump up the share buyback further or do a different deal. We don't have another deal secretly stashed away in the back cupboard to announce tomorrow. And the decision on how we would use that cash will be driven on our returns analysis. So if we -- if the returns analysis was stronger for share buyback versus any possible option that might exist in M&A, then of course, it goes to shares. And that's been absolutely the way in which we've gone forward.

Operator

Next question is from the line of Jo Walton from Crédit Suisse.

Jo Walton - Crédit Suisse AG, Research Division

I've got 2 broader questions. We see a slowdown in U.S. physician visits. Do you think that, that is to do with ongoing austerity or concerns about the recession more than the weak disease pressure that we've also seen? And within that, could you perhaps talk about the prospects of a drug like Lovaza, which seemed to be declining because people aren't taking scripts, and also the script rate for Advair, which is still looking pretty poor? And on a European perspective, do you think that the second half of this year will actually be better when you've annualized out the price cuts of Germany? Or in your planning, are you assuming that austerity measures will have to introduce new formats and that we'll still be talking about problems in the second half of this year?

Andrew Witty

So Jo, on the European piece, I'd love to say to you that, when Germany annualizes out alongside 1 or 2 of the other midyear '11 price cuts, that things will get better. Given everything you and I are reading in the Financial Times every morning, I think that would be heroic, to say that. So I think a conservative and reasonable view of the year for Europe is that, in all likelihood, we are going to be seeing something like this 4% to 5% price impact during the year. And it may have started off being dominated by the German flow-through, for example, but it may very well be picked up by something later in the year. It'd be great if we get better news than that as we go through the year, but I would -- I don't think -- given everything we see on the outside, I'm not sure I would subscribe to that at this point, and that's not how we're planning. In terms of the U.S., we've done some -- and some of you may have also come to the same conclusion, but we've -- we think and we're seeing some very, very compelling analysis which very tightly links patient visit dynamics to employment rates in the U.S. And if we look over the last 24, 36 months, you can see a very sustained and then, particularly in the last 12 months, very dramatic drop-off in patient visits at the macro level, which correlates with about an 18-month lag of employment. And those of you in the U.S. will immediately realize that's because of the COBRA legislation and the fact that you end up with a delay of the realization of loss of healthcare coverage compared to the day in which you're made unemployed. What you will also all know is employment has started to rise again in the U.S., and interesting enough, what we've seen in the last 4 months is a stabilization of the decline of patient visits at market levels. So I -- more than anything else, that I think is what's been driving a lot of the anemic prescription trend in the U.S. If you look at the 2 drugs that you cite, both Advair and Lovaza, in fact, Lovaza has been growing share, albeit its overall script trend hasn't looked very positive because the overall market is not performing. And Advair is actually very, very similar. Advair is fractionally losing share, which given the fact that we now have both Symbicort in the marketplace and Dulera in the marketplace for longer than a year each, obviously Symbicort for much longer than a year -- the fact that we're still holding about 80% of the scripts in the combination marketplace is really, I think, a great credit to our U.S. organization. As you know, we do not hold that level of share in Europe. The performance of Advair in the U.S. compared to any sensible analogy of having several entries continues to be very good. What we need to see is an increase in market. So what's driven the Advair marketplace in the last 2 or 3 years, in my view, has been this sustained employment to patient visit dynamic and, of course, the shift in labeling, which took place now 18 months ago. We think that's all starting to work through. And we're hopeful that we'll start to see some market strengthening, some visit strengthening, which will complement our built-in existing share strength, which we've been able to hold on to through this period. And so I remain actually quite optimistic about the U.S. as we go forward, provided we continue to see this gradual slow macroeconomic strengthening that we're seeing because, more and more, I think we believe, that will feed through into our big product markets where we've held great share positions, and we will be able to see that growth come back. Jo, thanks so much for the question.

Operator

Next question is from the line of Kyle Rasbach from Cowen and Company.

Kyle Rasbach

I have 2 quick questions. First, you've seen, I guess, 7 or 8 of the albiglutide trials. We haven't seen all that data. I was just curious if there was anything in those data that would change your overall perception of the drug relative to what we had seen previously. Second, if I can revisit the darapladib data a little bit or the interim look, if you could maybe please tell us what the statistical hurdle for futility was in that look.

