Sarah Elton-Farr - Head of Investor Relations Emma Walmsley - Chief Executive Officer Luke Miels - President of Global Pharmaceuticals David Redfern - Chief Strategy Officer and Chairman of ViiV Simon Dingemans - Chief Financial Officer..

Michael Leuchten - UBS Kerry Holford - Exane BNP Paribas Graham Parry - Bank of America Merrill Lynch Tim Anderson - Wolf Research Andrew Baum - Citi Steve Scala - Cowen James Gordon - JPMorgan Jo Walton - Credit Suisse.

Good afternoon, ladies and gentlemen, and welcome to the GSK Quarter Three 2018 Results call. I'll now hand you over to Sarah Elton-Farr, Head of Investor Relations, who will introduce today's session. Please proceed..

Good morning, and good afternoon, everyone. Thank you for joining us to discuss our Q3 2018 results, which were issued earlier today. You should have received our press release and can view the presentation on GSK's website. For those not able to view the webcast, slides that accompanies today's call are located on the Investors section of our website.

Before we begin, please refer to Slide 2 of our presentation for our cautionary statements. Our speakers today are Chief Executive Officer, Emma Walmsley; Luke Miels, President of Global Pharmaceuticals; David Redfern, Chief Strategy Officer and Chairman of ViiV; and Simon Dingemans, Chief Financial Officer.

Following our presentation, we will open the call to questions and answers. We request that you ask only a maximum of two questions so that everyone has a chance to participate. Joining us for Q&A are Dr. Hal Barron, Chief Scientific Officer and President of R&D; and Brian McNamara, CEO of our Consumer Healthcare Business.

And with that, I'll hand the call over to Emma..

Thank you, Seth. So overall, Q3 was another good quarter of progress for GSK with improvements in sales, the group operating margin, earnings per share and cash flow. Group's sales growth of 6% in CER terms, reflected sales growth in all three of our global businesses.

Our Pharma business grew at 3% CER during the quarter, driven by HIV, and growth of new respiratory products. Our new respiratory portfolio grew at 40% CER, including a GBP 42 million contribution from Trelegy, which continues to see good traction.

In HIV, we also continued to deliver double-digit growth, driven by sales of our dolutegravir portfolio, including Juluca, the first of our new two drug regiments. Benlysta has also become a contributor to growth and grew at 31% CER.

Vaccine sales were up 17% CER with continued strong demand for Shingrix, and for which sales are now expected to be GBP 700 million to GBP 750 million for the full year, as well as growth of the meningitis vaccine, Bexsero. And in Consumer Healthcare, we delivered 3% growth with growth in wellness oral health and nutrition.

We’re making very good progress on margin improvements within our Consumer Healthcare business, and this quarter, operating margins reached 22%, an increase of 250 basis points in CER terms compared to this quarter last year, reflecting continued manufacturing, restructuring and integration benefits and improved product mix as well as strong cost control.

Group operating margin this quarter were up 20 basis points on a CER basis, reflecting a more favorable mix of business and continued tight control of ongoing costs, which offset the investments we’re making in the business.

Adjusted earnings were up 14% CER, ahead of operating profit growth, primarily as a result of low minority charges due to our acquisition of Novartis stake in consumer health JV, as well as the reduced adjusted tax rate. On a total reported basis, EPS were up 23% CER to 28.8 pence. Our free cash flow position also continued to improve.

And for the year-to-date, was almost GBP 2.4 billion, up 42% versus the same period last year. We continue to expect to pay a dividend of 80 pence for the full year 2018.

And based on the results we've achieved to date, we are now tightening our guidance towards the upper end of the range for the full year, expecting adjusted EPS growth of 8% to 10% at constant exchange rate. And we expect to maintain this guidance range in the event that the generic version of Advair is introduced before year end.

As you know, I set out three long-term priorities for the business when I became CEO, innovation, performance and trust, all to be underpinned with a necessary shift in our culture. And we’ve made some progress on each priority this quarter.

On innovation, Howard laid out that his new approach to R&D at our Q2 results, and he has made some really important changes to his organization with the new governance framework in place, a new head of development, a dedicated head of research and end-to-end oncology and global health R&D units.

We’ve also had some positive development in our pipeline this quarter.

We continued to progress our two drug regimens in HIV, making regulatory filings in the U.S and Europe on the back of the positive GEMINI data for the combination of dolutegravir and lamivudine, and now also have had positive results from the pivotal ATLAS and FLAIR studies for a long-acting injectable HIV therapy.

We started the first study of BCMA and second-line treatment of multiple myeloma. We've presented some encouraging Phase II data on our anti-GM-CSF compound at the ACR conference last week. And we've seen the first results from an ICOS study which will there earlier we need to see more evidence, showed some initial indications of activity.

We have clearly said we will be more decisive with our pipeline. And this quarter we've also decided to terminate five development programs. These decisions were data driven, primarily based on interim analysis, will allow us to focus our assets on other assets with greater chance of becoming important medicines.

Strengthening the pipeline remains a clear priority for the group. Moving to performance, we continue to make good progress across the business. Investments in prioritization to improve our commercial performance are being reflected in new product sales growth, and we’re moving ahead with the restructuring program we announced at Q2.

In addition to the recently announced changes to our supply chain, we've already made some significant changes to our U.S. operations. And to be a high performing company for the long-term, we also need to run our business in the right way, building trust with all our stakeholders.

This quarter, we updated our policy on how we work with healthcare professionals with the changes designed to help prescribers understand new data and clinical experience with our innovative products. We also updated our approach to global health so that it's focused to impact.

And we are pleased to report this quarter initial promising data for a candidate vaccine to prevent TB. And turning lastly to culture. We continue to build the right teams to lead. And this quarter, we also announced deployment of Iain Mackay, our CFO, who will join us in the New Year.

Now culture change, of course, will take time and energy, but we are making progress. And we are working hard to build more focused, agility, accountability and, when appropriate, the courage to take smart risk. So overall, I'm pleased with our progress this quarter on our three long-term priorities in the beginning of the shift in culture.

