GSK plc (GSK.L) Q2 2011 Earnings Call Transcript

David Redfern - Chief Strategy Officer Andrew Witty - Chief Executive Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee Deidre Connelly - Moncef Slaoui - Chairman of Research & Development, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee Simon Dingemans - Chief Financial Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Mark Dainty - Citigroup Inc Mark Clark Florent Cespedes - Exane BNP Paribas Simon Mather Graham Parry - BofA Merrill Lynch James Millett Luisa Hector - Crédit Suisse AG Unknown Analyst - Mark Purcell - Barclays Capital Michael Leacock - RBS Research

Okay, good afternoon, everybody. While you all grab a seat, I'm going to make a start. Thanks very much for joining us for the Q2 results of GSK today. I'm sure you've all got the press release, and there's a book of the various slides that we're going to present just in a few minutes. I just like to make a couple of introductory comments before I kick off properly. First of all, just to introduce to you, we have got some of my colleagues from the executive management team of GSK here in the room and maybe they can stand up as I introduce them. Abbas Hussain, who runs our Emerging Markets Pharmaceutical business; Deidre Connelly, who runs our U.S. Pharmaceutical business; David Redfern, who's Chief Strategy Officer for the company, also looks after Stiefel and the ViiV business; Moncef Slaoui, who's the Chairman of our R&D Business and also is taking over responsibility for our Global Vaccines business; and of course, I've got Simon Dingemans here at the front with me; and Phil Thomson, who is our Head of Global Communications and IR. So they'll all be here. If you don't hear from them during the session, you'll certainly have a chance to chat with them afterwards when we finish. They'll be delighted to spend a few minutes with everybody over there with a cup of coffee if you just want to nail some of them against the wall and really interrogate them. I've brought a few extras for you. So great a opportunity for you to see them. Good chance for you as well to hear from Simon really for the first time properly as he spent the last 6 months really getting to grips with the organization and really challenging a lot of what we could do and what we could achieve, and I think you can see in the press release today the first really substantive evidence of the new financial architecture for the company, very thoughtful approach to how we should report going forward, trying to clear up, get greater clarity in the way we present our information, how we drive more value out of the business to generate more shareholder returns. And you can see Simon's fingerprints all over that part of what we're trying to do. It's exactly why we wanted him to join the group, and I think you'll hear from him during the rest of the session some further insights into the way he's looking at the business. So it's going to be a great chance for you to hear a bit more from him today. Before we get to that, I'll just give you a quick summary of where I think we are in terms of the group strategy and how things are going, and I think this quarter is quite a turning point actually in terms of GSK on a number of dimensions. First of all, it's really that -- although we still have some headwind for the rest of this year because of Avandia, Valtrex and Pandemic products dropping out, the rate of that headwind really drops now from this point onwards. So it's a turning point in terms of the pressure of the headwind which is running against us. That's the first important thing. Secondly, I think you'll clearly see the delivery of new products and pipeline into the organization. And I'll touch a little bit more on that in a few minutes. Thirdly, you'll see the shape of what this business is going to be for the next several years in terms of our geographic distribution, in terms of the emphasis we have across the business -- different businesses we have whether it be consumer vaccine, emerging market or the traditional pharmaceutical businesses. You can see that shape really crystallize as the restructuring process that we've gone through starts to come toward an end. We're putting in a couple of comments I made today in one of two of the interviews, just a statistic, which I think is just quite shocking actually when you think about it. When we created GlaxoSmithKline in the merger 10 years ago, the total integration synergies of that transaction, the GBP 1.8 billion, the total savings from the restructuring program over the last 3 years and through to the end of 2012 will be GBP 2.5 billion. So to just put into a context the order of magnitude of change in savings, I think that really crystallizes just how much has happened in this group over the last 3 or 4 years. Huge change in the shape, 25,000 people have left the group, 17,000 people have been added to the group; most of the leavers in the West, in the traditional Pharma business; most of the joiners in the East in the emerging markets. Huge change of our manufacturing footprint, 111 factories down to 65, adding back another 12 factories through acquisitions. So we're now at 77. But massive changes in the way our manufacturing footprint looks over that period. Our R&D headcount down 27% in the last 3 years, and yet, you can see the size of the portfolio that's coming through that pipeline. I'll touch on that a bit more during the presentation. And you see a business which is much more balanced in terms of its exposure to specific risks. What you'll also see is a business which is phenomenally disciplined. So we are focused on ensuring that we allocate all of our investment resources to get the best possible return. We are focused on managing our expense base aggressively. You'll see and you'll hear more from Simon on how we believe we can drive greater financial focus in the organization, if you will, add a further turbocharger to what we can do organically in the business in terms of value creation. And you can also see that we're disciplined and not straying off into buying lots of businesses just for the sake of the short-term adrenaline pump that the acquisition gives. We only deploy M&A at a small scale, and we only deploy even then when we're convinced that the returns are a superior way to deploy the money. And I think you've seen us resist all temptations to be drawn off that path in the last 3.5 years, and I think we've been proven to be right to do that. It's been a right way to protect the return profile for shareholders, and it's forced the organization to address organically what needed to be addressed to turn the group into what we think can be an extraordinarily competitive organization in the coming period just as we think many of our competitors are going to go into their worst moments. So let me start off just by giving you a little bit of a sense of where we are up to. Just summarizing the growth performance of the business. Underlying sales growth, excluding Avandia, Pandemic products and Valtrex, Q2, 5%. You can see for the last 6 quarters now the underlying number has been up 4.5%. So I think clearly we've got a momentum in our underlying businesses. As I said already, that comparator set of 3 products, those discontinuing businesses, will start to drop away quite quickly as we go through the second half, and that we are clearly confident that we are going to be able to get back to reported sales growth in 2012. You can see where that growth comes from, and you see the mix of the business as those consumer and vaccine businesses have continued to grow faster than the Pharma business. You can see they've become a more and more important contributor of the total, if you will, absolute amounts of growth in the business. But also, you can see that the Pharma business on an underlying basis continues also to grow. And you've seen in this quarter some further improvements, particularly in the U.S. So this is just an interesting way of looking at the business. This is the group. So this is all businesses integrated together. And you can see that 37% now of GSK's business is outside of the traditional North American and western Europe business areas. And you can see that, that's where all the growth is. Now, we're talking enormous amount about emerging markets. We shouldn't overlook Japan, which continues to be a tremendously exciting marketplace for GSK. Why? Because we've got a very substantial new product flow rolling out. This year, we launched Cervarix. Already this year, 840,000 girls have been initiated into the Cervarix vaccination program. So again, strong second quarter in terms of Cervarix. We expect to see that flow through the rest of this year. In the last few weeks, we had Rotarix approved for rotavirus prevention in Japan. Again, the first vaccine for that particular disease, just the Cervarix, was first in class. And we've also had Lamictal bipolar approved. This all part of that program that I stood up here 2 years ago and talked about 40 potential new drug opportunities in Japan. We are well through that. We continue to reload that pipeline. Japan is a great innovation marketplace, and I think the team have really solved how to get product there quickly and in a very rapid flow rate. Helped also in Japan by the new pricing regime, which has taken away that historic erosion of being a successful innovator. It's now you're incented to be an innovator, you will pay the price when the product eventually goes generic just as in normal Western markets. But for a company like GSK, where we have so much innovation opportunity. That's why Japan is such an important area for us, and Philippe Fauchet, who's our new head of that business, has really brought now, in addition to this R&D focus, an operational discipline, which I'm confident is going to continue to allow us to deliver great sales growth in our Japanese business. It's not just about geography though, it's about the kind of products that we sell. And again, if we go back to where we started, where we had a business which was very heavily exposed to a few specific risks, mostly around pharmaceutical pricing and pharmaceutical intellectual property, what we said at the time was we wanted to diminish our exposure to those risks. We wanted to move away from the white pill Western market domination that the business had seen the way we perceived it to be all of the risk. And we've done that in a whole variety of ways, partly geographically. So opening up the emerging markets has been a key part of achieving that. Of course, having different devices, different technologies, moving into Biopharmaceuticals is a key dimension. All the benefits of pharmaceuticals but in formulations with high degrees of protection, greater annuity potential than the white pills. Moving into areas like dermatology, same thing. Going into business areas which we believe to have less threat than the traditional white pills. And maybe just take a second to update you on Stiefel. The progress of that integration continued to be extremely positive. Just to give you a couple of examples, in the manufacturing arena, since we bought Stiefel, we acquired through the acquisition 4,000 SKUs, 4,000 different pack volumes within the Stiefel business. Already, we've