Andrew Witty

Okay, let's just take these questions. So albiglutides, so we've seen data on 7 of the 8. We're under very strict and important limitations on just how much we can and can't publish from those trials because of various agreements with regulators, trials still ongoing and that kind of thing. But the net-net, I think the overall sense of what we believe is material to shareholders is in the public domain, as you'd absolutely expect. As those trials come to their final conclusion, we’ll be able to draw the final endpoints, obviously. I think it's probably worth me just taking that question as an opportunity just to make one point as well in the context of the HGS discussion. Remember that HGS have about a 5% share of the economics of albiglutide, so if what's behind your question is trying to figure out the value of albiglutide to that transaction, I think you can see straightaway that, notwithstanding how big you think the drug may or may not be, the HGS share of the economics is so low that it has very little leverage. And it's probably also worth just taking a second to clarify what the economics of darapladib are as well. So darapladib, if it makes it to market in several years’ time, would be in a situation where HGS would receive a 10% royalty and they would also have the option to elect in for a 20% co-promotion profit share. It's important just to understand those 2 things and I'm sure you all get it immediately. You can't just add those 2 things together and come up with 30%. The second is a co-promotion deal. What that means is they share the profits and the loss at 20% of the total. And if you just work that through for a second, to take advantage of that co-promotion, the company would have to elect in very soon after the NDA was filed. They would then take 20% of all of the losses during the period up to launch and through the early phases of the launch, and then they would accrue 20% of the profits downstream. And so you can immediately calculate that, actually, when you add the 10% royalty to the 20% co-promotion, there will be periods of time when HGS' share of the economics actually is much lower than you would expect. And ultimately, it will be some -- it will be whatever the profit element of the 20% share, plus the 10% royalty. And it's just worthwhile understanding that, I think. Other than that, I've got nothing else to add in terms of the specific trials and interim analyses that I've already discussed.

Operator

Next question is from the line of Florent Cespedes from Exane.

Florent Cespedes - Exane BNP Paribas, Research Division

First on R&D. Andrew, could you confirm that you will organize an Investor Day to review the late-stage pipeline and your respiratory portfolio sometime during H2? Second question, on Benlysta. Could you give us an update on the performance and if there is anything that may improve the dynamic, going forward? And last question, on Promacta. Why have you decided to stop the CLD indication as you will file for the FC one [ph]?

Andrew Witty

Okay. Thanks for the question, Florent. The -- yes, we absolutely will have an R&D day in the second half. So I think what you should anticipate is you'll see some of the data on things like the HIV programs, the MEK-BRAF programs. The albi programs will obviously be published at some of the key congresses. And then as we move through the year, we will pull together an R&D day on the full late-stage pipeline, which of course will have a very heavy emphasis on respiratory within that. As far as Benlysta is concerned, I'm going to say what I've been saying since we launched the drug: This is performing very much in line with our expectations. We've seen a nice continued strengthening of the weekly performance of the drug. We remain very optimistic about it being a very significant product. It's, I think, in actually a good position. If we look at the performance of the drug versus any other analogs of biologics launched into the RA sector, early performances in among the group of products which have all gone on to be significant. And when I look at some of the basic drivers, so proportion of patients who are renewing insurance coverage, the number of physicians who are talking about extending their use, all of those leading indicator dynamics look very, very encouraging. And our view, our forecast of Benlysta hasn't essentially changed since we launched the drug. We continue to feel very confident about it and we continue to like the steady and gradual trajectory. I know that wasn't in line with what a lot of external commentators were talking about a year ago, but I repeat what I've said on every quarter, practically, is it's very much in line with what we anticipated.

Florent Cespedes - Exane BNP Paribas, Research Division

Okay. And Promacta, please?

Andrew Witty

Yes, I don't think we've got anything else to add than what we've already said in public. We're not progressing this indication for Promacta and I don't think there's anything else I need to add to that.

Operator

Next question is from the line of Mark Clark from Deutsche Bank.

Mark Clark

A couple of questions, firstly just on emerging market acquisition strategy. There was a deal by Amgen announced this morning for a Turkish company. One of those annoying sources familiar with this situation that likes to be quoted said that GSK was in the bidding. So I wonder if you have any comments on this and where you think you are light on critical mass in the emerging markets region. I'm guessing Brazil is one place, but are there others? And secondly, a question on the treatment of Vesicare. Were there any compensating costs associated with the GBP 174 million of revenues in the quarter? Or did that just drop straight through to the bottom line and therefore obviously have a fairly significant impact on the margin?

Andrew Witty

Great question. So let Simon answer the second one and then I'll address the first.