And now, I'm going to hand over to Luke, Dave, and Simon, who are going to talk you through some of the details. So Luke, over to you sir..

Great. Thanks, Emma, and hello, everyone. And it really is the pleasure to report on another good quarter. Driving this is a greater level of focus and prioritization in the commercial organization. In the form, you can see on Slide 7. On the product level, this means investing in key products that are differentiated and can probably grow and win.

For Shingrix, we are on track with good momentum. And this is a very large opportunity. But in the near-term, our ability to grow sales will be limited by our supply. Bexsero is another important growth driver for our vaccines business, and we continue to see demand and share gains in the U.S. on the back of the new campaign and better tactics.

We are also seeing good growth in private markets in the international regions. With Trelegy, the launch is progressing well, and we expect that continued strong launch trajectory as we launch into other markets. The product is now available in 16 countries and a further 9 by the end of 2019.

And we've also filed in Japan for the planned launch in 2019 and in China. And the key drivers for Trelegy right now are the U.S., the UK and Germany. On Nucala, we are doing well internationally, but we are seeing a more competitive market in the U.S. with the launch of Fasenra and now [indiscernible].

In my mind, this is about execution and we have changed some key members of the Nucala team in the U.S. We've also increased the resources behind that product, and we'll be engaging in a more focused way with doctors, driving our message of long-lasting protection from exacerbations.

Following updates to our healthcare policy announced earlier this month, we concluded our first paid external speaker event in the U.S. for Nucala, at the recent CHEST [ph] conference. And additionally, we are planning to launch an autoinjector for at-home use in 2019.

Benlysta, I'll cover shortly, and David will speak about HIV and the opportunity for growth and the potential for the two drug regimens in a moment. The second column on Slide 7 is market. And in a shift, we are very focused on the top 10 markets where the bulk of our growth is. And within this naturally the U.S.

is our biggest opportunity, and we're investing more here behind our priority products. China was also a focus and underrepresented today, but we're investing more and planning to launch more innovative pharma and vaccines products going forward. The third big change is that we're investing in our specialty capabilities.

In oncology, where we aim to bring our pipeline to market in the relatively near-term with BCMA, we're laying the foundations of our commercial infrastructure, which means hiring external people, who know hematology and oncology.

And Hal and I are very passionate about ensuring strong linkages between R&D and commercial, including the collocation of R&D and commercial in oncology. This is not rocket science, but we all know works to create value. Next slide please. We’re pleased to see another very strong quarter with Shingrix.

We’re expanding the market with about a third of those receiving the vaccine below 65 years, and overall around two third of people getting the vaccine, not previously vaccinated with ZOSTAVAX. Target sales 2018 are now in the range of GBP 700 million to GBP 750 million. And this is clearly an opportunity for further growth in 2019.

And working with Roger, we're in the process of building our supply capacity. However, and this is a key point, as we saw with meningitis, it will take time to reach a point where we had demand rather than supply-led.

I'd now like to take a minute on Slide 9 to talk a little bit more about Benlysta, as this is a good example of how and where we're investing more behind certain products and getting better at execution and accelerating the growth.

With the approval of the Subcut last year and increased investment, we see considerable potential for Benlysta, which remains the first and only product for SLE in over 50 years. And yet, the fact is this condition remains relatively undertreated. So currently, we have around 12,000 patients in the U.S.

on the drug out of an eligible or in-label pool of patients of the 100,000.

So there's a substantial scope for further upside, a potential trigger to unlock a lot of these patients is a study that we are very excited about, and this is the combo study with rituximab, where there's potentially a synergistic mechanism of action by some early data that could enhance the treatment effect to provide potentially a sustained disease control and also potentially an upside remission.

And this is a study that's recruiting well and reads out in late 2020. And now, David will take you through the performance in our HIV business..

Thank you, Luke. We continue to see good performance this quarter in our HIV business with growth of 12% at constant exchange rates, and 17% growth for our dolutegravir portfolio, which is broadly consistent with the growth trends we've seen for the year-to-date. We're continuing to hold our share in the U.S.

within the SDR core market at approximately 28%. There has been some switching at the margin, particularly from Triumeq, some of which has gone to competitors and some also to Juluca, but overall, the prescription trends in the U.S. are very similar to the last quarter.

Juluca has had a positive impact and is now at 1,500 scripts or more per week with greater than 1,500 physicians having prescribed this drug. Pricing overall in the U.S. remained stable albeit there is a slight adverse mix impact.

In particular, there is an increasing trend towards patients receiving the Medicaid price and this will likely continue next year. We've had some very good progress this quarter on the development of our further two drug regimes. On the back of the positive GEMINI data, we filed for approval in October for dolutegravir plus 3TC, and anticipate U.S.

approval in the second quarter of 2019.

We also now have positive data from both the FLAIR and ATLAS studies for cabotegravir+rilpivirine in a long-acting once monthly formulation, which will enable us to file for an approval in the first half of 2019 for what we believe we'll provide a highly differentiated treatment option for those patients seeking a long-lasting therapy for HIV, freeing them the burden of daily oral therapy.

We continue to progress the eight weekly dosing of cabotegravir+rilpivirine and expect to have data on that next year. We also presented 48-week data on fostemsavir at Glasgow this week. This showed fostemsavir effectively controls HIV and heavenly treatment experienced patients.

We would expect to fall for approval of this medicine in the second half of next year. With this broad portfolio of assets and positive clinical data, we believe we are very well positioned to meet the changing and different needs of HIV patients as lifespans and durations of therapy increase.

And although we expect it to take time for the two drug regimens to gain significant traction, we are definitely seeing awareness, interest and enthusiasm for TDRs increasing significantly, following the clinical results in Gemini, ATLAS, and now FLAIR. And we therefore remain confident in our growth outlook for the HIV business going forward.