got rid of 12% of them without any liability to sales. That's important. Even more importantly, it simplified 24% of the formulation. So we've got rid of 1/4 of the formulation complexity, and we've got rid of 75% of the packing complexity. That has allowed us to close 4 out of the 5 factories that Stiefel used to run. And that's one of the reasons why we're $50 million ahead of our synergy target on Stiefel and why it was such a very positive transaction for us. Because what it allowed us to do was to deliver synergies up and down the P&L and open up a significant emerging market business. You'll see in the numbers how strong that business has been during the quarter. And of course, all represents doing businesses which are a little more secure than the traditional white pills. Our Vaccine business, alongside Pharma, has also delivered tremendous new product flow over the last few years, and we're just beginning. There's no question this company wasn't the biggest deliverer of new product innovation during the early 2000s. That's really where the problem started. But what you've begun to see in the last couple of years is we've begun to start to ramp up the flow of new products into the marketplace. We've never promised you that we're going to solve this whole thing with one blockbuster. What we did tell you we would do is deliver a portfolio of small-, medium- and large-sized products over a sustained period, and that portfolio approach would, over time, build up a tremendous momentum. And it's beginning. And we're in the beginnings of that, and you can see in the quarter, almost GBP 600 million of new vaccine of Pharma products growing over 50% and the further incremental GBP 175 million worth of new consumer products launched in the last 3 years, primarily led by Sensodyne Repair & Protect, which continued to allow Sensodyne to grow very strongly. So that is what's driving the stronger, I think, more robust business profile that we need to be able to engage completely and grow during the period which is not getting any easier on the outside. And the outside world, isn't going to cut drug companies a break in the next 3 or 5 years. You need to be robust to underpin your delivery of growth and to deliver your shareholder return. Just a look at consumer in a little bit more detail. This is for the first half. In terms of performance, overall consumer was up 6% for the first half, 4% in Q2, a little bit of stock inventory movement going around. The 6% is much more indicative of what the underlying performance of that business is driven by Sensodyne, again up 15%. Just to remind you all that Sensodyne actually is a 50-year-old brand this year. It was launched 50 years ago. You can see the scale of that product and the performance of it. Panadol, again very much driven both of those by innovation. Lucozade. Fascinating to see how Lucozade is driving our African business, very strong performance, particularly in West Africa, and you can see the growth has been delivered there. Horlicks continues to be an Indian story. One in every 2 families, one in every 2 households in India have Horlicks in their kitchen. That's a great place to be when you're talking about a part of the world where all the dynamism of population growth, where all the focus on healthcare opportunity really is going to move towards, to have that kind of distribution capacity, that kind of presence inside every family across India is a tremendous foundation on which we can then build our vaccine and pharmaceutical businesses. Horlicks is a strategic opportunity for us in those markets. The great news in this quarter is that we continue to see our U.S. business turn the corner and come back toward where we want it to be. This company was once dominated by the U.S. business, which was great when there were no challenges in the U.S. marketplace. But as the U.S. marketplace has continued to get more and more challenging, to be so exposed, no longer became a strength. It became a potential weakness. We've been able to build a business which surrounds that U.S. organization, if you will, take some of the strain off the U.S. organization. But nonetheless, it remains our single most important profit generator in the group, and it's critical that this business grows. I was delighted to see we're back to growth this quarter, and while I'm sure we'll have bumpy quarters over the next few quarters, it's clear that the trend is going in the right direction, particularly as the pits of generics recede and of course, as our new products start to get traction in that marketplace. It's worth bearing in mind that the only thing we're stripping out from those growth rates are Avandia, Valtrex and Pandemic. We're still carrying GBP 35 million a quarter of healthcare levy under the Health Care Reform Act. We're still carrying an incremental further $200 million this year on top of last year's $500 million of price cuts from the American government. All of that has been absorbed by this business, and it's growing. And that's where we really want to stay focused. Now, why is it growing? What have we been doing over this period of time? What's Deidre and her team been doing? These are just a few of the examples. Huge increase in sales force productivity. Yes, sales have come down but we've aggressively managed our cost base at the same time, and we've been able to increase our productivity. 50% of the U.S. sales force has gone in the last 3 years. That's allowed us to come out of a very challenging period with a very productive organization ready to start to launch new products. We're the only company in the U.S. who have replaced the historic incentive scheme, paper prescription incentive scheme. A lot of people think that's going to cost us business. We are convinced it's going to be a competitive advantage because what it's going to lead to is the team working. It's going to create greater access for us to customers, and we're already seeing that. In my most recent visit with U.S. sales force, absolutely top of their mind was this is making a difference with the way we work, it's getting us in to see customers, who would never see us before because they just thought we were here to generate a script. Now, they want to see us because they see us as being part of the solution, giving us the access, gives us the opportunity to do what we need to do. We've completely restructured the way we discount in the U.S. We're seeing benefits in that from our discount levels but also in the way that our customers view us. We're recently ranked as the #1 company in terms of our relationship with the large contracting organizations. We've rediscovered how to launch new products properly. The performance of Votrient, absolutely great performance. Not the first in class but a nicely differentiated product in terms of tolerability in its primary indication, supported by a very focused commercial operation, already 15% market share, growing very strongly. And obviously, in the first half, we saw great data on Sarcoma, which will give us, when it's approved, further opportunity to grow this. Discounting, as I've said already, we changed the way we do it. But we've been able to find significant ways to reduce our cost. One of the reasons Ventolin is growing so strongly is that we've been able to increase our net price of Ventolin by more effective contracting, contracting where we get a return and cutting back where we don't. Portfolio optimization. We had a big sprawling portfolio in the U.S. We've worked hard. We brought Levitra in properly. So instead of it being shared with 2 other companies, 2 other sales forces running around, getting in the way of each other, GSK now owns completely Levitra commercial operations in the U.S, Clarity, focus, a chance to drive more earnings. Entereg ended up being too small for us. It's a distraction, so we've given it back to Adolor for consideration. Just very dispassionate, very objective portfolio management. And then making sure we get the best value out of every single asset we have in the organization. Lamictal. You all know Lamictal went off patent 3 years ago. You can see it's growing again. It's growing again because we've stayed focus on this product, and we believe that with the line extensions we had, we gave physicians what they wanted, which was a way to continue to use the brand and not the generics. All of that said, underlying sales growth, 3%. If you look at the 80% of the U.S. business that we promote, i.e. those products that we believe have potential, they grew 8% in the quarter. So you can see that at the core of that U.S. business, there is a very substantial business, which is responsive to promotion, and the growth was very good. Let's move to R&D because R&D needs to feed markets like the U.S. The U.S. remains, despite all of its challenges, a pro-innovation marketplace, and we need to deliver the product to it. This just simply the tells the story at a super high level about what's been achieved under Moncef's leadership in R&D. And you can see that more or less, in absolute terms, we spend the same on R&D today in pounds, as we spent back in 2007. We do a heck of a lot more R&D. For example, we do a dermatology R&D that we didn't use to do. We do significantly more consumer R&D compared to 4 years ago because we know that has a very high return on investment, very high probability to success, very fast paybacks. And we also do more in vaccines. Overall, that has all been accommodated by tremendous efficiencies within the pharmaceutical business. You've seen now on a whole dimension of fronts the kind of changes we've made, massive changes to discovery. So we've reduced the amount we spend in discovery as you just saw as a proportion of the total. Why? Because obviously, it's the late stage which drives short- to medium-term opportunity for the business, also because by externalizing our discovery operations, we're able to do a lot more for less in terms of exposing ourselves to new ideas and new opportunities. So right now, we have 54 external partners, one of the biggest networks of biotech and academic partnerships. We have 38 in-house Discovery Performance Units. Those have been running for up to 3 years. The newest one, I think, is about 18 months old. The original started back 3 years ago. We're in the process of going through our first 3-year review cycle. You remember we talked about the dragon's den process they have to get through. We're now into the kind of dragon's den on steroids review process that they're now going into. And look, everybody, I can tell you, it's taken extremely seriously because these teams know that they have a potential of being shut down. They have a potential of being held in a status quo, and they have the potential of having significant money added to their investment curve depending on what they've been able to achieve. That's what's going to happen over the next few months. By the end of the year, you should absolutely expect to see some of these teams closed, some recommissioned at the same rate and some recommissioned at a higher rate. The key point of all of these is that we are going to relentlessly keep raising the bar to raise the quality and the prospects of our discovery operations. I think if there's one thing