Emma Walmsley - GlaxoSmithKline Plc Simon Dingemans - GlaxoSmithKline Plc David Redfern - GlaxoSmithKline Plc Brian McNamara - GlaxoSmithKline Plc Patrick Vallance - GlaxoSmithKline Plc.

Graham Parry - Bank of America Merrill Lynch Richard Parkes - Deutsche Bank AG Andrew S. Baum - Citigroup Global Markets Ltd. Tim Anderson - Sanford C. Bernstein & Co. LLC Kerry Holford - Exane Ltd. Jo Walton - Credit Suisse Securities (Europe) Ltd. Jeffrey Holford - Jefferies LLC.

Ladies and gentlemen, welcome to the GSK analyst/investor call hosted by Emma Walmsley and Simon Dingemans. My name is Matthew; I'm your event manager. During the presentation, your lines will remain on listen-only. I'd like to advise all parties, this conference is being recorded. And now I'd like to hand over to Emma. Please go ahead..

Thank you. Good afternoon, everybody, and a warm welcome to this call in which we're reporting our third quarter results. Hosting the call with me today is Simon Dingemans, our Chief Financial Officer, who's going to talk you through the detail of the results in just a few moments.

As I said when I first spoke to you at our Q1 results earlier this year, Simon and I will be joined by different members of our management team on our quarterly results calls. So I hope you'll find this helpful for your questions, and it will give you a sense of the GSK team as well as different aspects of the company.

With us today are Patrick Vallance, Head of R&D; David Redfern, Chairman of our HIV business and Chief Strategy Officer; Brian McNamara, CEO of our Consumer Health business; and Luc Debruyne, President of GSK Vaccines. Before I hand over to Simon, let me make just a few comments on our progress this quarter.

In terms of performance, this quarter we've seen continued progress, with sales of £7.8 billion, up 2% at constant exchange rates, and up 4% actual rates. Total earnings per share for the quarter were 24.8p, plus 49% at actual rates, plus 46% at constant exchange rates.

Adjusted EPS were 32.5p, flat for the quarter and up 2% year to date, both at constant exchange rates. And we remain on track for our 2017 guidance of adjusted earnings per share growth of 3% to 5% constant exchange rates. We set a dividend of 19p this quarter and continue to expect to deliver 80p for the full year.

Sales growth in the quarter reflected continued momentum in our new products across HIV, our meningitis vaccines Bexsero and Menveo, and in Respiratory from our Ellipta portfolio and Nucala, our biologic medicine for severe asthma.

Adjusted operating margins benefited from targeted cost savings and integration benefits, particularly in our Vaccines and Consumer Health businesses. In Consumer, we delivered an adjusted operating margin of 20% after exchange benefits of 130 basis points.

This demonstrates the growing operating leverage in this business and that we are on target to deliver this percentage on an annual basis by 2020 at constant 2015 exchange rates.

Within Pharma, our largest business, the benefits of cost savings and the more favorable mix are being offset by continued pricing pressure, which we expect to see carried through into 2018, as well as investments behind our upcoming launches and progressing our pipeline. We continue to make progress on our improvements to cash flow generation.

We've seen an increase in free cash flow of around £370 million to £1.6 billion for the first nine months of the year versus the same period last year. As I set out at Q2, a key focus for the company is to maximize value from innovation. This starts with several material new launch opportunities, two of which have received approval since July.

Shingrix, our shingles vaccine, which was very recently approved in the U.S. and Canada; and Trelegy, a new three-in-one respiratory medicine for COPD that was approved in the U.S. last month.

We are optimistic about the scientific profiles and long-term commercial opportunity for both of these assets, although they will both take some time to build prescription coverage. Trelegy is the only once-daily single inhaler triple therapy to be approved for COPD.

Headline results from the landmark IMPACT study show its superior efficacy in reducing exacerbations when compared to two dual therapies. And we'll publish the full data in due course. In Respiratory more generally, we're building momentum in our existing inhaled portfolio, and Nucala, our biologic, is also performing well.

We plan to file for an additional indication for Nucala in the treatment of COPD following some positive Phase III results.

Overall, we're confident we have the products to reinforce our leadership in Respiratory, which is important as pricing pressures continue and we look to offset the probable generic competition to Advair that will arrive in the U.S. next year. With Shingrix, we have specifically designed an adjuvant to generate a strong and sustained immune response.

It is the only shingles vaccine to achieve efficacy of 90% or more in adults aged 50 and over. We received approval last week, and the ACIP vote is happening as we speak. In HIV, our innovation is focused around two drug regimens.

First, dolutegravir plus rilpivirine, second dolutegravir plus lamivudine, which very importantly will also be for naive patients, and third the long-acting drug cabotegravir plus rilpivirine.

You'll remember that we filed the first of these in July alongside a priority review voucher, and we expect a regulatory decision on this asset in December and, assuming it's positive, would plan a rapid launch.

Elsewhere in the pipeline, in Oncology, BCMA was granted PRIME designation by the EMA for multiple myeloma, and we expect to present positive new data for the asset at an upcoming scientific conference. In addition, we've exercised our option from Adaptimmune to develop the T-cell receptor immunotherapy NY-ESO in multiple tumors.

So over the next three years, as we said in July, we expect significant data from our pipeline. These results are going to determine our R&D investment decisions and how best to generate value from these assets, which may include potential options for partnerships or collaborations.