With that, I'll hand you over to Simon..

Thank you, David. Overall, we believe the group's results for the quarter demonstrate consistent operational execution against our key strategic objectives with strong delivery in all three businesses. We continue to grow sales across the group and deliver operating margin improvements while investing behind our recent launches and R&D.

Based on this momentum, we are confident in our delivery for the rest of the year and have tightened our guidance for constant currency adjusted earnings per share growth for 2018 towards the upper end of the range. Our earnings release provides an extensive amount of information.

So I'm going to focus on the major points, our expectations for the rest of 2018, and any important comparators to take note of within your modeling. As usual, my comments today will be on a constant exchange rate basis, except when I specify otherwise, and I'll cover both total and adjusted results. Starting with the headline numbers.

Group sales up 6% to GBP 8.1 billion, total EPS 28.8p and adjusted EPS 35.5p, up 14%. Total operating profit was GBP 1.9 billion, up 7%.

Adjusted operation profit grew at 6%, with profit growth in vaccines and consumer healthcare more than offsetting a slight decline in operating profit for pharmaceuticals as we increased investment in R&D and behind our new products.

On currency, the strength of sterling compared with last year, particularly against the dollar, resulted in a headwind of 3% sales and 4% of adjusted EPS. If exchange rates were to remain in line with rates at the end of the third quarter, we would expect the full year headwind from currency to be approximately 3% on sales and 6% to adjusted EPS.

Total results for the quarter showed strong progression on Q3 2017, despite higher charges for the revaluation of acquisition-related liabilities, principally the TCL, helped by disposal profits on tapinarof, as well as stronger operating profits and lower minority interest off to the -- and Novartis' interest in the consumer joint venture.

A number of adjusting item provision releases also led to a lower total tax rate. The rest of my comments will be on adjusted results. Turning to the top line. This quarter's growth of 6% was driven by momentum in all three businesses, and within that, strong contributions from HIV and vaccines in particular.

Sales within the Pharma business, up 3%, driven by the HIV portfolio, which grew 12% in the quarter.

Within HIV, our brands continued to perform well within a highly competitive marketplace and we continue to expect HIV to be an important growth driver for the Pharma business going forward, remembering that in the short-term, Q4 is up against the tougher comparison than Q3.

Respiratory sales grew 5% with growth from the Ellipta portfolio and Nucala, more than offsetting the decline in Seretide/Advair. Trelegy continued to perform strongly benefiting from share gains after an expanded U.S. label.

And we expect this momentum will be increasingly important as one of the key growth drivers of the Ellipta portfolio and the respiratory overall. Nucala growth was driven by international launches and market expansion in the U.S. The competitive environment for Nucala is picking up.

And as a result, we’re expecting growth for the next few quarters to be a bit more challenging as we respond to these new conditions as Luke has set out. Longer-term, we remain confident that the strength of our data around Nucala, and the 4.5 years of usage history and patience will allow us to build a significant product for the group.

Seretide/Advair declined more slowly this quarter with less volume and price decline than in the first half, as we begin to annualize the step-up in pricing pressures that we saw in the second half of last year.

Volume also benefited from some inventory phasing, I continue to expect an overall decline in Advair before any generic entry for the year of around 30% in line with year-to-date performance. RAR returned stronger growth in the quarter, up 16% globally with good growth in Europe and international. The U.S.

is more challenging with sales up 11% despite volume growth of 27% and the pricing benefits of lower RAR adjustments compared to last year, partly offsetting an increasingly competitive pricing environment. We continue to expect that Breo will be the most affected of the Ellipta products as Advair goes generic.

Established Pharmaceutical declined 9% in the quarter and 6% over the nine months. I continue to expect the full year decline will be in the mid to high-single digits.

Despite the competitive and pricing pressures we're experiencing in Pharma, the momentum we have from our new product means we remain confident that we will deliver overall sales growth for pharma in the low-single digits for the full year. Moving to Vaccines. Sales, up 17%, primarily driven by Shingrix as well as an improvement in Bexsero.

We’re very pleased with the execution of our Shingrix launch, and in particular, how we've been able to accelerate our production plans. By the end of Q3, approaching 7 million doses have been administered globally since launch.

We now expect to be able to deliver enough doses in 2018 to take Shingrix revenues for this year to between GBP 700 million and GBP 750 million. Looking forward, Shingrix should be an important growth driver for a number of years as we continue to expand capacity.

More specifically, over the next 2 to 3 years, we plan to increase our annual capacity to levels of doses in the high-teens millions, and build further from there. But please keep in mind, the ramp-up is very unlikely to be linear.

The meningitis franchise returned to growth in the quarter, with Bexsero driving market expansion and gaining share in the U.S, Europe continued to be impacted by the completion of cohort catch-up vaccination programs.

Flu sales in terms of doses broadly in line with last year although we did see some price erosion, largely due to channel mix in the U.S. Overall, I expect our full-year volumes to be similar to last year.

The momentum in the vaccines business continued to give us confidence in the mid to high-single-digit outlook for sales CAGAR over the medium-term, although 2018 will show higher growth than this as a result of the Shingrix launch.

Turning to consumer, sales grew 3%, despite a drag of around 1 percentage point from the combined impact of the divestment of nonstrategic brands, and the final quarter's impact of GST in India. The drag is a bit less than we had originally expected as we are seeing supply shortages from the TDS generic that will probably last into 2019.

Oral health had a slower quarter than usual, largely due to a step-up of competitive pressures in Europe, and some destocking in international. But consumption remains robust, and we expect oral health to return to stronger growth in Q4. The business continued to achieve both price and volume growth with volume up around 2%, and pricing up 1%.

We saw a very strong margin progression for consumer in the quarter. Keep in mind though that in Q3 we benefit from the selling of 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.

We remain confident in delivering low-single-digit reported sales growth for consumer for the year, and we are on track with our margin objectives. Turning to operating profit. Our adjusted margin of 31.2% was down 30 basis points as actual rates, but up 20 basis points on a constant currency basis.