that we've done since I took over as CEO of GSK, that you would have to drag me out before you could change it, it would be the way these DPUs operate. Some of you have had the chance to visit with them. And I think when you walk into those labs and you see all the different disciplines working together in a hothouse environment, not having to book meetings with each other, not having to negotiate for time with each other but literally moving where the signs takes them, I'm convinced we have the way to rediscover success in discovery, and I think the data we're seeing reassures us of that. We're focused on 7 key therapeutic areas where we come up with drugs. And of course we do, from time to time, come up with drugs outside of our 7 key therapy areas. Then what we're going to is what we've already done. We will create specialist organizations, business units, if you will, starting in discovery and flowing through, which will allow us to stay focused. It's obvious that a company this big can be focused on 20 things at the same time from a product portfolio perspective. And so that's why we created ViiV. That's why we created the rare disease unit. And you should fully anticipate we will do more of that as we go forward. Sometimes, those things will be wholly owned. Sometimes, those things will be in partnership with other companies like ViiV, and sometimes they may ultimately be floated off from the group. That's a dynamic which we expect. We think it's the right way to manage our assets, and we're opening up optionality for us to get the most out of each of our assets, while maintaining a core focus for the business. And all of that has been achieved with tremendous change: 27% fewer scientists in the last 3 years, 45% fewer square meters of laboratory space. You have to do all of that to allow all of this volume of R&D to get done for the same money that we spent 4 years ago. This company has never done more research than it's done today, but it's not spending more money doing it. This gives you just an update of where we are in terms of the late stage advanced program. We said at the beginning of the year that we would have data on 15 late stage assets during 2011 and 2012. These are the 15. We've already had data on 5 of them. All of it's been positive except for otelixizumab. One of our upsides of it having a setback is that I have going to have to pronounce the name quite so often. But even on that one, I think Moncef and I, we think that's not over yet. It may have gone back a couple of years but we don't think it's over, and we're reworking on what we have to do with that particular drug. Notwithstanding that setback, 4 out of the 5 sets of data we've had so far have been positive, and we continue to be excited about this whole set of assets on this chart. There's something like 30 more sets of trials to report out in the next 18 months on the programs which are still running or are still on this chart, and it's going to be coming thick and fast. Now one of the things that's going to drive you a little nuts over this year and next year is we're not rushing out a press release every time we get a piece of information. There's so much data coming through. We want to make sure that when we present the information, we're really representing to you whether or not we've got a success, a failure or a question mark. What we don't want to be doing is coming out with 1 trial saying 1 thing and 1 trial another. Now you might be wondering why I haven't said anything about Promacta today. The reason we said something about Promacta today, even though we had 1 trial, it was so positive. It was so positive that we felt it would have been just completely wrong to delay sharing that information with you guys. There's no question, Promacta in Hepatitis C are allowing people to use interferer for longer. That's going to be an effective product. We've got one more trial, confirmatory trial to come. But the first trial was extraordinarily positive. Hopefully, the second will be the same. But based on the first, we'd be very surprised to not see that. So this is the program. Now, so this is 15 drugs over the next 18 months. I did a quick review last week about what's coming behind this portfolio because one of the things that I've been very keen on and Moncef has been very focused on trying to achieve is we really want to avoid that history of the 1990s where even a successful drug company succeeded once for 2 or 3 years and then had 5 or 6 or 10 years with not much else. The key is not just to have a portfolio like this but to have a flow of products. And you might be interested to know that after this portfolio and after the drugs that you can see in the pipeline, we have 25 Phase III star opportunities in the next 2.5 years. Of those 25 Phase III opportunities, we think 15 are discrete new drugs or very major new indications. So right behind this portfolio is the next portfolio. And that's really what we believe is what's required to sustain the business. Because again, what that does in the world we now live in, it diminishes the need for any individual drug to be a blockbuster. And any business that in today's world with price pressure and access control, is relying on one drug to carry them for 5 or 7 years is, to be honest, delusional. So that's where we are in terms of pipeline Now, I also get lots of questions about respiratory, and I thought it might just be worth taking just a couple of slides just to talk about where we are on respiratory. Now, this just gives you a sense. I like this slide actually because we got a tick in lots of boxes. What you can see here is all of the areas in which we're currently working in advanced development. So this lists -- and to save people their blushes, I've taken other companies' names off obviously. But you can see for GSK, we're operating in a whole portfolio of different mechanisms of respiratory. Many times, people say to me, " What are you going to do with Advair? How does Reovair replace Advair?" And I've repeatedly, repeatedly said it's not about Reovair replacing Advair. It's about the portfolio building on Advair. Advair isn't going to go away. It's going to have its challenges in different parts of the world. Advair is going to be a very major product into the future, just like Ventolin has stayed a major product for 40 years, just like Flovent remains a major product. But on top of Advair, we have the opportunity to significantly broaden our respiratory offering. Every mechanism on this chart is in Phase IIb or Phase III. These programs are all either in full final development or are moving up to our committed Phase III development. And you can see that we cover the key known mechanisms, as well as some advanced areas for new mechanisms. If we look at what GSK respiratory really is, so what that franchise is that we've built and we're going to defend and grow, you can see that just in these numbers. 6 Discovery Performance Units, so 6 out of the 38 teams working respiratory. Now, the most important thing on this chart is not the 6. It's that 5 of the 6 working targets and mechanisms for which there's absolutely nothing out there at the moment. So the next generations of respiratories, beyond the ones I've just shown you, we're going into completely new target areas, which again signals to you we want to be in this area for a very, very long time on a very substantial scale. I've told you already about the late stage programs. Huge clinical trial activity going on. 20,000 patients enrolled as of today. We expect to enroll another 25,000 patients in the next 12 months, particularly in the comparative studies and also in the various safety studies that are required. You know the sales numbers, between 50 and 75 million patients on the drugs. We made 125 million Advair devices in 2011. Just on a side note, on that front, we're now in our manufacturing operations. Over the last 5 years, we've been able to take Advair from 200,000 devices per manufacturing employee to 1 million devices per manufacturing employee. Huge increase in productivity of our factories, which has underpinned the sustained reduction in the cost of goods for Advair over the last several years, which we expect to continue. We manufacture, globally, 0.5 billion inhaler devices. As you know, each of these come off the spoke[ph] Production lines where some sales are extraordinarily expensive to build, and we've been in this position for 40 years. This is a business that we're determined to stay on top of, and I think oftentimes you see people talk about how one company is going to come along with one product and enter this marketplace. What you see at GSK is we're continuing to move through the generations of discovery and development that we've been through. Ventolin, then into steroids, then into the combinations as you can see here into multiple new mechanisms and multiple new combinations. So this is a continuation of what has been an extremely strong story for us. So it's worthwhile just to summarize where we are on the respiratory. So, as a group, we feel very confident about where we stand today. The bottom line is we're on track. We're on track with the strategy we set for ourselves, and we're on track with the delivery that we set for ourselves. We believe that we can get back to reported sales growth in 2012, and we believe that we'll be able to begin to drive operational leverage from 2012 onwards. Now, it's important that we recognize that what we're looking to do is get a nice trend going in terms of improving sales, improving leverage. It's not all going to happen in 2012 but you're clearly seeing the turning point, and you can see the direction that we want to go in. Now, what I'd like to do now is ask Simon to come up and address for you a few things, mostly for him to lay out for you how he sees the group and the opportunities from a financial perspective, the areas that he's already found to further accelerate value creation for the business. Everything I just touched on really talks about the organic substance of the business, takes us down to the operating profit line. Now I've just said we expect to be able to get leverage on. There's a heck of a lot that goes on after that, and some of the opportunities there Simon has already started to address. Simon's been in the group for 6 months. He's made a phenomenal start, and it's just before he comes up, I just like to say a couple of things. First thing is obvious that he's going to focus on things like the interest rate and cost of funding and those sorts of areas. And you're going to hear that, and he's done exactly what I would hope on that front. What you'll also hear, I think, is that Simon has come in with a real focus on how to manage our cost base, a huge amount of the cost base sits now directly underneath Simon, unlike in the previous organization, so that he controls all of our shared services, all of our core business services across the businesses, a direct ownership of a very substantial part of the cost base. And he's come in and earned great credibility already in the first few months in terms of his focus and ability to look for opportunities there. So I'd like to have Simon to come up now and give you his sense of where we're at and what he's going to do.