This quarter also saw the arrival of Luke Miels and Karenann Terrell both of whom bring deep expertise and new perspectives to my executive team. They'll be leading efforts in two key areas of the group where we need to make improvements to our performance and our competitiveness, Pharmaceuticals and digital data and analytics capabilities.

I wanted to also quickly mention our performance in the Dow Jones Sustainability Index, which was reported this quarter. It's a well-recognized and credible assessment of 4,000 companies, and I was pleased to see us progressing to a leading position within our sector.

Improving the company's track record on sustainability and trust over the long term is going to remain a key focus for us. So in conclusion, we are focused on strong execution of our current and upcoming portfolio, and we're making changes and some progress on the strategic priorities I set out in July of innovation, performance, and trust.

With that, I'll stop and hand over to Simon, who's going to talk you through our quarterly performance in more detail..

Thank you, Emma. As a reminder, our earnings release provides an extensive amount of information, so I'm going to focus on the major points, our expectations for the remainder of the year, and some comments on next year, and comparators to take note of for your modeling.

Overall, the group's results for the quarter were in line with our expectations, and we remain on track to deliver our 2017 earnings guidance for adjusted EPS growth of 3% to 5% at constant exchange rates.

Our results reflect continued strong operational delivery and further investment behind the key future growth drivers in each of our three businesses.

The commercial environment remains challenging, especially in our Inhaled Respiratory business, where we face a highly competitive market that we expect will result in continued pricing pressures through 2018 beyond any Advair generic.

Additionally, our Consumer business has seen a material slowdown in the global growth of its key categories to a rate of around 2% this year, compared to the 3% to 4% or so that we've seen over the last few years.

While in the medium term we see some improvement from this year's levels, the outlook for our categories is probably now more on a global trend of 2% to 3%, given the greater pricing pressures, competition from new entrants, and tougher emerging markets that we're seeing.

This is what we've factored into the revised outlook for our Consumer business that we gave you at Q2.

Despite this market backdrop, which is affecting particularly our Pharma and Consumer businesses, we believe it's the right thing to do for the long term to continue making investments across the group to drive share for our new products in this more competitive environment.

In addition, we are stepping up investment in preparations behind three important launches that we're planning in Q4. Two have already been approved, Trelegy and Shingrix, our new shingles vaccine, and the third, our first dual treatment for HIV, is in the final stages of regulatory review, and we expect a decision in December.

Given the more recent dynamics in the sector, it will take some time to build managed care coverage for Trelegy and Shingrix. But we believe these two new products represent significant innovation that will benefit patients, and we remain confident in their long-term significance for the group.

While less materially financially, the launch through 2018 of the first dual also introduces significant new innovation to the HIV market, and strengthens our competitive position. Lastly, we also continue to invest in our pipeline, particularly for Pharma, following the progression of a number of mid- and late-stage programs.

Now looking at the quarter in a bit more detail. As usual, all my comments will be at constant exchange rates, except when I specifically refer to currency. Starting with the headlines, group sales up 2%, total earnings were £0.248 per share, and adjusted EPS £0.325.

On currency, now that we've passed the anniversary of the Brexit vote and the main step change in the value of sterling, the related exchange impact is much lower than the last few quarters. This quarter, currency resulted in a tailwind of 2% on sales and 3% on adjusted EPS.

And if exchange rates remain in line with the rates at the end of Q3, we would expect the full-year tailwind from currency to be approximately 5% to sales and 7% to adjusted EPS. Looking at our total results, the gap between total and adjusted EPS is quite a bit narrower than the last several quarters.

And this is primarily because in Q3, we did not have the large accounting charges for the revaluations of contingent consideration in the put options, which were required in previous quarters to reflect upgrades in the sterling values of those related businesses.

This quarter, the majority of the difference relates to charges for the restructuring we discussed in July, including manufacturing site rationalization, and a charge related to the decision to terminate our rights to sirukumab. The rest of my comments will be on our adjusted results.

Turning to the top line, this quarter's growth of 2% was driven by new product momentum in Pharmaceuticals and a pickup in growth in the Consumer business. We're also pleased with the progress in Vaccines, with another strongly executed flu season, but one facing a tough comparison against a very strong quarter last year.

Sales within the Pharma business were up 2%, despite a drag of around 1 percentage point relating to the Aspen and Romania disposals. In Respiratory, sales were flat as growth of the new products, the Ellipta portfolio and Nucala, offset declines in most of the older products, including Advair.

In the U.S., the new Ellipta products continue to gain share and grow volume, while at the same time, the run rates for discounts and rebates across our inhaled respiratory products, particularly the older ones, continue to move higher.

This reflects the pricing pressures we previously flagged from the combination of payer consolidation, the threat of an Advair generic, competitive pressures, and the continued transition of our Respiratory portfolio to the new products.

Additionally, the reported sales in Q3 for Breo, Anoro, and Ventolin were impacted by unfavorable true-up adjustments from sales in previous quarters. Advair sales reflected a favorable true-up in the same quarter.

As we've highlighted before, you should expect a bit more volatility in RAR rates than historically, given the more competitive dynamic in the marketplace and shifts in the channel mix that we're seeing. However, importantly, in total, the impact of true-ups was broadly neutral to the reported total U.S. Respiratory sales.