COGS, as a percentage of sales, was 30 basis points lower at constant currency, driven by improvements in vaccines and consumer, the mix benefits and supply chain efficiencies, which more than offset the pricing pressures we're seeing in Pharma, and increased input costs.

SG&A increased by 4% in the quarter as we invested significantly behind driving our recent launches in vaccines, respiratory and HIV, as well as supporting seasonal products. This was partly offset by further reductions in the back-office and other noncustomer facing resources.

R&D costs, up 8%, with around the third of that growth driven by a provision for payments due to a third-party on the PRV we were recently granted.

While we continue to step-up investment behind key R&D projects, overall R&D spend growth also continues to benefit from the savings from portfolio prioritization decisions outlined in earlier in the year, we continue to expect growth rates in R&D spending to pick up next year.

Royalties GBP 94 million in the quarter, lifted by higher sales of Gardasil, and are now expect royalties in the range of GBP 250 million to GBP 270 million for the full year. Moving to the bottom of the P&L, we continued to manage our funding costs carefully.

Net financing costs in the quarter were GBP 221 million, reflecting the higher debt, following the acquisition from Novartis of their stake in the consumer joint venture, as well as around GBP 23 million and one off interest charges on historic tax settlements. I continue to expect net financing costs for the year to be around GBP 725 million.

Restructuring is progressing well, with changes announced in the quarter for the U.S. Pharma business, the Sligo manufacturing site and the streamlining of our [indiscernible] business. On tax, the adjusted rate was 18.6% in the quarter, 19.5% for the nine months, in line with the range we expect for the full year of 19% to 20%.

Charge for minorities was GBP 1.1 million, down from GBP 228 million last year, following the Novartis buy-in. Turning to cash flow, we remained focused on driving greater cash discipline across the group and improving cash conversion.

Free cash flow for the group during the first nine months of the year was GBP 2.4 billion, up GBP 0.7 billion and 42% natural terms compared with last year. This increase was principally driven by improved operating profit, tighter control of capital expenditures, lower restructuring costs and higher proceeds from divestments.

This was partly offset by the vaccines milestone payment to Novartis at the beginning of this year, some foreign currency movements and a larger increase in working capital. The working capital increase, primarily driven by increased receivables, largely Shingrix, partly offset by inventory reductions.

Net debt now stands at GBP 23.8 billion, primarily reflecting the impact of the Novartis buy-in. Given our improving cash generation, we remain comfortable with our balance sheet capacity to support future investment requirements. Moving on to expectations for 2018.

Based on an encouraging nine months, I'm pleased to be announced tighten the range of our guidance for the year towards the upper end of previous expectations. We now look at adjusted EPS growth of 8% to 10% on a constant currency basis.

Exactly where we land within this range will be dependent on the number of factors, but particularly final deliveries of Shingrix on the timing and scale of any generic competition to U.S. Advair.

For the longer-term, while the mix of business and product contributions may have changed since the group has evolved over the last few years, we remain confident in delivering the financial outlook for the group we published back in 2015, and reiterated in 2017, of mid to high-single-digit adjusted EPS CAGR over the five-year period 2020.

With the business growth we see in vaccines, including the positive momentum from Shingrix, we anticipate we will achieve stronger margins than originally expected. And we are now targeting the vaccines operating margin in 2020 of around mid 30's percentages, at 2015 exchange rates.

This upside together with the progress made in consumer, offsets the increased investment we're making behind our new products in R&D, which will impact the Pharma margin, which we now expect to be around 30% in 2020, again at 2015 rates.

Overall, the progress we're making, the momentum we have in each of our businesses and the increased cost and cash focused that we’re building across the group, gives us confidence that we can make the investments we need in R&D and behind our new products and still deliver our original expectations for the group, for the period 2020.

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

Thanks, Simon. So in conclusion, we've had a strong first nine months of the year, and we’re confident of delivery for 2018. Our new product launches are going well, particularly Shingrix.

We’re working hard to drive cost discipline across the company and remain very focused on improving the performance of the Pharma business and strengthening our pipeline. And finally, looking more broadly, we remain confident in our ability to deliver the outlook for sales and earnings growth previously set for the five-year period to 2020.

And now, the team is ready for your questions. Operator, if you could open the line, please for Q&A..

[Operator Instructions] Your first question comes from the line of Michael Leuchten, UBS. Please proceed..

Thank you. It's Michael Leuchten of UBS. Two questions on the -- for David please. One, just to your comments about the trajectory of dual -- or the ramp of dual being maybe little bit slower and needs to build over time.

How do we think about the trajectory for ViiV into 2019? Does that mean we’re going to see a transition year before momentum can pick up again? Or is ViiV actually going to be able to continue to grow whilst the dual strategy is building momentum? And then the second question on ViiV, just around pricing historically to HIV market in the U.S.

has not been one where we've seen pricing being a component. Is there any evidence that going into 2019, we’re going to see any changes that I’m thinking about is Gilead really a player that could use the older part of the portfolio to try and position their integration has returned more preferably? Thank you..

Well, thanks, Michael. And David, I think, straight to you..

Thanks, Michael. I mean, the first thing I would say is we remained very confident about our two drug regimens, and particularly dolutegravir and lamivudine. It's been interesting actually since the IAS in July when we published the Gemini data in detail.

We have had an awful lot of interest and very positive engagement around the world, actually around that data, with all stakeholders, but particularly physicians. And I think the vast majority see it as a major innovation and there is clearly a debate going on with us and with the medical community of exactly which patient could benefit from that.

So our enthusiasm around two drug regimes is as great if not greater than it ever was, and clearly that's been supplemented by the positive Advair and FLAIR data on cabotegravir. I think, inevitably, as we have said we expect to get a record transition in Q2 of next year.

It always takes a little bit of time to build reimbursement coverage and so forth. And that will be the case there. It's much faster than respiratory. But it still takes a bit of time. So that was really what the remarks referring to. But as we said, we definitely see HIV and ViiV as an important part of the growth story of GSK going forward.