Simon Dingemans

There were a number of costs, but they're not material relative to the overall contribution on the revenue line. But I think I'll just remind you, as we touched on in the comments around the margin development, that we regard that as a potential source. And we have deployed some of that flexibility and invested behind some of the growth drivers that we have going forward here. So it's part of the opportunity mix that I highlighted in discussing how we manage margin overall.

Andrew Witty

Thanks, Simon. As far as the emerging markets are concerned, obviously we're not going to talk about what deal we may or may not have been involved in. As a general rule, I always try not to listen to people who claim to have inside knowledge on these things, but that's up to you. In terms of -- going forward, in term of strengthening our position, I think, over the last few years, we have, I think, done a nice job of building up strength in key geographies. And of course, at the same time, we've been organically developing our business. So if we look at China, for example, where a few years ago we were definitely light through a variety of deals and JVs, acquisitions and very substantial increase in our organization, we've really, I think, moved ourselves into a position we feel much more comfortable with in terms of competitiveness. And the same is true in most other places. I would guide you a little bit actually that, while we will still do the occasional bolt-on in the emerging markets, I think, with the evolution of the pipeline for GSK and the way that it has come together and is coming together this year, our focus as a company is going to be moving much more towards the exploitation of organic growth around our pipeline. And I think you should expect to see relatively less -- I'm not saying there will be none, I am sure there will be the occasional one, but you should expect to see relatively less bolt-on activity from GSK in the emerging markets. So I think, as we move into a -- in what I believe will be a very intense pipeline phase, that is going to be where much of our focus is going to lay, and we're going to be very much orientated in that direction. And you may see the occasional bolt-on in EMs, but it won't be at the same pace that you've seen in the past. I think that absolutely reflects how we can create the most value from the company and that's what we intend to do.

Operator

Next question is from the line of Naresh Chouhan from Liberum Capital.

Naresh Chouhan - Liberum Capital Limited, Research Division

So the question's on EMAP and then one for Simon, please. On -- if you -- if we back out the Middle East sales decline, there's about 7% growth in the rest of the EMAP x Japan region. Is that the kind of growth rate we should be expecting for the rest of the year? I think you already alluded to it, Andrew, but the Arab Spring started roughly in Q1 last year, so perhaps that annualizes in the second quarter? And then, Andrew, you also said that you think you could grow at roughly 11% in emerging markets now you've changed your categorization. If we look at EMAP x Japan should we be thinking of that growing around 11% as well, or is Asia Pacific growing much slower? And then, Simon, could you tell us the size of the royalty adjustment in COGS, please?

Andrew Witty

So as far as the growth rates, we've never included Japan in our EMAP definitions. And we'd expect -- as I've said, we expect EMAP to grow above the market rate and the market rate at the moment is about 11%. So that – and it’s pretty straightforward. And in terms of your back calculation to 7%, I think what you have to remember in that is, of course, the phase-in of vaccines, which again is suppressing the Q1 number and is why we think that we will see a stronger pickup in the rest of the year. So I would be simplistically guiding you to much more nearer the market growth for the EMAP region. And Simon, on the second part?

Simon Dingemans

In terms of the adjustment, it has an effect in the quarter of about 0.5%. But remember, there's some phasing in all of these types of royalty adjustments and it does play to the investment opportunity we see behind the COGS line. So that's the overall effect, but we have used some of it in terms of contributing to some of the growth opportunities we've talked about.

Operator

Next question is from the line of James Gordon, JPMorgan.

James D. Gordon - JP Morgan Chase & Co, Research Division

So my question was -- in the Novartis results yesterday, we saw that QVA149 is significantly better than Advair in the ILLUMINATE study. And I wonder, does that mean you need to do a study of Zephyr versus Advair so that you've also got the same differentiation. Or would the issue of cannibalization be a deterrent?

Andrew Witty

Well, we are doing that study, so hopefully, that solves your question. I repeat: GSK's objective is to grow market share in respiratory over the next 5 to 10 years. And I think what you can see from our Relovair programs, from our LABA/LAMA programs, from all of the different mechanisms of action we're developing, the way in which we've been able to close down the gaps on our competitors so we're now in a position where we ought to be able to launch ahead of many of our competitors and our continued ability to hold very strong market shares in all the key markets, I think, should demonstrate to you how seriously we take that goal. And we are absolutely deploying the trials to make sure that our new molecules are super competitive in the marketplace.

Operator

Next question is from the line of Jeff Holford from Jefferies.