We're preparing to launch Trelegy in the U.S. during the middle of November. This is a key addition to the Ellipta portfolio, and one which we believe will be a significant new growth driver for the Respiratory business. Building Trelegy to its full potential will take some time as we get coverage in place and work to add the IMPACT data to the label.

Seretide/Advair was down 15% globally. And with no substitutable generic entry expected this year in the U.S., we continue to expect a global decline of 15% to 20% in 2017 as a whole, with the U.S. more at the 15% end of the range and Europe more at the 20% end.

Moving to our HIV products, overall, our HIV portfolio grew 13%, growth again driven by the continued strong performances of Triumeq and Tivicay. Epzicom/Kivexa continues to decline as a result of generic competition affecting particularly Europe.

Looking forward, we're planning for a more challenging environment for our dolutegravir franchise as we go into next year. But our data set is strong, and we will continue to compete hard on the back of it.

Realistically, however, you should probably expect more volatility quarter to quarter as that challenge unfolds and we start to bring new growth drivers into the HIV business.

If all goes well, we expect to launch our first dual treatment for HIV at the end of the year, and next year we're looking forward to Phase III readouts from two additional two-drug regimens, including the oral combination of lamivudine and dolutegravir and one with our long-acting integrase, cabotegravir.

Established Pharmaceuticals, which includes the majority of our off-patent products, declined 4%, including the impact of divestments and the Avodart generic, which declined both in both Europe and the U.S.

This group of products has done somewhat better year to date than we originally expected, benefiting from some of the supply capacity investments we've been making that are now coming on stream, as well as the phasing benefits from some tenders and other contracts.

We still expect the overall percentage rate of decline for Established Pharmaceuticals for the year as a whole to be in the mid to high single digits, but we'll likely be at the better end of that range including the impact of disposals. Pharma operating margins 34%, down 30 bps on both an actual and CER basis.

The margin benefited from cost savings and the favorable mix. However, these were more than offset by the impact of tougher pricing of our inhaled respiratory products, as well as the continued investments we're making to drive share gains for our new products, prepare for the upcoming launches, and to progress the R&D pipeline.

Moving to vaccines, sales were flat. As we've previously flagged, reported growth this quarter reflected the phasing of shipments that benefited earlier quarters in the year, particularly for Synflorix in international and a tough comparator for flu vaccines.

That said, we're very pleased with another strongly executed flu season, particularly in the U.S., where the total number of doses we expect to sell this year is a few million more than last year, when we sold just short of 35 million doses, 90% of it in Q3.

Most of the extra doses for this year will now fall into Q4, after similar deliveries year on year in Q3. During the quarter the Meningitis portfolio grew 25%, led by strong performances of Bexsero in both Europe and the U.S., where sales grew 32% and 23% respectively.

Established Vaccines down 5% in Q3, reflecting the phasing of tenders but also increased competition to our Infanrix, Pediarix franchise in both the U.S., where competition has returned to full supply, and in Europe, where a third competitor is now in the market and competing for tenders.

Overall, given the momentum in the business to date and now with the approval of Shingrix, we remain confident in the mid to high single-digit outlook for sales growth out to 2020.

The Vaccine margin was 41.3% in Q3, a 190 basis point improvement on a constant exchange rates basis over the prior year, primarily as a result of a favorable mix but also lower inventory adjustments compared to last year. Q3 is generally the quarter with the highest margin because of the seasonality of the flu sales.

And we remain comfortable with the 2020 margin outlook of 30% plus. Keep in mind that this business will be making investments to support the upcoming U.S. launch, as well as for the eventual global rollout of Shingrix.

Moving to Consumer, sales were up 2% after a 1% drag from the combined impact of the divestment of the Nigerian drinks business at the end of Q3 last year and implementation of GST in India in July of this year.

Strong performances from power brands in wellness and oral care, particularly Sensodyne, which grew strongly in all regions, helped offset the slowdown in global growth in our key categories and continued competitive pressures for Flonase OTC from private label.

Despite the more difficult environment, the business has also continued to execute well in delivering its integration plans. Looking forward, the next few quarters will be impacted by the recent launch of generic competition to one of our legacy Novartis products, which was contributing sales at an annual rate of around £80 million.

We also expect some further tail brand disposals during 2018 that would have a full-year impact of around £50 million on sales. Given all these factors, as we previously discussed, we're not expecting much growth at the top line from the Consumer business this year.

And unless the market backdrop improves, we would not expect more than low single-digit reported growth next year. However, we continue to expect top line percentage compound annual growth over the five years to 2020 of low to mid-single digits.

Synergy benefits, as well as greater flexibility in the cost base from the integration, have provided a significant improvement in the operating margin in the quarter of 260 basis points in constant exchange rate terms, while still delivering strong growth from our power brands and continued investment in future innovation in the Consumer business.

In Q3 we typically see a stronger margin, as we sell in seasonal cold and flu products, and like last year we expect higher costs in Q4 and a lower margin as we promote behind those sales to drive consumption. Overall, we remain confident in delivering our target of getting the business to a full-year operating margin of 20% plus by 2020.

Turning to the group's operating profit, our adjusted operating margin of 31.5% was up 1 percentage point both at actual rates and CER rates.