Okay. Thanks, Andrew. And before I start, I just wanted to add my particular welcome to all of you as I think for many of you, this is the first chance we've had to meet face-to-face, and I'm very much looking forward to getting to know all of you a bit better over the coming months. We'll turn to the quarter in a minute, but before we go there, I wanted to take a few minutes just to really describe for you, as Andrew said, my long-term priorities for the group, and in particular, how I'm translating that into a new financial architecture that we're rolling out across the group. And that's going to drive my overall financial strategy for the group, but it's also going to drive our planning priorities, how we think about allocating capital and, in particular, how we report going forward, so that you can see more clearly and more transparently how we're going to drive the group going forward, how we should be measured and what are the kind of key performance indicators that we're using to monitor the business going forward. When Andrew and I were talking before I came on board, we could see clearly a number of opportunities to drive the strategy harder and, most importantly, to drive improved returns from that strategy. And having been on board for about 6 months now, it's quite clear that those opportunities are very real, they're deliverable, but they're only going to be accessible if we take a different approach, and that's really what my financial architecture is about, is making sure that those priorities are clear to the businesses, that we drive them through the planning process into how we drive the business going forward, that we allocate capital according to those principles and that we're absolutely rigorous about how we take those decisions between competing priorities going forward, because there will always be choices to be made in how we deliver those returns. I'll come back to the detail a little bit later after the quarter review, but just to summarize for you, beyond the sales growth that Andrew's already described for you, our strategy is beginning to deliver. The architecture is designed to convert that into stronger earnings per share growth and stronger free cash flow growth. And it's going to do that by 3 things, which is driving operating leverage into the business, delivering improved financial efficiency to the bottom line and improving cash conversion and free cash flow generation. And together, those elements should allow us to deliver sustained, superior returns to shareholders over time. And I'll come back to the detail of that in a minute. But let's turn to the quarter and Andrew's obviously covered a number of the highlights of this, so I'll keep this at a relatively high level. But you'll see in the press release today a refocusing of how we are communicating the business performance of the group, simplifying a number of the different measures and categorizations so that we're really focusing on the group's performance and the drivers behind that in terms of Pharma, Vaccines and consumer and then looking at the geography across the group, where particularly so in Emerging Markets, we see our businesses more and more converging, and our performance in those markets very much feeding off each other. And as you can see in the press release as well today, we have around 37% of our sales outside the U.S. and Europe growing at over 15%. And that really kind of illustrates how those businesses are beginning to combine. So at the top line, you can see very much the impact of the continuing roll-off of Pandemic, Avandia and Valtrex products, which leave reported sales down 2% in the quarter. Below that, if you strip out the decline -- and remember, decline is over GBP 470 million of sales in the quarter alone, you can see the underlying performance up 5%. And that reflects a contribution from the consumer business of 4%, up 5% from the Pharma and Vaccines business. And within Pharma and Vaccines, again, Pharma up 3%, Vaccines very strong and up 19% on an underlying basis, really reflecting very good progress across the portfolio, but particular contributions from Synflorix and other new launches. Emerging Markets is a key part of that growth, and the Emerging Markets is a key part of the growth of Pharma, Vaccines and consumer businesses going forward. And overall, Emerging Markets in Pharma and Vaccines, up 20% in the quarter, driven across the portfolio, including good contributions from respiratory as well as from the Vaccines business. Japan, as Andrew described, also a good contributor, less on the vaccines this particular quarter but more expected during the balance of the year, but good progress also on respiratory and a number of other new product introductions. Elsewhere in the world, the U.S. returned to growth and that 3% growth on an underlying basis that we reported, particularly driven by the recovery of the respiratory business from the first quarter levels, and I'll come back to that in a minute, but also a number of other product introductions across the portfolio, so not just from the respiratory performance. Europe also produced a good performance, down 1 in reported underlying sales, but that really reflects a 6% drag from European government price cuts during the quarter. And as Andrew highlighted, we continue to see that as an issue for the balance of 2011 but within the framework that we've already set out for you, and we continue to expect that overall austerity cuts in Europe and the U.S. combined will impact sales by around GBP 325 million over the balance -- over the whole of 2011. So if you turn to the product contribution to the top line, our respiratory franchise is the biggest contributor, with strong contributions from Seretide/Advair, from Ventolin and Veramyst. On the Seretide/Advair front, 2% up over the quarter. And that's really reflecting good progress in the U.S. of 2% and Europe as well at 2%. But remember, underneath the 2% performance in the U.S., that reflects a mix of volume down 7% and a net benefit of around 3% from pricing and mix. So we think the underlying performance is probably down about 4%, which really reflects a mix of stocking patterns between the first quarter and the second quarter. And as Andrew said, going forward, you should really expect the quarterly progression probably to be a little lumpy, but overall, we see encouraging progress on that front. Below the top line, at the operating level, EPS and free cash flow levels, you can see a significant impact from the Pandemic, Avandia and Valtrex roll-off, and that's really driving the margin performance and the declines that you see at each of these levels, although EPS also affected by the loss of the associate income from Quest following the disposal of our stake earlier in the year. But I think the main message from this performance recorded on the slide is we are where we expected to be. We are on track with the second quarter performance that we were planning for, and we're on track for the first half performance that we were planning for. So overall, as Andrew has highlighted, we're on track in terms of our expectations. So given the amount of noise, I just thought it was worth highlighting how we see the Pandemic, Avandia and Valtrex products rolling off over the balance of the year. And you can see already significant reduction H1 to H1, and in H2 2010, GBP 558 million of sales from those products. We don't expect it to go completely to 0, but you can see that very quickly through the balance of 2011, that distraction and that distortion to the number should disappear. And we remain confident that as we move into 2012, we should see underlying sales growth converging with reported sales growth. At the operating level, the margin, again on track with our expectations, moved back about 1%. And that really primarily driven by the impact of the roll-off of Pandemic, Avandia and Valtrex products on the COGS line where COGS has increased and the reported numbers about 1%. That actually benefits from a number of positive inventory write backs we had in the quarter, so the underlying position is probably around 25%. And remember, the indications we've given you previously are that we expect overall COGS performance over the year to be around 26%. SG&A, really reflecting a mix of issues, both in terms of the Pandemic issue, some currency adjustments but also offset by operational excellence gains and greater efficiencies in the business, leaving it relatively neutral. And on the R&D expense, we've also seen operational excellence benefits reinvested in the late stage pipeline, leaving us overall flat for the quarter. So overall, on track and we remain in line with our guidance for a margin upturn for the rest of the year. Over the first half, we've generated around GBP 2 billion of free cash flow. GBP 750 million of that has gone to fund legal outflows during the quarter as we paid out settlements previously provided for. But probably the biggest factor is GBP 300 million swing in working capital, which really stems from the first quarter and reflects inventory build ahead of the launches of a number of new products in the vaccines and consumer businesses and a number of other Emerging Markets sales initiatives that we're expecting to play out over the balance of the year. But you can imagine, this is a big focus for us, not just in terms of the overall amount but in terms of bringing that back in line and making sure that we're converting that inventory into sales performance going forward. Overall, that leaves net free cash flow for the half at GBP 1.2 billion combined with the disposal profits of around GBP 1.3 billion, we have now paid out a little over GBP 2.5 billion in distributions, reflecting those inflows in dividends and buybacks. So we have left the overall debt position unchanged until with a few bolt on expense and other items, we pushed the debt level at the half year up around GBP 400 million. And so looking back on the half, you can see that we have basically paid out all of our free cash flow and the disposal proceeds, reflecting that capital allocation decision that we highlighted back in February where we're going to balance the opportunities to reinvest in the business with share buybacks and other opportunities to invest, and where do we see the best return. And overall at the moment, we continue to see M&A opportunities outside the group as relatively expensive and generating less attractive returns, and we're continuing to actively purchase shares in the market, and we're up to about 900 million by the end of the first half, on track to execute at the upper end of the range that we gave you back at the beginning of the year. So let me go back to the financial architecture. And as I said earlier, what this is about is trying to create a simple and straightforward framework so that we can use it to drive the business internally, but more importantly, from your point of view, that you can measure us and you can determine our progress from the outside. And what that is designed to do is to take the sales growth that you can see beginning to appear on an underlying basis and convert it into operating profit and then convert it into earnings and then convert it into cash. And by doing that, we'll hopefully be able to drive for you attractive earnings per share growth going forward and free cash flow that we can ultimately then use to generate returns for shareholders. So what are the key elements of that model? And you can see here that we've simplified it down to kind of 4 pillars so that we can drive that into the business in a consistent way, that it's clear what people are being measured on and it's clear on what basis people are expecting to report back their returns and their growth going forward. And the focus on EPS and cash flows, really, because that's what I see as the foundation for generating superior returns going forward. Because the combination of them and our ability to then choose where we put our cash having generated the earnings and convert it into cash in the way I've described is what's ultimately going to secure the long-term future of the group. So it's about balances and choices using a very rigorous capital allocation process based around CFROI metrics that will allow us to be consistent across all the businesses in a way that perhaps we haven't been before. So let's take each of these in turn. At the sales level, this is about managing the matrix. We've got a balanced product and geography, we've got to decide where to put our resources, and we've got to decide where we're going to generate the best returns. And in order to do that, one of the things I've done since I came on board is reorganize the finance function to put it much, much closer to the business so that it can work with the businesses done at a country-by-country, region-by-region level to help drive the decision-making that's really going to get this matrix right, so we're generating the best returns. I've stripped away and centralized under the common functions that Andrew described, which I also have under my brief, a number of the sort of shared services and sort of common finance functions to give more time to the finance organization to be able to really drive the strategy going forward. And I will submit a number of new appointments, including a new CFO in the U.S. business, and aligning the financial leadership of our R&D and vaccines business so that we can really drive this matrix as hard as we can and make sure that we're putting real rigor into the decision-making and that we're driving the best growth out of the allocation of the resources that we're giving it. Below that, at the