On pricing, Michael, as I said, pricing for the ViiV products remain very stable, really nothing to say, nothing to change with this year or going into next year. The only thing at the margin, there was a slight increase in the Medicaid book of business, principally from increased use of 340-B, which obviously has a slight impact on the mix.

But overall, for our portfolio, pricing is very stable..

Thanks, David. Next question please..

Thank you. Next question comes from the line of Kerry Holford, Exane BNP Paribas. Please go ahead. You are live in the call..

Two questions please. Firstly on Shingrix. So clearly you have raised the guidance for this year that to leave an implied Q4 sales figure below Q3. So I guess, as it relates to demand, so can you just talk a little bit more about doses that you expect to deliver this year.

And then, Simon you've mentioned, moving forward to doses into the mid-3 to high teens over the next two to three years. So should we expect your aiming for high teens by, let's say 2021? Or is that an average of that period? And then secondly, on the pipeline, clearly, it's good to see continued prioritization here.

But as a clear out continue, I guess, investors will increasingly ask the question what's going to play seasonal for the pipeline overtime. So I wonder if you could talk about your willingness and ability to look at external collaborations in light of opportunities to bolster this slimmer, but focused internal pharma pipeline? Thank you..

Thanks very much Kerry. So Hal will come to you just in a moment to talk about how you think about BD because we have clearly said in some of our capital allocation priorities have strengthened the pipeline. That is obviously was stopping some of these things, so we can focus on the priorities we have organically.

But we also want to do and to the point the new leader to think about BD2. And just in terms of Shingrix, some of you may want to add to this. But, Q4, there is a bit of seasonal demand.

But this is also supply driven, obviously, being absolutely delighted with the power of the launch of this vaccine ahead of expectations and have mobilized very hard to increase supply. And as Simon has said, we expect to reach high-teens over the next two to three years, but it won't be linear.

So we are not going to give you precise guidance either in doses by year for this year, or '19. And that's the shape of what you should expect. And then, we will -- as we look further to a global rollout, to further expansion beyond that, I don't know whether Simon, you ….

Yes, I mean, I think, as you would expect Kerry, as we build our capacity, it sort of comes in modules as you put in additional vessels on the secondary capacity. So it's not going to go up smoothly. But we are moving as quickly as we can.

We are really pleased with how the vaccines team has performed this year to pull forward some of the plans we previously had. I hope it gives you a sort of sense of where we are headed after a very rapid ramp-up this year with now suggesting that and we will move forward into '19 and '20 and beyond.

I would remind you, as I said in my remarks, we are not stopping our high-teens. We are seeing lot more potential as we get global on this product from there on. But clearly, we've got to get on top of the short-term demand we have particularly in the U.S..

And so Hal, is there anything else you'd like to add on BD?.

Yes, just to follow-up, strengthening our pipeline clearly is critical. And inorganic growth through business development will definitely play an important role to achieve this.

As I think most of you were my first hire reflecting the importance of BD was Kevin [ph], who's now with me in San Francisco, and is very focused on exploring all the different opportunities.

As we said in July, the focus of BD, the strategy is to explore opportunities that will facilitate that's realizing the strategy, which is to remind you is to focus on the immunology, especially immunooncology, but also to explore human genetics, function of genomics, machine learning. And those efforts are ongoing and looking promising.

Our first deal was with GBP 23 million. I just want to point out if that's going extremely well. We've already identified 13 targets that were exploring to see whether any of those would be candidates, and we're going to continue to look for other opportunities, but keeping an appropriately high bar..

Thanks, Hal. And yes, just to reiterate, we do very much care about the discipline that we put in place around the terms on BD. So thanks Kerry. Next question please..

Thank you. Next question comes from the line of Graham Parry, Bank of America Merrill Lynch. Please go ahead. You're live in the call..

Thanks for taking the questions. So firstly, on HIV, just coming back to the pricing question, I think, Shionogi on their call referred some price pressure being driven by generic Atripla. And also, we see some payers now starting voucher programs to use Tivicay in combination with generic backbone.

So is that pushing more of your mix towards monotherapy Tivicay? And is there a negative price mix effect from that? And do you see overtime, perhaps having generics in the market good to spring them pricing overall? And then secondly on Shingrix, do you have a sense of how much of work you are getting in terms of vaccinations now? Is bolus patients previously immunized? And do you have a sense of how far into the bonus pool you are versus a attainable new patient pool? And it is been intent to match capacity to the latter? Or you are effectively producing capacity that ultimately one day will become redundant because you run out of the patients to immunize? Thank you..

Thanks very much, Graham, for the questions. So David, we'll start with you on HIV. And then Luke, I know, you made some comments already in terms of the profile of the patients, but perhaps you can pick up on the state of the machine rates based on the U.S. of this year at the moment..

Okay, thanks, Graham. So on HIV pricing, I think, the dynamics very little bit across the world. But in the United States, there's no doubt that today what matters more than anything is the medical profile of the medicines, and the base of behind the medicines and the differentiation between the medicines.

And whilst it's true that today most HIV medicines are pretty potent and pretty efficacious, the potency does vary between them. And what particularly varies is tolerability and side effect profile. And there are quite significant differences in the way patients feel and the way they tolerate their medicines.

And we’ve seeing, over the last few years, that certainly in our case, the support the second generation integrates is generally has really grown to become the standard of the care.

And within that, dolutegravir, where we now have five superiority studies, a whole raw of data from Phase III B4, and over six, probably most important, we actually have 600,000 patients on the medicine. What really matters is the differentiation of that medicine and that overrides really anything else.

And we -- as I said in -- to Michael's question, we see very strong access, very strong reimbursement, nothing has changed. What happens in the generic backbone and so forth we see, but I think, it's pretty, pretty stable from where we are right now. I would also say we see where it goes in the medium-term.