The margin improvement was primarily driven by leverage from sales growth plus the benefit of a more favorable mix in all three businesses; lower inventory adjustments in Vaccines; and continued tight management of our costs, including delivering the benefits targeted in our restructuring and integration program.

These tailwinds to operating margin were partly offset by the continued investments we made in support of our new products' upcoming launches and the R&D pipeline. In aggregate, these factors impacted the Pharma margin while benefiting Vaccines and Consumer. Looking forward, we're now in the latter stages of the integration and restructuring program.

And as a result, you should expect lower incremental benefits each quarter.

This will likely mean a bigger headwind to operating margin from the continued need to invest behind new products and launches across the business, particularly next year in the Pharma business, where if the data justifies it we will also likely want to step up R&D expense again.

This impact will be exacerbated while we transition through an Advair generic, given the profitability of that product. And while the precise timing still remains uncertain, this seems increasingly likely to be a 2018 event. In February, we expect to provide a similar guidance framework for next year to reflect this uncertainty.

Royalties were £107 million, flat on last year. I continue to expect a step-down in the fourth quarter given the various royalty streams, but I now expect the total for the year will be a little bit higher than £300 million.

During the quarter, the extended restructuring program delivered an incremental £0.2 billion of annual savings, including £100 million of that driven by currency benefits. Turning to the bottom half of the P&L, interest costs were up slightly due to higher net debt, in line with our expectations. Tax rate was 21%, also up slightly versus Q3 last year.

We continue to expect to be in the 21% to 22% range for 2017 as a whole and over the next few years to see upward pressure on the rate, given the shift in geographical mix towards the U.S. in particular. Minorities charge was up £71 million to £228 million, reflecting the growth in the Consumer JV and HIV operating profits.

On cash flow and net debt, free cash flow for the group during the first nine months of the year was £1.6 billion, up over £370 million compared to last year, even after funding the £106 million investment we made in Q2 in the PRV.

This reflects tight working capital control as the business grows, as well as reduced restructuring spend, higher profits, and currency benefits. As I pointed out at Q2, due to the significant seasonality of the group's business, our cash flows are expected to be more weighted to H2.

In the fourth quarter, we expect to maintain this trend, with operating profits, phasing of receivables collections, and continued unwinding of inventory levels invested earlier in the year turning to sales, benefiting free cash flow.

Net debt now stands at £14.2 billion, down £0.6 billion compared with the end of Q2, primarily reflecting £200 million of translation benefits of free cash flow generation ahead of dividend payments in the quarter. So in summary, Q3 represents another quarter of progress, and we remain on track to deliver our guidance for the year.

Significant work is underway throughout the group to drive our new priorities, which we covered in detail at Q2. In Q4, we plan to launch three important new products. These launches will require investment and time to build, but we believe they each represent significant opportunities that will contribute to the long-term success of the group.

And I'm also pleased to report that, in line with the dividend expectations we laid out at Q2, today the board approved the third interim dividend for this year of 19p. And with that, I'll hand you back to Emma..

Thanks, Simon. So we're now going to open up for Q&A. And again, as I said, I've got the team here ready to take your questions. So, operator, first question, please..

Thank you. And your first question is from the line of Graham Parry of Bank of America. Please go ahead..

Great. Thanks for taking my questions. So firstly on Tivicay and Triumeq, we've seen a trend towards faster growth in Tivicay versus Triumeq recently in new-to-brand prescriptions.

Can you give us any insight into what you think's driving that and the extent to which is this is physicians preparing for bictegravir arrival next year by putting patients onto the backbone contained in the Gilead product? Secondly, could you let us know how you're positioned on payer and hospital formularies with Tivicay and Triumeq into next year? Is there anything you can do to lock out bictegravir by contracting at this stage, particularly with hospitals and providers, which can be quite important in this market? And thirdly, on the Pfizer Consumer business, you'd previously said you'd be interested in looking at this, and Pfizer's now announced its review of that business.

But you've always indicated it would be more likely you would offer to bring that into a JV-type structure rather than an outright purchase, given balance sheet considerations.

To what extent is your JV partner interested in increasing its capital commitment or being diluted? And then finally, comments on 2018 regarding increasing R&D in Advair generics, the savings (25:45) decrease seems to point to a lot of margin pressure next year.

So is your best guess that margins will be flat, up a bit, or down into next year? Thank you..

Thanks very much, Graham. So I'm going to take your question on the Pfizer business, and then I'll ask Simon to comment on outlook for 2018, and obviously come to David on the two sets of questions around the HIV business.

In terms of the Pfizer business, I'd first of all reiterate that our capital allocation priorities that I laid out in Q2 go completely unchanged. We did say we'd be potentially interested in building up our Consumer business; it's a business we like.

We're a world leader in consumer healthcare and have a demonstrated track record of successful integrations, so you would expect us to look at any assets that complement our portfolio from a power brand or geographic footprint point of view.

Although we did talk about potentially bulking up Consumer, our first focus in capital allocation was clearly around our biggest business in Pharma, and R&D within that. Nonetheless, we would be looking at it.

But they only announced the process last week, so it's a bit premature – it's not even confirmed for sale – to discuss in any detail, if and how. And we would, in all cases, be very focused on driving shareholder value – you're absolutely right, that's obviously a conversation we would be having with our partners in the joint venture.