operating level, we think about this very much in terms of operating margin and operating profit growth. In the past, we've talked a little bit about the individual lines leading to that. But the way I think about it, the cost base of the company is in 3 buckets: COGS, SG&A and R&D, all of them costs, but all of them costs that we can trade off against each other to drive operating margin and drive operating profit going forward. And you can see that a little bit in the cost base of the company, when you look back over what we've done over the last 2 or 3 years. And Andrew's described for you the amount of change that's gone on. And you can see that even though the mix looks broadly similar. Look at the margin structure and you can see that in certain areas, we've taken the savings and the restructuring benefits that we've created, and we've reinvested them. And in certain areas, we dropped them further to the bottom line. But overall, what we've also been doing during that period is fighting the headwinds of genericization, the loss of Avandia, both of which produced very high-margin, strong-cash-conversion products. And if we hadn't dropped some of that benefit to the bottom line, then the operating margin, which was 34% in 2007, would probably have been closer to 20%. So you can see that we have already put some of this back to the shareholders, but we have also invested a material amount, and we estimate around 40% to 50% of those benefits reinvested over the period, depending on which category you're looking at, to drive the restructuring and reposition the group going forward. And so, when we look at, sort of the leverage that sits underneath the headwinds, you can see why we begin to -- why we have begun to say that going forward into 2012, as those headwinds dissipate, that the leverages already in the system will begin to show through. But on top of that, we also think that there is a process of being able to scrub down the OE program and generate greater savings out of what we've already done. And just to pick a couple of examples, I mean, the other day I was in Aranda, our Spanish respiratory plant, and the line manager was showing me through the Ventolin production line where they have a significant project to reduce the cost of goods of Ventolin, and they estimate that they can take the cost of goods down by 10% to 15%. But that has only been possible because of the previous phases of the restructuring that they did, which has allowed them to unearth the processes in a simpler way and then take it to the next level. Same thing going on in the oral care business in consumer, where they've halved the number of tube varieties within the Cleans range, within Aquafresh and within Sensodyne. And across-the-board, you can see that as real cost reduction, but it's only been possible by the first phases of the Operational Excellence program. And so when you look across the group, since I came on board, as Andrew said, I've scrubbed down that program. And we've done 2 things which made a number of savings in the overall cost of it, but we've also identified another GBP 300 million of savings that we can generate from that program without any additional cost. And that has allowed us also to include in the overall total the restructuring of the consumer business that's going to be necessary when we sell off the tail brands that we've already announced. And that will come within the original targeted cost of GBP 4.5 billion. And so those savings are already playing off in terms of additional benefits for the group. So this is one area, and in terms of kind of how we choose to apply that GBP 300 million, well, clearly, as with the existing program, some of it will be reinvested, some of it may go to the bottom line. It will depend where we see the best returns going forward. So it's likely to be a progress that is going to lead to operational leverage going forward on a relatively gradual basis. We said it will begin in '12. It will flow into the years beyond that. On top of those benefits, however, we also see another area of opportunity, and that's really in terms of taking the group's restructured cost base and looking for new opportunities to make savings without incurring significant additional restructuring charges. So 2 buckets of opportunity. And just to give you a sense on this second category, if you just think about the way in which the cost base has been restructured and the way in which the manufacturing operations in particular have been restructured, it's opened up a whole series of areas where we can centralize and standardize some of our common functions, so particularly IT where, today, I think we have around 4,500 software applications in the catalog. By standardizing the software platforms across the group, which is something we're in the process of doing, we will be able to significantly reduce those which have real and tangible benefits. Equally in procurement, I've just hired a new procurement head for our indirect businesses, so that's outside manufacturing. That's a total spend of over GBP 1 billion. And I've deliberately gone to a consumer company to look for someone who's really going to drive that harder and faster and challenges in a different way from what we've done previously. So you can see that there's a number of areas where we can add going forward. But to repeat, I think these are going to take some time to come through. They'll begin in 2012, but that will flow forward from there. And so, in the shorter term, I think we've already identified a number of savings. But in particular, over the last few months, I've been focusing on the group's financial efficiency and how we can drive further benefits from that going forward. And a number of areas which I'm focused on. First and foremost, I should reiterate, there was no intention to change the group's commitment to its short-term credit ratings. We see those as very important to how we access the markets, and balancing off our ability to access funding and liquidity relative to returns is obviously a critical component of this strategy, and no change there. But what, within that framework, we can do is look at how we fund ourselves and how we manage our cash balances relative to our debt portfolio. And over the next couple of years, as we've said in the press release, we expect to be able to realize savings so that our effective net interest cost or funding charge will reduce by 200 basis points. And that's despite the fact that net debt levels are likely to go up over that period, reflecting a reduction in cash balances. And clearly, the reduction in cash balances is going to be an important part of that because currently today, you earn very little on your cash balances. But it's also part of refinancing approximately GBP 4 billion of debt that comes due over the next 24 months in a different mix, in a different funding structure than we have today so that we can take advantage of some of the attractive interest rates around today. The second area is on tax efficiency. And as Andrew highlighted, the shape of the group has changed materially over the last 2 or 3 years. And by aligning our tax affairs more tightly with that changing shape of the group, we think there are a number of opportunities that will allow us to drive the tax rate down by 2 percentage points by 2014. So in 2014, we're expecting that the tax rate will be 25% compared to the 27% we've indicated we expect for this year. And then finally on share count, where returns are attractive, we will continue to look to acquire shares and repurchase shares in the market. But that's going to be a relatively judgment against other opportunities that we see out there. But you can see that putting those together, again driving EPS at the core of this model, that those should make a significant contribution. The last piece is cash flow. These businesses are very cash generative, but there is a lot more we can do to improve their efficiency, to improve the conversion and, ultimately, release resources that we can choose to reinvest in the business. And so just thinking about how that converts, restructuring charges as the OE program come to an end should be reducing, and you've seen some of the impact of that in the first and second quarters. But we -- by the end of this year, we will have spent the vast majority of the charges that flow into 2012 and 2013 in cash terms, but they're going to reduce very rapidly. So that's going to contribute to overall cash flow. CapEx, absolutely rigorous process bound into the kind of relative judgments I've described for you elsewhere. CFROI is a key measure, looking at the overall returns, what's the timeframe, and we'll be working hard to try and reduce and save where we think that is appropriate, while also protecting the integrity, safety and security of the business. So that's a difficult balance to make sure we get right, and we're always going to err on the side of caution. But we think there are opportunities there as well. But perhaps the biggest is in working capital. Now on this one, I'm going to highlight it for you in the first quarter that we saw an outflow of around GBP 300 million. That's not where we wanted to be, clearly. And if you look at our performance relative to many of our peers, then you can see that while we have made some progress since 2009, we've still got a long way further to go, and particularly, in relation to inventory. And so since I came on board, I've restructured the way in which we think about working capital, which used to be run through a central project. And I've pushed it right down into the business. So consistent with the reorganization of the finance function that I described earlier, I've embedded the working capital responsibilities with the local finance directors. And I've also appointed a new team inside manufacturing, led by the Finance Head for Manufacturing that are in the process of driving a really targeted project to go after our top 10 to 15 products in terms of the inventory that we're carrying across the supply chain and looking at it on a real end-to-end basis. And clearly, we'll be targeting to make some significant process there, which will contribute to cash flow going forward. So overall, if you step back from it, you can see putting all those 4 together, you drive earnings per share, you drive free cash flow and then, ultimately, depending on what you do with that cash flow and how rigorous you are in terms of how you measure it, we could reinvest to deliver returns for shareholders. So alongside that new model, as you've seen from the press release today, we are making a number of changes to the way in which the group reports. Now many of them are in today. We've tried to give you a clear sense of the direction, and we will come back before the end of the year to give you the metrics, the comparators, restated numbers, the adjustments you should make. So don't worry about that in terms of today and where we can talk about some of them. But we will give you that measure going forward. And in particular, we've already started to simplify the top line disclosure. But at the operating level, we're going to move to a core measure of operating profit and EPS. This is consistent with what most of our peers do. We believe it's a better measure of underlying performance. And as you can see from the way I had to run through the quarter, there's a lot of noise in the numbers. Now some of that is going to come from the headwinds that we've just been describing and will diminish going forward, but we want to be able to give you the clearest measure we can to measure -- to track our performance going forward, and we think core earnings is the right way of doing it. And it's also consistent with our focus on looking at operating margin and operating profit rather than the individual cost lines, particularly as we see those as being able to be played off to drive operating profit going forward. And then finally, down at the earnings per share level, that will also give us a cleaner measure of that going forward. Given that we are also now coming to the end of the Operational Excellence program, we think it's appropriate at the end of this year to end the middle column. So consistent with that second category of cost savings that I've described for you, future restructuring will be in the business, will have to, therefore, generate returns in a much more transparent way and will hold us to account in terms of generating the benefits going forward. But we think there are real savings to go after there, and we will report on those in an ongoing basis. And then finally, the working capital metrics, which I've just showed you, is something that we're going to be tracking going forward and highlighting to allow you to measure our delivery against those objectives. So overall, the financial architecture, we believe is simple, is one that we can apply to the business. And in terms of the progress going forward, this is not a change that we're going to do in the future. This is a change that's happening now. We've already applied this to a revamped and reorganized planning process, which I put in place since I came on board and we're just beginning the first cycle under this new framework now and that will flow into the plans for 2012 and beyond. And part of that planning process to this new form drives these metrics all the way through the business down to every single country, across the consumer business, the Vaccines business and the Pharma business. So that is in place and that's going to be driving our performance and that's how we expect to be measured going forward. And with that, I'll hand back to Andrew.