I do think we’re in quite a good position, because we have a bit more flexibility than most given that Tivicay is the only second generation, integrated single agent medicine. So it can't be combined with all sorts of different combinations..

Thanks, David.

Luke?.

Sure. Graham, one of the -- probably, the best way to answer your questions is just to give you some of the IP and a sense of where these patients are coming from. So if you look in the U.S. people of 50 plus are around 115 million people, and then if you cut that by people who've had a recent adult vaccination, that’s around 67 million.

Within that population, there is 22 million people who previously have Zostavax. And so far we've had around 4.5 million be vaccinated for Shingrix. If you then split that 4.5 million out and ask, okay, who's had Zostavax vaccination before that, around one third of those? So two thirds are actually naïve.

If you then look at the Zostavax population, say okay, what was their age split? Then, around 40% of them were 65 plus, a third of them have 60 to 64, and interestingly about 10% of them are 50 to 59.

If you look at who is being vaccinated by age now with Shingrix, we've got in the 50 to 59 cohort around 16% of our vaccines are going to that group, 60 to 64 is around 18%, so that's 34 below -- 34% below 65 years. And then if you look at the 65 year plus population, we're getting around 66% of vaccines going into that group.

So I think the short answer to your question on top of all those numbers are, we’re expanding the market and there is a fair amount left to do, because if Zostavax is 22 million, and we've already got to a quarter of that. This is before we've even started DTC, and on the back of tight supply.

So the key question that and the point that Simon has made, and I have made is really we need to get the supply expanded as fast as possible because we can pretty much sell anything that we make now in the U.S..

Thanks, Luke. Next question please..

Thank you. The next comes from the line of Tim Anderson, Wolf Research. Please go ahead. You are live in the call..

Question on HIV. So my understanding is that one of the reform measures being considered is to remove the protective drug class status from certain categories that were laid out back little over a decade ago, and HIV is one of those. So that protective class designation has essentially made it so that companies in the U.S.

don’t have to compete on price. My question here is, do you think that that could happen as a reform measure in the coming months as a potential proposal? And if the protected class designation is removed, does that kind of change the outlook for pricing that you articulated earlier in the call? And then second question is just in general on U.S.

pricing, given the political environment, how you're looking at your ability to take net price increases in 2019, relative to 2018? Is there any diminution? Will it be like Pfizer for just pay a claim that is business as usual?.

Yes, so I'll make it general -- I'll make a general comment. Obviously, we are not going to be specific about our pricing outlook looking into next year for the competitive reasons. GSK has long taken a very responsible position on pricing.

And we report our net pricing, which has been slightly down over the last five years, and this quarter was minus 3. I think from the beginning of the year, we have reiterated that continued price pressure in respiratory, and obviously the genericization of Advair is going to have an impact, particularly on ICS/LABA. But there is no news there.

Obviously, we watch very carefully at the broadest level and engage very seriously with the administration around all the discussions on blueprint. The latest communication on it is mainly focused on part B, as you know, which relatively speaking, GSK has less exposure to.

In fact, it's a part of obviously both the Nucala and Benlysta businesses, but relatively speaking to other companies we have less exposure to that. And obviously if it takes five years to implement, then it's going to take some time for meaningful impact.

But we will be watching it closely, not least because of the sort of prospects of our portfolio moving a bit more into specialty. But, David, perhaps you'd like to comment, particularly on the protected class question, which was a very live question some while ago, but less discussed more recently..

Yes, okay. Thanks, Tim. Well, as you say, HIV is a protected class in Medicare, which is about 20% of our business in the US. It was obviously mentioned by the Health Secretary when the blueprint came out whenever it was -- a couple of months or so ago now. So, I think we have to say it is a risk. I don't think we can completely eliminate it.

That said, I think there's a couple of important factors. Firstly, of all the protected classes, and you probably expect me to say this, but I would argue there is a very strong rationale why HIV should be a protected class for a highly infectious virus like this. The most access to medicines -- modern medicines, I think, remains critical.

And clearly in HIV, there's a very powerful patient lobby and stakeholder group that will be extremely interested in retaining it as a protected class and keeping the access to it.

And then secondly, I mean we'll obviously have to see how things play through in the US, and you're probably more expert on it than me, but it's actually very unclear exactly what the process is by which protected classes could be removed.

Does it have to go through Senate? Can it done by executive order and so forth? And obviously that plays into all the other dynamics of the midterm and so forth. So, I don't think it's an immediate threat, but it's certainly something we will watch..

Thank you. Next question, please..

Thank you. Next question come from Andrew Baum with Citi. Please go ahead. You are live in the call..

Thank you. Just following up on the previous HIV-related questions.

Given United Healthcare's moves to introduce their cost-centric HIV plan today, what's the risk that more aggressive narrowing of formularies in commercial plans actually increases the probability that a protected class removal under Medicare is more palatable? We know that the President's HIV and AIDS Committee disbanded shortly after his administration began, suggesting there's not significant interest within that community.

So, I'm getting, just looking at the way the commercial outlook is evolving, if it's good enough for commercial plans to have a more narrow formulary, then why should the government cover a broader and restricted range? That's number one.

And then number two, could you clarify the opt-in rights? Just thinking about your BCMA molecule, obviously Novartis is a leader in hematologic medicines, with the exception of having a key position in myeloma. I imagine there may be some considerable interest.

When you structure a deal, is it a question of you setting the valuation and they walk away because it's too high, assuming you want to keep the asset, or alternatively, is there an independent valuation that has to be agreed with in order to enable Novartis to exercise their option at a reasonable price if they so wish? Thank you..

Thanks, Andrew. I'll ask Simon just to comment on the deal structure, and then, David, we'll be back to you in terms of the commercial environment on HIV, recognizing that we're obviously not going to make any comments on any individual customers.

So Simon?.

So Andrew, it's a bit more straightforward. We -- if we file a product -- so, BCMA as an example, we have to show it to Novartis, and they have the right to make us an offer and we have to take it seriously. And there's a timeline set out to allow each party to do that.