And one option is structurally, that we could have a structured deal, but there are other options as well. So we'll continue to watch it, but nothing more to really add at that stage.

So, Simon, do you want to comment on 2018 outlook?.

Yeah.

I mean, I think, Graham, as we've touched on a few times before, at the moment an Advair generic arrives, given how profitable it is – and you can see the sort of decline we modeled into the guidance that we gave you for 2017 – that that sort of downdraft is going to be hard to withstand without shortchanging the investments that we're making for the long-term growth of the company.

So it will depend partly on how steep a decline it is, which will depend on how many and what sort of supply they have. But if you assume any sort of normal analog, I think it would be very surprising if the margin didn't go down in that period while that transition was happening, and then recover out the other side.

But I think that's more of a steer at this point, rather than precision. We'll have to see precisely how it unfolds..

And it was factored into our 2020 outlook..

Yeah. And we – back in 2015, we said somewhere between now and 2020 we'll have an Advair generic, and we've got this residual assumption of a couple of hundred million pounds of U.S. sales, so I think it's playing out with some uncertainty around timing. But the inclusion of that was very much built into our previous views..

So, David, on HIV..

Yeah. So, Graham, on Tivicay and Triumeq, I think the first point actually, on a global basis, prescription trends continue to be very solid. In the U.S., we measure what we call core and SDR market share, and for dolutegravir overall, we're now above 26%. We started the year a bit below 23%. NBRx is just over 30%, holding very steady.

And dolutegravir remains the leading integrase prescribed in the U.S., and indeed throughout the world. It is true, as you say, there is a mix effect, and there's growing demand and increasing growth rate of Tivicay compared to Triumeq. We think about 40% to 45% of Tivicay now is prescribed with Descovy, and that's obviously a popular regime.

I think – I mean, from the market research we've done, of course the competitive intensity will increase next year as the competitors launch, and I'm sure at the margin there will be some doctors that may switch.

But, the research we get back is, the vast majority are prescribing Tivicay because they want to prescribe the best third agent, which they view to be dolutegravir. And for patients that are well tolerated and doing well on Tivicay, we think there's every reason why they won't be switched and they can remain on their current regimes.

We've seen now quite a lot of the clinical data on bictegravir. Clearly the headline is, it's not inferior. If anything, efficacy just a touch below some of the efficacy rates we've seen in the dolutegravir studies.

So, I think the answer is, the competitive intensity will go up, but we feel we've got a very strong database, and very good reasons why Tivicay should continue to be prescribed. In terms of the payers, I mean, I'm not going to get into lots of detail around the tactics of that.

It's a very different marketplace in a specialty area like HIV to Respiratory. We have very high, if not virtually total coverage, and I don't see any change in the dynamics with the payers in our HIV business going through 2018 and this year. The exact tactics and so forth versus Gilead, I think we'll keep confidential..

Thanks, David. Next question, please..

Thank you. Your next question is from the line of Richard Parkes with Deutsche Bank. Please go ahead..

Hi. Thank you very much for taking my questions. Firstly, on the Ellipta portfolio, obviously, Anoro and Breo were a bit below expectations this quarter. I know obviously there were some rebate adjustments there. But I'm just wondering if you could talk through what continues to surprise there. And, in addition, Breo U.S.

sales seem to be trending a little bit below prescription growth. I'm wondering how much of the price pressure you're seeing is spilling over into the new portfolio and what we should expect on that Ellipta portfolio in terms of price going into 2018. Second question, I wondered if you could just comment over industry consumer and OTC trends.

Obviously you've reduced your midterm guidance. 3Q was a little bit better than expected. But there seems to be a slowing across the industry, and I'm wondering if you could comment, in the U.S.

in particular, whether you see that as a structural change given the impact of things like e-commerce, and how you might adjust your strategy to cope with that. Then finally, I think, a pipeline one. On the BCMA ADC antibody, I think – looks like we'll get data at ASH, by the sounds of it.

We've previously seen some pretty robust responses, but with dose-limiting toxicity that looks like it might be a bit more challenging than with other new drugs like Darzalex, I'm just wondering whether you feel that really limits the drug's potential to the refractory setting and how you think about that market opportunity and how that will evolve given likely highly effective new first-line regimens that are coming through in the near-term horizon in multiple myeloma.

Thanks so much..

Thanks, Richard. So in a moment I'll come to Brian to comment on the Consumer sector outlook and obviously Patrick on BCMA. But just to comment first of all on Ellipta, you frame your question as what continues to surprise there. I don't think we're surprised by what's going on in the respiratory market, as we outlined also in Q2.

The ongoing competitive pricing environment is something that we anticipate to continue through 2018. Simon has already mentioned the RAL (33:36) true-ups. And I might ask him to add in just a second a little bit more detail on that.

But I will start with a reminder on the good performance as far as TRx, the prescription trends, are concerned in terms of the Ellipta portfolio. Breo up 74% year on year, Anoro up 70% – Anoro and Incruse – with NBRx, (34:00) of 38%, Breo NBRx at 24%. So we are seeing good growth here.

And obviously what's also key is taking into account the total Ellipta portfolio and what will come when we launch Trelegy, too, which will take a bit of time to build.

But once we're able to factor in the IMPACT data, we do think is going to bring us back to a place, as we gave in the outlook, where our 2020 total Respiratory sales is at least as strong as our 2015, having factored in an Advair genericization. But pricing pressure is real, and very much continuing.