Thanks, Simon. Great. Thanks very much. Okay. So let's open up now to Q&A, please. Yes, go ahead. Mark Dainty - Citigroup Inc: Mark Dainty from Citi. Just a couple of financial questions, actually. The GBP 300 million in savings you have identified for 2012, should we assume all that flows through to the bottom line or some is reinvested? And just on working capital, if I look at some of your peers, in inventory, they've sort of targeted around a 90-days inventory outstanding. Is that something that you think is achievable given your business mix, Advair, complexities et cetera, et cetera?

So let me ask Simon to respond to the first, and then I'll pick up on inventory. So yes, Simon.

I think as I said in the presentation, the GBP 300 million and how we'll treat that going forward will very much depend on where we see the best returns. I think, however, you should not expect all of it to drop to the bottom line. We used a measure of around 40% to 50% in terms of the preexisting OE benefits. We'll take decisions going forward as those benefits are realized.

And on working capital?

On working capital, I mean, remember that our mix of businesses is quite different from many of the peers at the bottom end of the range. And in particular, our Vaccines business has very long lead times, which is always going to mean that where we can get to will probably be some way back from them. Equally, we think about the risks quite differently. You've got to trade off what you do on the supply chain versus what you do on the way through in terms of delivery to customers. So I'm not in a position where we're going to give targets at this point, but I think there's clearly a significant amount that we can move forward from.

There's no question, as far as inventory's concerned, we absolutely recognize there's tremendous scope to bring that down. We're going to be just -- we've got a simple target, particularly a benchmark target from outside with very different business shapes would be created. I mean, if you just look at vaccines. Vaccines, I'm thinking, has something like a 6 to 7 month release time, post manufacturing. So the minute, you have a Vaccine business, you automatically have a big working capital number compared to somebody who doesn't. Equally, you work with biological products. These are processes where you're more likely to have variations because it's a biological process. Again you want more inventory to protect yourself from the unexpected biological variation that might come along. So you're going to see different numbers to the benchmark, but it can come down materially from where we are now. So I think over the next 2 or 3 years, you should expect to see us bring that down aggressively. Last 2 years, we focused very obviously on receivables and payables. We made good progress on that, and it's been just in time in terms of Southern Europe. So we look at our exposure to the Southern European states, it's very much down from where it was 2 years ago. We've done that, now we've got to crack inventory. Thanks, Mark. Yes, go ahead. Graham Parry - BofA Merrill Lynch: It's Graham Parry from Merrill Lynch. And quick question on Promacta. This is also for -- you said that it was positive data, and you talked about reducing or increasing ability of patients to take interferon. Can I clarify, did you actually hit the primary endpoint of an SVR response rate on that trial?

Moncef, do you want to specifically answer that?

Yes. [indiscernible] significance that make you feel very confident. Graham Parry - BofA Merrill Lynch: Second question is on Alto. You talked about recruitment being complete for that. I just wondered what your expectations for first stage read out would be? And then the final question was just on the GBP 300 million of savings, just wondering if you could you give us a bit more color on exactly where they're coming from? You talked about Stiefel but that go on there as well.

On Alto, as you know, this is a event driven client, so it'll be totally inappropriate to predict. Let me tell you, I hope it's going to be as late as possible, because it means the effect is bigger, but the recruitment is complete.

On the GBP 300 million, I think if you worked on the assumption of the mix being similar to where the existing OE benefits have come from, which is roughly about 50% from COGS and the rest split between SG&A and R&D, that wouldn't be a bad measure. Graham Parry - BofA Merrill Lynch: And is there any color on division area that was coming from, is that predominantly Pharma?

No, I think it's coming out of all of the areas. I mean, take the consumer business, for example. I talked about the sort of the restructuring that we're going to have to do in that business following on from the tail disposal. That -- part of that process is about aligning the manufacturing chain much more to the ongoing business. So in consumer, there will be a number of savings in manufacturing and distribution, in logistics and in the front end. So it's across the board. But it's indicative of actually sort of where we think we can unearth more savings across each of the categories we've already been working on. Luisa Hector - Crédit Suisse AG: Luisa Hector from Crédit Suisse. Is there any more color you can give on the tax rate and how you can achieve that 2 percentage point benefit? Any particular driver? What is the mix?

I don't think there's any one particular driver. It is a mix issue and it's a geography issue and it's about aligning our cost base and our profit flows with the changing shape of the group that Andrew described. And that gives us a number of different opportunities that add up to the 2%.

I think what's also very encouraging on the tax front as we talk about the next 3 years and the way you've seen. We think then beyond that, you then move into an area where things like the U.K. patent box start to become enacted. So there's clearly opportunity for us to continue to put pressure on the tax rate going out into the future beyond. Now that isn't what drives the first 2 percentage points, but it's a further opportunity we've started to come in. And I think after very many years of seeing that tax rate as pretty stubbornly stuck, you're starting to see a number of ways in which we can get traction on it, which is for over potentially quite a prolonged period. Unknown Analyst -: Eric Mobits [ph] from Goldman Sachs. A couple of questions. One on the business mix and the pressure you might see on margins because the businesses that are growing regionally are at low margin, significantly low margin than say the U.S. or Europe. So how should we think about that? And then secondly, in your legal disclosures, you talked about settling the standoffs on European Advair litigation. Can you just talk about how that's maybe changed your view or not on the threats in Europe?

Let me take the second and then maybe Simon, you talk about the margin. So we'd come to an agreement with Sandoz. This is on the so-called -- it's actually on the SBC element of the patent because the patent had expired in what was dated 2010, but in some countries, mostly in Southern Europe, there were supplemental extensions. This patent had already gone in a whole bunch of countries and we just took the view that actually it was no point spending money in litigation on this point. It was just a marginal call, we took it. We don't think it changes anything. Remember this patent's been absent in the U.K. since 2004, and then in other countries subsequently. So we've had a very long period of time without this patent. I'll say something they've said on this stage and similar stages so many times. It's never been about the patents. Never. And it's always been about whether or not people can manufacture the product to a standard #1. And then is that standard substitutable or not. And if the patents were there originally, but actually it's never been about a patent issue, which is why I think when you look at the U.S., nobody's ever filed a paragraph 4 against the patents in the U.S. But again, it just gives you that same sense that it's about whether they can make it and whether what they make is equivalent or not. We believe that is not going to happen in the U.S., certainly not as fully substitutable generic. It's hard to see even a branded generic in anything other than the medium to long run. In Europe, we're going to see, as I've said many times, probably sporadic generics. We'll see what comes along and we think it's very, very unlikely to have a single European scenario. We think it's going to be very different market by market. And who knows how that plays out? But we've dealt with that in the past with many different products. So as far as this particular settlement is concerned, we see it has no impact on what may or may not happen.

And on margin and mix, I mean, you're right that obviously a lot of the growth that we've seen has been in some of the lower margin businesses in the group. But at the same time, look at the overall operating profit performance. That's where you get straight into the kind of cost reduction efforts as well. But we're playing off the mix versus those cost reductions where we invest to drive overall operating margin and overall operating profit. We're not driving them individually by business because ultimately, operating profit is what's going to turn into earnings per share and therefore into cash flow. So I think expect to see us doing more of that as we think about kind of where to invest and where to change the mix of the business. But you've already seen us doing it over the last couple of years, and the decline I showed you in that chart was really most heavily weighted to the beginning of the chart. And I think we're going to be focused in that way going forward.

I think as well, there's a build on that, what we've tried to do, and I think you see some of that in things like core business services or the corporate costs, those shared services, we spend 20% less today than we did 3 years ago on our cost of administration, so things like HR, IT, those sorts of things. What we've really done is we've tried to unhook those cost rows from the sales line, and the same is true of R&D. You're not going to hear us forecast in the future R&D as a percent of sales. We'll talk about it. If we talk about anything, we'll talk about absolute number of pound notes because actually, we don't think R&D should grow just because the sales line grows. Now that's sort of been a bit meaningless, while the sales line hasn't been growing. Once the sales line starts to grow, the separation of those curves is going to become very apparent, right? So as long as we can stick to that decoupling, if you will, of some of those big areas, that's going to create margin opportunity. Some of that, plus the other things that Simon's described in terms of cost reduction and all the rest of it, some of that will end up being reinvested, some of it will go to drive the operational leverage that we anticipate coming through, and it's going to be turbocharged in the first couple of years by further leverage, below OP but before EPS in the shape of tax and interest. And that's really the way where trying it. So rather -- what you're going to get from us is a bit less detailed forecasting of cost rows and probably a bit sharper target in around the OP level, and then where we're going to ahead with in terms of overall margin. Florent Cespedes - Exane BNP Paribas: Florent Cespedes, Exane BNP Paribas. A few quick ones. You deliver on the cost control, we believe that your next challenge will be on the research portfolio. When could it be possible to have an update on the late stage portfolio? Could it be possible to have towards the end of the year when we have the DPUs update or maybe later next year? And a follow-up on the DPUs, you have to understand that some units will disappear and maybe some new ones will be created. Could it be possible to see new ones beyond the 7 core areas? And maybe last one, on products, on the respiratory, could we have a quick update on the antagonist [ph] program in the U.S. and where you stand regarding the discussions with the FDA, if there is any new potential safety clinical trial there?