Jeffrey Holford - Jefferies & Company, Inc., Research Division

I have 2 questions. The first, just to follow up a bit more on Vesicare. If you take the GBP 174 million, that's about 8% of your core operating profit, about 260 basis points of the core operating profit margin, so I just wonder if you could give us an x Vesicare gross margin and operating profit margin once those other costs that you said -- the minimal costs are taken into account. And what helps you in terms of phasing of the various cost items, COGS, SG&A, R&D, to get to your guidance through the remainder of the year, what changes in the mix? And then the second question is -- you obviously have a large amount of potential new product launches coming through. You have commented that you've been disappointed with your ability to launch new products in the recent past. What changes are and will be ongoing at GSK over the next year or so to make sure you maximize those new assets?

Simon Dingemans

Okay, on the gross margin question. I don't think you can kind of pull it apart in quite the way that you're doing without also taking into account a number of the other opposite factors we talked about at the top line as well. And remember, we have Vesicare contributing positively, but we also have a number of generic declines and product disposals contributing at the top line negatively. And those also are very high margin, as we talked about through the course of last year. And so the margin impact has very much a mix effect reflecting both of these factors. So I don't think you can just drop it straight through without taking the adjustment in the opposite direction.

Andrew Witty

And as far as the second question, of course, that is absolutely critical for the company to make sure that, having done all of the work to get these molecules hopefully to the final phase and then to approval, that we do the absolutely best job of launching the products. And that is driving all of our decisions around how we structure our interface between R&D and commercial, how we drive our focus as an organization. And of course, I've just given you an insight into one example of it where we are making the call to focus less on bolt-on activity in the EMs to ensure that we have the focus on organic growth driven by pipeline. And that’s a very -- it's that kind of decision-making we have to take. This is -- we have a remarkable opportunity as a company, differentiated from almost every competitor in the industry, to have a diversified business of closely aligned businesses, all of which are essentially through their major headwinds of whatever shape they came, with a very significant pipeline of opportunity to now launch. If we can do that at the time when the rest of our competitors are facing some of their tougher times, without pipelines in many cases, that is clearly an opportunity we are going do everything we possibly can to exploit to the absolute maximum. And that's what's driving everything inside the company. We have time for one last question.

Operator

And it's from the line of Nicolas Turner from Mirabaud Securities.

Nick Turner - Mirabaud Securities Limited, Research Division

We heard from Novartis management yesterday that they have the opinion that the FDA favors twice-daily dosing for respiratory drugs. You obviously have a great deal of experience in this area, and I wonder if you’d give us your take on what the FDA actually favor and with particular reference to potential positioning of Relovair in COPD.

Andrew Witty

I'm sorry, you're just going to have to repeat that last part of the question again.

Nick Turner - Mirabaud Securities Limited, Research Division

Okay. Just it -- really, the Novartis view that the FDA favored twice -- or seems to – at least Novartis believe that the FDA favors twice-daily dosing for respiratory drugs, and I wondered what your take is on that comment. And also, obviously your experience with the FDA as a regulator, what does that lead you to believe in terms of once-daily versus twice-daily dosing? And then maybe you could put that maybe into some sort of context as far as the potential filing of Relovair in COPD in the U.S. is concerned.

Andrew Witty

Well, I -- to be honest, I'm kind of a bit bamboozled by the whole concept. We've seen absolutely no evidence of any kind of antipathy towards once-a-day dosing. The agency, of course, sets the standard and a hurdle that you have to prove that your drug is indeed once-a-day versus twice-a-day. But there's no -- I've never -- actually, I don't think anybody at GSK has ever experienced a kind of ideological objection to the notion. I'm slightly struck. I'm sorry, obviously, I didn't listen to that call yesterday. I'm slightly just -- I'm just trying to process what you said, given the existence of Spiriva on the U.S. marketplace. As far as everything we've seen and as far as everything that we've done, we feel very confident not just with our LABA but with our steroid and with our LAMA that we're in good shape to be able to prove and therefore be able to file for once-a-day on all 3 of those individual molecules and then, absolutely, deliver the products. So I don't -- I find it very odd that there's an assertion that there might be some kind of ideological position. Listen, if your data doesn't stack up and your drug doesn't stack up, then the FDA isn't going to let you have the claim. But if it does, then you're going to be fine.

And that's it. We're out of questions. We really appreciate all of your time today. Thank you very much. And obviously, the IR team at GSK is available to take your individual calls if you have any further questions or points of clarification. In the meantime, thank you very much.

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