So, Simon, I don't know if you just want to add anything – more detail on the (34:40) -.

No, I think the key point, Emma, is that the script trends are very, very consistent. We continue to build share. Volume is obviously the key driver. And the individual quarter-to-quarter adjustments, I wouldn't get too hung up about, because we certainly see them flow both ways.

It's the big driver of the gap you're seeing, or that you highlighted, between the script trends and what you've seen in terms of reported revenue in the quarter. But the new products are moving pretty much in line with the old products in terms of the general pricing trend, and then you have this volatility position.

But net-net across the whole Respiratory portfolio, which is how I'd encourage you to think about it, it's not a material factor..

Okay. Thank you.

And then – so, Brian, do you want to just say a few comments around the Consumer sector?.

Yeah, as Simon said earlier, we're seeing growth of 2% this year versus 3% to 4% in previous years. And our outlook is more like 2% to 3% for the categories. And really linking the two things, I mean, we're continuing to see volatility in emerging markets.

So economic slowdown in countries like Brazil and Saudi Arabia and others, and also the impact that we've seen in India of demonetization and now GST we're working through. But we are also seeing pricing pressure in developed markets in the U.S. specifically linked to growing e-commerce.

Now, for us, e-commerce is a key channel and a key focus area, and while in our categories it's still relatively small, we're growing ahead of the category, and in the U.S. specifically almost double the category growth in those channels. So that's a big focus for us.

Listen, we have great brands with great equities, and we think e-commerce is another channel where our consumers are, and we can compete in that channel..

Thanks, Brian.

So – and, Patrick, you want to comment on BCMA?.

Yeah. So obviously BCMA is a great and rather specific target that we presented the results last year of the first wave of this study, showing I think very high response rates. And later this year we'll present expansion cohorts and the durability data associated with that.

But clearly that level of efficacy is what people really care about in this disease, and in oncology of course that's what drives most behaviors is the level of efficacy.

In terms of the side effect profile, the one that one thinks about with the drug antibody conjugates is corneal effects, and those corneal effects that we saw in the first phase of the study that we reported tend to be mild, Grade 1 or 2, and tend to be reversible. So, yes, there were some corneal effects that are there.

We don't think they in any way reduce the importance of the efficacy signal, and we think they're manageable and reversible. So I think we're pretty confident on what we've seen so far, and we'll present the updated results before the end of the year..

Thanks, Patrick. Next question, please..

Thank you. Your next question is from the line of Andrew Baum of Citi. Please go ahead..

Thank you. A couple questions, please. At your midyear analyst meeting, many investors came away feeling that what you were offering was a challenged HIV and Respiratory business and just downgraded the expectations for Consumer. You clearly have an active Oncology business.

The BCMA has been highlighted; you signed the Adaptimmune deal; you're extensively hiring.

Could you help me understand why you just haven't committed it and it still remains a potential area rather than an important future growth driver for GSK? And then secondly, in relation to emerging markets, perhaps you could break down for us the underlying Pharma growth within China.

I ask in referencing a older question, which is what would it take to reconsider the commitment of your established drugs to China rather than licensing to a third party and thus obviating some of the headwinds associated with the legacy of GSK in recent years in that market?.

So thanks very much, Andrew.

And you're right in terms of us laying out in Q2 that, as well as our two core areas of HIV and Respiratory, when we want to think about preparing for the next wave of growth for the company, particularly into the 2020s and beyond, Oncology and specifically three subsets of Oncology – immuno-oncology, epigenetics, and cell and gene therapy – you're right, were potentially key for us to be able to reaccelerate to growth for the company within the Pharma business unit.

But it's still very early days. We said they were potential new therapy areas for us to recompete in, being Immuno-inflammation and Oncology. We're one quarter on. We highlighted in July five assets, I think it was, in Oncology that were part of our priority assets, and we've updated on two of them this quarter.

But we are still in early phases, and it's premature to pronounce on how we may or may not choose to compete, alone or in partnership, in terms of the commercial part of it.

But obviously you'll understand that's something that Luc and Patrick and the Oncology – and growing, as you said – Oncology teams are working on quite hard now, and we'll keep everybody informed on as data defines it. In terms of China, I'll ask Simon just to comment on the numbers for China.

But our position is unchanged, which is China remains an extremely important and strategic market for the industry and the company.

As events of this week, it's obvious that reform is likely to continue to accelerate in the sector in China, and that's something that we are participating in and we take a long-term view of continuing to be able to build our business profitably there.

But, Simon, do you want to comment at all in terms of the actual numbers of (40:57)?.

Yeah. We're down mid-teens in the quarter for the Pharma business. The Vaccines business showing actually very good progress in the quarter after the launch of Cervarix, which has started well. And I think as we talked about before, Andrew, I mean, we're not closed mind to a structural answer to a different way forward in China.

I think that it's a market we want to stay in. It's a market that we see opportunity, and – particularly with some of the rule changes about how you get products approved there, and what we might be able to do to bring our pipeline a bit further forward in that market. But we've got to find the right sort of base for it.

So I think it's a bit early to give you anything more specific than that, but – other than to say we're looking at all the options that we might have available to try and take advantage of the opportunities there..

Thanks. Next question, please..