But we, importantly, do not have to accept it if we think we can generate better value by ourselves, and I think we've given you some sense of the opportunity that we see there. So, we are very comfortable that we are fully flexible in how we develop that program and that we can go it alone if that's what we see as being the best opportunity.

So, it's a right of first look. It's no more than that..

So, Andrew, I think what I would say is there has to be some correlation between what happens in the private insurance market in the US and Medicare, and not least because a big proportion of the Medicare business, as you know, is administered through managed care. So, there has to be some crossover there.

How much it plays into all the politics and what Washington does, I think, is very hard to say. But I'd come back to what I said earlier.

What matters most to HIV patients and their physicians in the US market is that they get access or retain access and treatment on what they perceive to be the best, most innovative, most modern medicines for HIV, that have the best profile for efficacy and particularly tolerability and side effects.

And it's a very, very guideline-driven marketplace, and the guidelines are regularly updated to reflect what, in the opinion of the regulators and the guideline formulators, are the best medicines. And at the moment, it's very clear that second-generation integrases are, and particularly dolutegravir, are right at the heart of all of that.

So, that really outweighs any kind of peripheral measures that are happening around generics or the NNRTIs or the older proteases and so forth, and why I'm confident we don't really see much impact from where we sit today..

And the only other thing I'd add to that, Andrew, is obviously we have the opportunity to think quite strategically about the pricing of our new launches. So, next question please..

Thank you. Next question comes from the line of Steve Scala, Cowen. Please go ahead..

Thank you. I have two questions. First, Shingrix certainly has been impressive, but drawing on a related situation, Prevnar in adults taught us that the accessible population is limited, could be worked through in a year or so, and success won't replicated OUS.

Or do you think Prevnar in adults is simply not a good proxy, and if you don't think that, why do you think it is not a good proxy? That's the first question.

Second, what does a bit more challenging mean for Nucala sales going forward? Does that mean flat, if not down? And what is the Nucala sales call against Fasenra and Dupixent, other than long-lasting impact against exacerbations which was mentioned? Thank you..

Thank you very much, Steve. So, Luke, it would be good if you could pick up both of those questions please..

So, Steve I don't...Prevnar, of course, is an enormous product. I don't think the parallels are necessarily straight there. And I think the key thing to remember right now, if we first look at the US, we've done no DDC. We really haven't done any efforts -- haven't made any efforts to build the marketplace ourselves.

It's been largely through media, articles in New York Times, et cetera, word of mouth. So, I think the potential to penetrate broadly still remains there. And remember, Zostavax got to 22 million with, I think, an efficacy profile that you would say, OK Shingrix is certainly in a much better place.

And of course, there are symptoms that come through with -- if you subsequently get Shingrix. And the odds of getting shingle, of course depending on the age group, are up to one in three. So, most people know someone that's had shingles. So, I think these are the things which will enable us to build.

If you look ex-US, we've had a good trajectory in Canada. It's really about getting on the UMV listing. In Europe, I think the build will be slower because there's no market there right now. But we're very focused on discussions with groups like STIKO to build the clinical argument for use.

And I'm actually very excited when you look at markets like China and Japan, where you've got large older populations, and you've got the potential to create quite an opportunity there.

So, long story short, these are all really nice, but the thing that's restraining this is less demand and more supply for the next couple of years, as we've mentioned. In terms of Nucala, it really is about anchoring people. So, I'll start with Fasenra, and let's talk about Dupixent after that.

So, if you go back 12 months ago, I think we very much behind on several parameters in terms of the perception of Nucala versus Fasenra. So, we were behind on interest in the mechanism of action. And I'm talking about prescriber perception here. Speed of onset, on efficacy when we looked at market research we were behind, and dosing frequency.

And what we've been able to do, by very much focusing on efficacy and going through our studies systematically and looking at equivalent patient populations, is we've neutralized the mechanism of action. We've neutralized the speed of onset in the market research tracking, and we're very much in a position now to compete with them.

What we can address right now, of course, is dosing frequency. We're four weeks versus their eight. And that's why the importance of the auto-injector and home injection is very attractive and important for us as we look in the future.

If you look outside the US, actually we've done a fantastic job, and we've very much held Fasenra in place in Japan and Europe. So, I'm very encouraged by that. We can compete. But the fact remains we're not getting enough with these patients in the US, and I put that down to more execution rather than data.

If you look at Dupixent, again it's early days, but I think, again, there's no change to our strategy here. We need to focus on efficacy and make our case. If you look at the population that Dupixent had in their label, of course it's a bit broader. I'm personally not too worried about the moderate population.

We've only got 25% population in the severe. So, I think the usage in milder patients is likely to be not very extensive. If you look at ICS and their label and then you apply a screen of IOS, then the overlap is quite extensive based on the data that's published, both ours and other people's data. So, that range is between 70% and 90% overlap.

If you then look at the data that they report, I think the key thing you have to adjust for is around 52% of people in the Dupixent population were controlled on background ICS, whereas Nucala -- our entire population was more severe and it was maxed out on background therapy.

So, the question there with Dupixent, of course, is if you did give these patients more steroids, what would happen? If you then cut the data by IOS of 300, then it gets much, much closer. I mean, Dupixent's exacerbations are 66%, 67% versus our range of 61 to 64 in our approved doses. So, I see equivalence there. And the same with OCS reduction.

You know, they're very much similar of around 50% when you correct for placebo. The key thing, though, that we have to focus on, of course, is allergists are very familiar with the product, and you've got at-home dosing. So, these are the things which, again, we think that will put some headwinds behind Nucala.

This is very much a three-dog fight between us and Fasenra and Dupixent. But if I look in the median term, I think if we keep working on these things and we can neutralize the dosing frequency, then in the second half of 2019, I'm more optimistic. But we have to be realistic in the short term.