Okay. So as far as an update on the pipeline, as far as -- so remember the DPUs is really is the early phase discovery activity. So what we do or don't say about the late phase is kind of independent of what might or might not happen with the DPUs. And we'll certainly give you an update of what the conclusions are of the DPUs. We're not going to tell you exactly which targets we'll research and what we've stopped, but we'll certainly give you a feel for how many closures, how many doubling up, how many status quo decisions we took, how many starts we took. And we've got -- one of the great things about this whole process in discovery, is we've got literally dozens of scientists in the company putting forward their ideas for new DPU opportunities. It's kind of creating that innovative vibe inside the organization again, because they see these chances to get -- they get their chance to do what they've always dreamed of. Now, if they don't do it well in the first 3 years, then they're at risk to get stopped. But there's a tremendous atmosphere, so we will update you on the shape of those conclusions. Now, as far as the late stage is concerned, we will come to you with an update on that pipeline. And it will be somewhere, it will be either the end of this year or the first quarter of next year. We haven't quite nailed down exactly when it's going to be, but somewhere in that window. And the reason why we're not rushing that is we want to have a reasonable amount of data on the key assets before. There's no point coming in and talking to you and saying we've got 2 bits of data today, but we're going to have 5 bits of data next week. We need to come to you with a substantial quantity of the data. So it'd be somewhere around that kind of period. And I'm excited that we're going to have that opportunity to show you all of that. As far as U.S. is concerned, as far as the Relovair programs, we're very comfortable that we have everything we need already underway in terms of what's required for the COPD program. As you know, we haven't got any specific asthma trials underway for a U.S. filing but we have a very big program x U.S. The whole thing is justified, the asthma indication is justified on the x U.S. opportunity. And as you've seen, FDA's view continues to evolve, then we'll make a decision on filing for the U.S. a bit nearer the time. But the option's open for us there. And if you ask me today, I'd say there's a reasonable chance we might end up filing in the U.S. for asthma, but we're not committing to that right now. We need to just see how that opinion continues to evolve. But we're not planning to do a big safety trial in advance of those filings, and I think we're in good shape as we stand. Now we are commissioning the safety trial on Advair along with other marketed companies, right? So we're doing those safety trials as required by FDA. But as it stands today, that's not being required so far for these programs for Relovair. And I think we're in very good shape on those programs. And our expectation is that we should be in a position to file in the first half of 2012. Unknown Analyst -: [indiscernible] Just a question on your respiratory portfolio and especially the new fixed dose combination of LABA/LAMA that you want to bring to the market, I mean you were with Novartis to bring this new fixed dose combination. So what's your strategy? Did you plan to file [indiscernible] the 2 components, the LABA/LAMA with your new device? And also, with regards to the device, how this generally differs from discussed? And finally, just on the share buyback program, what should we expect going forward not for 2011, but going forward?

So share buyback for 2011, we're going to be at the upper end of the 1 billion to 2 billion range. We haven't given any numbers out for next year other than to say 2 things: one, the initiation of the share buyback program was the beginning of a long-term program. So I think you should anticipate more share buybacks. And secondly, we said that when we dispel, assuming we can get a price for our consumer tail, which meets what we expect and is a fair reward for our shareholders, then from the net proceeds of that will also go back to shareholders, potentially through further share buybacks or I suppose conceivably special dividends but one or the other. So that's on that first part. As far as the LAMA/LABA this is the Zephyr [ph] program. I'm not going to go into a huge amount of detail of what we're doing in terms of our registration strategy. What's become very clear in the last 3 months is that there's a really good chance we can be first to market in the U.S. with this product. And that's obviously we're going to chase that as hard as possible, and we're not going to give our competitors any clues. Now, in terms of Gemini. Gemini is a very interesting device in a couple of dimensions. First of all, it builds on everything we've learned from discus. So all the key bits of Gemini are evolutions, if you will, of what we know works and we can manufacture at very high capacity on discus line. So in a way, it's a bit like developing the iPhone from the iPod, right? You learn a lot about the technology in one product and you make it reliable, and that's how you make the new thing super reliable. That's really important because we know we can get this thing up and running. We've already got lines up and producing huge volumes. The other bit that's very, very different is if you look in the discus, what you'll see in the discus is the drugs are premixed in one blister, whereas in Gemini, there's 2 different blisters. So that massively simplifies the whole development challenge, which is why we've been able to accelerate so many drugs in parallel. And why I showed you today, just the scale of what's coming. It's partly because we sold one of the really difficult problems, which is compatibility of molecules, by not having them together in the device. And that created a tremendous amount of technical opportunity to move a lot of things in parallel much more quickly than anybody thought we could move. Michael Leacock - RBS Research: Michael Leacock from RBS. Two questions. Firstly, if I may, in terms of the U.S. sales versus incentive [ph] scheme, I wondered if perhaps you would be able to comment. In what outcomes are you expecting from the sales reps. What sort of metrics are being targeted to deliver and how will we know that they're a success. And secondly, [indiscernible] mostly competitive landscape like for deals, yes? I think we're expecting some of a bit of follow ons from the other way around at some point. Can you just give us an update on that landscape? It would be very welcome.

Okay. Deidre, do you want to make a comment on the sales force incentive program?

Yes, in terms of the sales incentive, what we've changed is previously, most of the incentive was dependent on additional scripts at the doctor level. We have devised a program that now requires that our sales professionals have 3 things that they need to meet on metrics. One is product knowledge [indiscernible] knowledge, which enables them to have a more sophisticated discussion with their customer. Second is business acumen, so the investment of their resources, both in time and dollars. And third, is the total sales and profitability of the region. So there's still a commercial sales incentive that's been pulled up to the region. Those are the three parts of incentive plan.

And the way you're going to know if it’s working is sales are going to go up. I think I had a fascinating, not long, maybe about a month ago in Chicago, I met with a bunch of our sales force. And it was really, and I was just -- sometimes you go there over the last few years and people will tell you all about stuff that's happening. And then it was very interesting just to hear the kind of shift in perception of our U.S., people on the front line. And one of the things that really came out from that conversation was actually how positive this was. So one of the quotes that really struck me was the representative said, "It's amazing now. I actually helped my colleague get their appointment because I know it doesn't matter if they get the script or I get the script. Whereas before, I'd do anything to stop them getting the appointment because they might have gotten my script." Which actually, as a company, is just nuts, right? So I'm delighted that we're the first company in the U.S. to be doing this. I think this is really going to change the way that we compete. I think it's massively changing the way customers see the company. But also, of course, by the way, rightly or wrongly diminishes one of the things our critics think is wrong about the industry in terms of what's driving the pressure in the system. So by -- we're trying to mitigate some risks in the downstream, we're also creating a better relationship with customers. I think we're going to create a much more cohesive team orientation in the organization and ultimately, that's going to lead to better customer relationships and better sales. ViiV. So when's the next ViiV going to be, David?

I mean, firstly on ViiV, I should say it's going incredibly well. So we're very pleased with the focus that the team under Dominic [ph] have brought, and you can see that actually in the sales numbers, Epzicom up 7% and sales entry up 37%. So a real acceleration in the 2 promoted brands and pipeline progressing very well and we have the data from the registration studies on the integrated inhibitor next year. I mean, I think the short answer is we're absolutely open to those sort of structured deals. ViiV as I’ve said has been a very good experience and it certainly possible that more could follow. I would say, having been involved with ViiV right at the beginning, these are very complex deals to put together technically. There's an awful lot of tax issues, there's an awful lot of separation issues. And you do need quite a large number of stars to align. You need a sort of symbiotic balance between the 2 companies in terms of what they're thinking and what they will bring. And it's not always the case, but we're certainly open to it and we'll see down the track. Mark Purcell - Barclays Capital: Mark Purcell from Barclays Capital. Two questions. Firstly on respiratory, could you help us understand what you believe the impact of Seretide generics is going to be from a pricing perspective i.e. how reference pricing might change across Europe, how pricing might change in emerging markets, et cetera, going forward? I'm thinking about this from 2 aspects. One, the pricing of traditional respiratory medicines as we know today, and then secondly, looking at the data coming through in sort of Phase IIb at the moment in your new mechanisms, what you have to show these new products to gain pricing and value. So for a CPD drug, do you have to show a 25%, 30% exacerbation benefit, do you have to show mortality benefit? That's the question. And the second one is on productivity. With due respect to what you've said already, I think on the gross margin, historically that's how it was to keep the gross margins flat x royalties going forward. I just wondered if that is a sort of a 1,000-foot goal that the company still holds. And I think on G&A, correct me if I'm wrong, I think it used to be 8% to 9% of sales. So I understand what you're saying in terms of sales reaccelerating and you wanted to get to sort of mid-single digit range where some of your competitors were. So could you help us understand where you are now? You were at 8% to 9%, where are you now to give us some shape of how that's changing?