Thank you. Your next question is from the line of Tim Anderson of Bernstein. Please go ahead..

Thank you. A couple high-level questions, please. Emma, since the late July analyst meeting, Glaxo's stock price has basically been in a free-fall, and it's down today again.

What do you think are the things the market is misunderstanding the most about the future of Glaxo under your leadership, and in your opinion what are going to be the triggers for a rerating, and when do you think those triggers are going to play out? Kind of sounds like you're not indicating a very hopeful 2018.

And related to the same question, one of the concerns that came out of that meeting, and I think it still exists today in the mind of certain shareholders, is the security of your dividend. You gave guidance through 2018 on the dividend.

But can you give investors assurances that in all likelihood there really is no dividend risk here, either in 2018 or beyond? And if you can't do that, in terms of talking about beyond 2018, can you articulate what could be the potential factors most likely to create future dividend uncertainty, for example, looking at Pfizer's Consumer business, if you were to acquire that, can you say that that creates some possibility of dividend risk?.

Thanks, Tim, for your questions. I will just slightly contest the free-fall point. But that aside, I'll answer your point on what do I think may be undervalued or under-recognized. I think consistently I view that our Vaccines business is not fully recognized. We have a very competitive position here, a strong pipeline.

We feel very positive about the long-term growth contribution of Shingrix, which is such a differentiated vaccine. And we'll see what more comes through on that today. We also think we have a world-leading, very competitive Consumer business and great track record there too of progress.

And I think, as I highlighted in Q2, the reality of rebuilding confidence is being able to show visibility on the pipeline that's going to – which isn't currently valued because it's early days, and we need to let that data play through so that we can be convincing on the next wave of growth for the company.

And that's something that needs a bit of time to play through with data. We've also got to make sure we build confidence around our capacity to execute new launches with excellence, which is why we're all very focused on the three primary launches that we've talked about.

In terms of the dividend, our position is absolutely unchanged from where it was a quarter ago. We know the dividend matters to our investors.

We intend, and we do pay it now, as a function of our free cash flow after investing in the necessary priorities to secure long-term growth for the company, and that capital allocation was very clearly laid out in Q2, starting with the Pharma pipeline, potentially bulking up Consumer, and then security of vaccines supply.

And we confirmed our intention to pay the dividend in 2017, £0.80, and again in 2018, and then we will be returning to declaring a dividend quarterly and not giving a more specific outlook beyond that. And in all cases, as you know, the dividend is a decision at the time for the board. Next question, please..

Thank you. Your next question is from the line of Kerry Holford of Exane BNP Paribas. Please go ahead..

Thank you. Three questions, please.

Firstly, on the meningitis vaccines, I wonder if you could detail what the underlying growth of Menveo and Bexsero was in Q3, so excluding that positive impact of CDC movement? Secondly, on Trelegy, could you just detail a little more about how you plan to position that triple in COPD versus Breo and Anoro? And also on pricing, I see that the Trelegy list price is around 50% above that of Breo and Anoro, which I find relatively surprising, given it's such a highly competitive market.

So is it fair to suggest the high rebate pressure we're now seeing on the existing elective (46:36) brand reflects the need to support that premium-price triple? Or on a net basis, should we assume it'll be priced at broad parity? And lastly, just on Vaccines, coming back to Graham's earlier question, just to clarify.

Simon, you mentioned we should potentially anticipate margin decline with Advair generics.

Were you referring to the Pharma division only, or group margins? I wonder if – should we expect that the Consumer vaccine margin expansion could offset any decline in Pharma over that period?.

Thanks very much, Kerry. I think I'm going to – since most of those questions were linked to comparators financially, I'm going to pass them to Simon..

Okay. Thanks, Kerry. So on meningitis, it's really a Menveo story, and we saw some withdrawals this time last year, in Q3 last year, from the CDC stockpile, and so it's really a growth rate point going into this year. I think the underlying market share data is very, very consistent. So it's really a Menveo point.

If you strip out the year-on-year benefit from that comparison point, Menveo would be flat in the quarter. So that's the kind of swing overall, so there's about a £30 million swing quarter to quarter, in terms of the quantum of that. I think on your Respiratory pricing point, we're not going to get into what our pricing strategy is around Trelegy.

But we've always made it very clear that we want to be competitive. We have to be comparable with some of the older products in the portfolio so we don't create discontinuity. But we obviously also want to get value for the innovation that we had.

So we're not going to get into the detail of how we might contract with people on that, but I think you can see from the list price, the signal that we're sending that we want to get access and be into the market as strongly and as quickly as we can.

And then my point on margin was a Pharma one, but potentially also a group one, depending on how quickly and how hard Advair lands on us.

If it comes in a typical analog of a genericization of a product, or we get two or three players in the market all at the same time, I don't think it's realistic to lose that amount of super high-profit sales because of the age of the product and not expect some impact on the group margin. I'll hand that back to Emma..

Thanks. I mean, the only other thing I'd say on the triple is obviously short term in terms of the label. It's directly for patients that are either using Breo and Incruse or just Breo and could step up.

But the results in our IMPACT study really do look very significant, we believe, very important for the long-term potential of this when you're seeing an exacerbation reduction of 15% versus Breo, 25% versus Anoro.