There'll be volume growth, but there'll also be competitive pressure in terms of patients. And that's why we said what we're saying about Nucala. Sorry about the long answer, but it's quite a complex one, as you can imagine..

Thanks, Luke. Next question please..

Next question comes from line of James Gordon, JPMorgan. Please go ahead. You are live in the call..

One question which is following up on the comment on Nucala and the auto-injector, how important is the auto-injector and what proportion of Nucala use do you think would actually come from auto-injector use at home? And how does that interact with how US doctors might get reimbursed? Could there be incentives one way or another in terms of what works better for them? Second question would be on Shingrix, just around the implied sort of [indiscernible] sequential decline in Q4.

It sounds like that is because of the amount that you can manufacture.

Can you talk about how much of a deficit there was Q3? As in, how much more did you sell in Q3 than you could manufacture? What's sort of the starting point for where capacity is at the moment from which you're going to have this dramatic expansion? And then lastly, just a clarification.

There was a slide about Benlysta and the new phase III combo study you're starting with Rituxan. And I right that the patent goes in 2025. So, you'd have less than four years from when phase III reports to actually capitalize on any good results there, or could this actually be a much more longer-lasting product? Thanks..

So Luke, do you want to pick up on Benlysta and the auto-injector profile? And then, I'm not sure we're gonna give you quarterly phasing of our capacity on Shingrix, but, Simon, if you want to add anything on that you can..

Sure, James. So, there is some work we can do around IP. I can't remember the full point at which we would expect a theoretic exposure to biosimilars, but it's further out than that. And the second thing I would say is right now, there's no biosimilars on the horizon for Benylsta. So, that's how I would answer that..

Shingrix. I mean, it's very much boluses. So, as the team is producing that and you combine that with the seasonal effects -- so people are going in for their flu vax, then in many cases the pharmacists will, in effect, upsell them on Shingrix. So, then you see it as patent. So, that's the combination of why you see the ups and downs there..

Thank you. Next question please..

Sorry, and the autoinjector. We see it as very interesting and very compelling. In terms of the dimensions in terms of physician motivation, et cetera, that's a harder one to call, but I think ultimately patient preference and the judgement of the physician whether the patient is confident and has the capacity to inject at home will drive that.

Of course, we'll get some early indications from Dupixent, those patents there. But I think it's a very important thing, opening up and unlocking. I mean, 75% of patients who should be treated with a biologic in aisle five, when you look at IOS and severity of asthma currently not being treated in the US.

So, I think home injection is an important component of converting that..

Just also there to reiterate, it's all got -- for these patients who are at the severe end of asthma -- they're 10, so 15% of asthmatics, but 60% of the cost. And to healthcare and the efficacy of exacerbation reduction is absolutely the primary point. Obviously, if there's a convenience aspect to it as well, we don't to have any competitive weakness.

Okay. So, I think we have time for one more question just to finish up please..

Thank you. Your final question comes from the line of Jo Walton at Credit Suisse. Please go ahead. You're live in the call..

Thank you. Roughly a third of your Pharma business is still the Established Pharmaceuticals, and the rate of decline has accelerated a little bit to down 9% in the third quarter. I wonder if you could just explore the opportunities and growth there going forward. I understand that Luke has really focused the promotion.

So, presumably there's even less promotion on these products, and they're probably incredibly profitable. What sort of rate of decline do you think we should look for, and is it still a feasible opportunity to get rid of some of these assets, either use them in, I don't know, asset swaps or whatever.

I know people say those are always very, very difficult to do. But other drug companies have been much more active in their disposal of legacy products than you appear to have been. And a second question ask, if I could just a little bit more -- you say that you have done your first meeting -- paid speaker meeting.

I just wonder I follow up could tell us what you think the advantages of that are and how extensive that program will be as we move into 2019?.

Thanks, Jo. So, maybe, Simon, just speak very briefly about the Established products outlook. I think we have guided to this anyway. But you know this is a key profit contributor, but we are constantly looking at the portfolio, Jo, and being thoughtful about how to continue to evolve it. But any specifics, Simon, you want to add on the --.

No. I think as we said at the beginning of the year, we expected a slightly better performance in the first half, and we are seeing some significant genericization going through the portfolio in terms of Coreg, in particular, this year. So, overall, that should even out to a kind of mid-to-high delivery for 2018.

Going forward, we're then largely through the major generics in the portfolio, and so we should see a slightly slower rate of decline. And as you point out, it is a big profit contributor.

So, while we're always looking for opportunities to drive value if they come up, actually in terms of the overall funding, we see quite a lot more opportunity that we can bring to the group, and if we can slow the decline down by focusing that portfolio more, I think we can do more on top. But, Luke, I don't know if you want to add something. .

Yes, I mean, you've also got Lamictal, as well. So, there's a few through which we'll rebase throughout the year. We are very focused on these products in a select group of countries where we can drive growth. So, products like Augmentin, Ventolin, Seretide -- where we can drive growth, we certainly do that. It's in a very disciplined fashion.

And in terms of divesting them, no, there's no plan to do that at this point. In terms of the speaker program with Nucala, the initial feedback is very, very positive.

Why did we make this change? It was really around when we looked at the dimension of trust and the feedback we were getting from physicians, they wanted to hear from someone with recent current clinical experience who had used multiple agents and get their perspective on Nucala.

So, now that we have this place, it's something that we're very, very focused on. I don't want to give away numbers at this point, but you can imagine it's that we are very focused on and active rolling out in the US and Japan between now and the rest of the year. And then we'll open it up to Europe and selected markets beyond that in 2019..

Thanks, Luke. And I would just like to reiterate that we underpin this with strengthened commitments to transparency and all due controls around disclosure of payments. But it is a very -- it is an important move when you think about the strategic shift in our portfolio.

We expect to more specialty medicines where the science is moving fast, and hearing from a practicing clinician about a paradigm shift in treatment is going to be very important. So, with that, thank you very much everybody for joining the call. And I look forward to speaking to you soon..