Sure. So in terms of the margin structure, we're still targeting to bring down that G&A rate, and we're on track to do that some time over the next 3 years. So that's quite a punchy reduction and you certainly need some sales growth to create the oxygen to allow you to -- it's very hard to take 50% of something down without any kind of sales growth. So absolutely we're aiming to do that. We continue to drive toward it. We've done, as I've said already, we took 20% of our corporate infrastructure costs out in the last 3 years where a lot of the leverage comes in the next few years is things like the ERP platform, our first deployment of the ERP takes place in a couple of weeks. So that moves very quickly then to put the whole group on to a standard platform across the organization. We continue to take out seniority across the company. So this year, I think we have something like 10% of Vice Presidents have gone in terms of the upper echelon of the organization. Why is that important? Because the VP is the first who commissions all the costs in the organization. So if you can keep your upper command relatively tight, then you take away an awful lot of cost and complexity underneath. So that goal is still there. In terms of COGS, the challenge on COGS is we've got price pressure, mix pressure, so particularly Avandia and generic dropping out and royalties coming in. So whether or not we will be able to hold that COGS line into the far future, I think we can get pretty close, but I think we're not going to guarantee it. One of the reasons why we say, let's focus on that OP number, because actually if we can make up for what we're missing at the COGS line somewhere else in the system do you really care? And the proper answer is you probably shouldn't care, because ultimately you're still delivering that profitability level at the bottom. And we don't want to walk away from good business opportunity simply because it's our lower gross margin down the current. Now if you did that. we'd get rid of the vaccine business because the vaccine business is a lower gross margin than Pharma. You see what I mean? So I think we just got a bit of a flexibility in that one. As far as Seretide is concerned, listen, even before you start with generics, you have to recognize that in Europe is tremendous price pressure in Europe. I mean 5% or 6% of price pressure in the core is enormous actually when you think about it. So across the whole of Europe, you'd definitely got a dynamic of governments being very aggressive on price and they're very aggressive on market access hurdles. Now, how long ago, 3 years, 3.5 years ago we reconfigured how we did files, right? The med submission program inside GSK really aimed to rethink how we filed, and we have a language inside the business called reimbursable files. So the goal for Moncef's organization isn't just the drug approval, it's the reimbursable approval. And so the whole point, and sometimes we've taken 6 months' time liability to get more data generated before we file. We think that, that's going to allow us to get the best prices that we can in the marketplace. But bottom line, when Moncef and I put this strategy together at the beginning, we both agreed that the core assumption should be that the average new drug of the future would have a lower yield than the average new drug of the past, i.e. there wouldn't be so many blockbusters, because pricing would be so much more aggressive. That's why you need the portfolio. So our strategic response to that issue is of course, we want to generate the data to get the best price possible, but we're going to hedge that by having a portfolio of products so that no single product has to carry the burden of everything. And that's the whole underpinning of the strategy of the group over the last 3.5 years, to get ready for exactly that situation, which is clearly here. And I would much rather be in the position we're moving into now, where we have broad portfolio of products to negotiate, we're we've invested the R&D cost to get differentiation, and where actually we don't need to die in a ditch for the last EUR 5. Because we know if we can't get the EUR 5 on drug a, we've got drug b. And I think that's very from are the industry's been over the last 10 or 15 years, where people are prepared to literally argue themselves to a standstill to get that last few dollars or euros of cost. They want to be there in this world. You want to be there with a portfolio, and that's exactly what we've been striving to build

James from the CLA. Just a quick question for Simon on the capital allocation policy within the group that he's talked about today and how that actually works in practice. I just wondered if you could give us a bit more color on how you will control that process within the group going forward? And to what extent is the genuinely new methodology for you?

I think there's a couple of elements to that. As I said at the end of my presentation, we're in the process of rolling out a new planning process across the corporation to really kind of build in the metrics that we're going to use and make sure that those are going to be applied consistently. So how is that going to happen, that's how it's going to happen. We've also changed the metrics so that we're using, going forward, a CFROI benchmark that will allow us to compare between different projects and different investments, whether it's in sales force or in capital allocation or capital projects that we can kind of use across the board. It also focuses on the cash returns that are being driven out of that. And that is a shift from where we've been in the past, where we view similar metrics but perhaps more of a balance of NPV and IRL [ph] type calculations relative to ROIC which has largely been applied to M&A going forward. So consistent capital allocation benchmarks across the business is how we're going to make that happen. And already, Andrew and I had a session last week on this year's capital spending projects where we've been through kind of the largest of those and we'll be scrubbing down the next batch in the coming weeks, and then we'll be going to the planning process over the summer, then all of the businesses are being asked to put forward capital expenditure plans as part of their plan, which they've not been asked to do before. So those are a few of the concrete changes we're making.

I think also just to summarize how I think things are -- have already begun but are changing now is I think the finance organization under Simon's leadership is going to be much more hands on into the guts of the company. And we had a perfectly good finance organization, but it was more of a keep in school kind of finance organization. I think what you're going to see is a much more -- Simon's going to role model it obviously at the top. But as he said, through some of the key appointments we've been making and where he's inserted people deep into some of the key bits of the company, what we're really trying to make sure is that finance is really part of the driver of the future, not just simply checking what happened yesterday. And that's a very simplistic way to describe it, but it's very fundamental. And obviously, a really positive shift. And it's going to create an awful lot of value and opportunity in the business, because really what you're looking at in this business, it's all about making sure that the next dollar gets spent on the best return and opportunity. And clearly, as everyday goes by, that opportunity looks slightly different and we need to make sure we're on top of that to get the absolute best return.

It's Mark Clark from Deutsche Bank. A question for Simon on core EPS. I'm surprised no one's asked this so far. I just wanted to ask you a couple of things. Firstly, when you talk about removing legal charges, is that just the large onetime items like Advair rather than the sort of bread-and-butter legal costs that are part of every drug companies' quarterly numbers? And secondly, due to the pre-exceptional and pre-legal EPS figures you've reported, e.g. the 26p and the 29p or whatever it was last year. Do they give a reasonably good approximation to the core EPS or is there any sort of major differences you'd like to point out our way?

Well, I think going forward, we will take out legal charges as all our peers do, but we will also take out a number of amortization, other write-offs, other one offs that again are consistent with what our peers do. So there is more by way of adjustment than the strip outs you've just highlighted. And as I said in the presentation, what we'll do is we'll come back before the end of the year and we'll give you all of the adjustments so that you can track 2011 into 2012, and that you've got a clean base on which to start from. So rather than try to kind of recreate it out of what we've already got, we'll give that to you going forward. But we do believe that is the cleaner measure going forward and that's why a number of our peers already use it.

Okay. Let me thank you very much for the questions. Just to summarize where we're up to, and as we're coming on track for this year, not all of our guidance has remained unchanged for the rest of this year. Share buyback continues a cliff up towards the upper end of the range we've given you. As we move into next year, we expect to see reported sales growth, we expect to see expansion of our operating margin and we also expect to be able to start to deliver greater financial efficiency between OP and EPS. What's critical, I think, is what we've started to lay out for you is the corner or the inflection point that we believe we're now hitting in this company. It isn't just about the next 6 months or the next 18 months, it's actually about what the shape of the group is going to be over the next 5 or 10 years. But what it's showing you is a group, which through its restructuring has got a portfolio of activities which exposes us to where all the growth is. 93% of all the births in the world are outside of America and Europe. So if you're in the healthcare business and the Vaccine business, you'd better be big outside of America and Europe. That's a good example. If you look at where our Consumer business is exposed, 60% of our consumer business post disposal will be in emerging markets. So you have a very different sort of shape to underpin our future growth, and as you've heard today, what we're focused on doing is not just seeing that growth over that period in sales. Also, working hard to make sure that year-on-year-on-year, we look for ways to further drive cost reduction and margin leverage, whether it be in the core business or in the financial dimension of the organization. So not just about the next 18 months, about the next 18 months showing what the trajectory can be for the subsequent several years. It's been a long time in terms of reshaping the organization, but I think you should be able to see today what that looks like. And the portfolio of R&D assets, I think, clearly demonstrates the progress that's been made and the way in which that those assets are going to start coming to market over the next few months. On that note, I'd also remind you that we remain the company with the highest number of FDA approvals since 2007. So we can discover the stuff. We can develop it and we do get them registered. And as you start to see that build up, you're going to start to see a bigger and bigger contribution from new products come in alongside everything else. If you think back for the last 3 years, we've battled our way through headwinds without much new product and in the middle of a massive restructuring program. Think about the future, very substantially reduced headwinds, new product portfolio, big established businesses, which have been redesigned for where we think the opportunity over the next few years. A very different picture next 3 or 5 years compared to the last 3 or 5 years. With that, I'd like to thank you for your attention. As I said earlier, we're going to join you over there if you'd like to for a cup of coffee. And for people who have not had a chance to ask a questions, please feel free to do so. Thanks very much.