And then when you also combine that with the FULFIL study versus Symbicort, we do have in hand the only closed triple with, we think, a significant long-term opportunity here. So as well as the financial combination, we are looking at what we think will, long term, be a meaningful contributor to this market and to our growth. Next question, please..

Thank you. Your next question is from the line of Jo Walton of Credit Suisse. Please go ahead..

Thank you. And my question actually follows on from Emma's last comment, or at least one of them does. So in the Respiratory side, your initial label for Trelegy is relating only to patients who were already taking your own product.

So I'm wondering whether we should think very much for next year of Trelegy effectively cannibalizing your existing sales? And when should we start to think that you can take material gains from outside of your portfolio to be long and sustainable? And I wonder if you could also help us on any elements of formulary coverage that you may have, anything that you can share with us, because clearly Trelegy came very late to the season for contracting for next year..

Thanks, Jo. Sorry, go ahead..

And on your HIV portfolio, it was said that about 40%, 45% of the dolutegravir prescriptions were coming with Tivicay and then being used with Descovy. I wonder if you could help us on what the dynamics would be for a patient. Presumably they're taking two co-pays if they take Tivicay and Descovy.

And if they were to move to a combination bictegravir next year, that would be cheaper from a patient point of view. I wonder if you could just tell us how important patient co-pays are in the HIV market. And a final quick question on the Consumer business.

You've highlighted that e-commerce is a trend which has depressed the market, but presumably where people are buying brands they are ultimately sourcing your product, but via a different route, which may be less profitable for you.

But is there also a move towards private label, or are people just actually getting by and not buying these products because they're not going to the pharmacy and, therefore, they're not making impulse purchases? Just a little bit more on that Consumer dynamic, please..

Great, Jo. So I'll pass the Consumer one to Brian in a moment, and David will pick up on HIV. Just on your question on Trelegy, you're right, it will be a slow build. But again, we're working very hard to get the IMPACT study published, and just to point out that we think, maximum, Breo represents about maximum 15% of the open triple market today.

So we do see plenty of opportunity for this medicine. In terms of the formularies, they're going to be published obviously Q4. I think the team's done a great job and are looking to see at least if not slightly improved access for our medicines.

So, David, do you want to comment on HIV?.

Yes. Thanks, Jo. So what I said was, of the Tivicay business, we think about 40%, 45% of that is prescribed with Descovy. Exactly what the co-pay situation is depends a little bit which channel you're in, so there's difference between Medicare and the private insurance market.

But you're right, in the private insurance market they will be paying two co-pays. I think – I mean it's clearly not irrelevant, but it's not the main influencer either, and we will work very hard to keep the co-pay to a very manageable level.

I think in a specialty area like HIV, it's obviously the data – or it is the data – that really drives the prescribing decision, and I think that will probably override everything else.

The other thing I'd say – of course, one option potentially, subject to the FDA approval in the next few weeks, is if they want to move to one tablet, is to move to, if you're virally controlled, the potential to move to our first dual with dolutegravir and rilpivirine.

And I would flag there we've had some important news in the last 10 days with the U.S. guidelines, the DHS guidelines in the U.S., which specifically refers with a strong recommendation for those patients that might want to switch that they could switch to dolutegravir plus rilpivirine based on the SWORD data that we published earlier in the year..

Great. Thank you.

And, Brian, do you want to pick up on e-commerce?.

Yeah. So on e-commerce, I mean, you're right, it's another channel where consumers can go to buy our products.

I think the dynamic that we're seeing that's causing some suppression in the market growth is around pricing and pressure on pricing, especially as bricks-and-mortar retailers look to compete with e-commerce and get more foot traffic into the store. And that's kind of depressing the value growth on the market..

Yeah, that's true, but I mean, you also made the point about private label. We have forever been competing in the U.S. and the U.K., particularly with the private label business, really in OTC. You don't see much private label anywhere in the world in our oral care business. And you've seen another quarter of very strong results in oral care.

We're ahead of the market. And in all cases, whichever channel you're in, and when you're competing against private label, what matters, as Brian said earlier, is extremely strong brands. And that's where our power brand model continues to work.

We got high single digit growth this quarter on our power brands despite the market environment and also having the right kind of differentiated innovation, and those are priorities for this business. So we think we can continue to compete, but it does mean that the amount of (55:40) differentiation matters ever more.

Time for one last question, please..

Thank you. Your question is from the line of Jeff Holford of Jefferies. Please go ahead..

Oh, hi. Thanks very much for taking the question. Emma, I'd just like to come back to the dividend really, just a bit more really again on the back of Tim's question. Because I think it's a no-brainer that you would look at the Pfizer Consumer unit.

But market confidence in Glaxo's dividend is being slowly eroded by some of the current commentary from Q2 and then the fact you would be, in inverted commas, "looking" at the Pfizer business unit.

Can you just give us a more specific answer to the question? Would you seriously consider making a purchase such as Pfizer Consumer if the dividend or portion of the dividend had to be sacrificed to fund that? I'm just trying to work out, is there a red line on the dividend? Can it be sacrificed to do M&A, or is it something that's sacrosanct, and if you can't afford to do the M&A without cutting that, then you have to let those opportunities go? Thanks very much..

Thanks very much for the question, Jeff. I'm afraid I'm just going to say that it's really too premature and hypothetical to respond to that at the moment..

Okay, with that, thank you very much, and wish you all a good rest of the day..