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Edited Transcript of GSK.L earnings conference call or presentation 6-Feb-19 2:00pm GMT

Q4 2018 GlaxoSmithKline PLC Earnings Call

Brentford Middlesex Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of GlaxoSmithKline PLC earnings conference call or presentation Wednesday, February 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Simon Redfern

GlaxoSmithKline plc - Chief Strategy Officer

* Emma Walmsley

GlaxoSmithKline plc - CEO & Director

* Hal V. Barron

GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director

* Sarah Elton-Farr

GlaxoSmithKline plc - Head of IR

* Simon P. Dingemans

GlaxoSmithKline plc - CFO & Executive Director

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Conference Call Participants

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* Emmanuel Douglas Papadakis

Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research

* Graham Glyn Charles Parry

BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Kerry Ann Holford

Exane BNP Paribas, Research Division - Analyst

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Mark Douglas Purcell

Morgan Stanley, Research Division - Equity Analyst

* Richard J. Parkes

Deutsche Bank AG, Research Division - Director

* Stephen McGarry

HSBC, Research Division - Analyst

* Timothy Minton Anderson

Wolfe Research, LLC - MD of Equity Research

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Presentation

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Operator [1]

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(technical difficulty)

analyst call on the GSK fourth quarter 2018 results. (Operator Instructions)

I will now hand you over to Sarah Elton-Farr, Head of Investor Relations, who will introduce today's session.

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Sarah Elton-Farr, GlaxoSmithKline plc - Head of IR [2]

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

Before we begin, please refer to Slide 2 of our presentation for our cautionary statements. Our speakers today are Chief Executive Officer, Emma Walmsley; Simon Dingemans, Chief Financial Officer; and Dr. Hal Barron, Chief Scientific Officer and President for R&D. We have a broader team available for Q&A. (Operator Instructions) Our presentation will last for approximately 45 minutes, slightly longer than usual to give Hal time to update you on our R&D progress.

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

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [3]

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Thank you, SEF. Before we take you through our 2018 achievements, as this is the last quarter that Simon is going to be representing GSK, I'd really like to take the opportunity to reiterate my sincere thanks and appreciation to him for all he has done for the company over the last 8 years. Our CFO designate, Iain Mackay, is also on the call today, just in listening mode this time. And he will be on role in April, so you'll hear more from him on our Q1 call in May. I am absolutely delighted to welcome him to our team.

In 2018, we have made good progress across the group, with improvements in sales, the group operating margin, earnings per share and cash flow. Group sales growth of 5% in CER terms reflected an increase in sales in all 3 of our global businesses, with particularly strong performance in Vaccines. The Pharma business continues to shift its portfolio shape with excellent new launch growth. And although Consumer had a slower quarter, we remain confident and excited about the outlook for this business.

Group operating margins this year were up 50 basis points on a CER basis. On a total basis, earnings per share more than doubled to 73.7p, and adjusted earnings per share were up 12% CER.

Our free cash flow position continues to improve, and we are particularly pleased with the underlying improvement in our cash flow. For the year, free cash flow was almost GBP 5.7 billion, up 63% in actual terms versus last year.

Today, we declared a dividend in respect to the fourth quarter of 23p, resulting in a total dividend for 2018 of 80p. When I became CEO of GSK in 2017, I laid out my 3 long-term priorities for the company: innovation, performance and trust, all to be powered by a necessary change in culture. In 2018, we made significant progress on accelerating these priorities, have improved our operating performance and reshaped the group's portfolio, including development of the pipeline. We've put in place new leadership, who are already driving shifts in our culture. We've put a clear focus on launch execution and have had considerable success, notably with Shingrix, but also with Trelegy in Respiratory and the first of our 2-drug regimens in HIV.

Our clear priority is to improve Pharma performance and pipeline. Luke Miels, President of Commercial Pharma, has been restructuring to focus our commercial operations alongside a reduced manufacturing footprint. And last July, Hal, our Chief Scientific Officer, laid out our new R&D approach with a focus on science related to the immune system, the use of genetics and advanced technologies. And he'll update you more on our good progress since then, later.

We've also made significant progress in reshaping the portfolio. Our first focus was R&D program prioritization. And here, we've terminated or divested around 80 programs since 2017, including 7 within the last few months, to invest more behind the potential medicines we see bringing greater value to patients and stronger growth for GSK.

Of particular note is the expansion in oncology, from 8 drugs in the clinic in July last year to now 16, with 3 pivotal study readouts by year-end. We've stepped up business development, be it in our partnership with 23andMe, the recently closed transaction with TESARO or the global alliance we announced just yesterday with Merck KGaA, Darmstadt, Germany. We've made noncore divestments, such as the announced divestment of Horlicks to Unilever. We've successfully bought out the Novartis stake in Consumer Healthcare. And at the end of the year, we made our most transformational announcement to date with the plan to create a new joint venture with Pfizer.

Looking now briefly at the new product launches. We've seen a very strong start to Shingrix in 2018 with sales of GBP 784 million in its first full year. We've now administered more than 9 million doses globally since launch. And as we said last quarter, we're working hard to build capacity and meet long-term global demand, and we've made good progress on this.

Moving to Respiratory. Trelegy has achieved sales of GBP 156 million in its first full year. Labels in both the U.S. and Europe have been updated, with data from the landmark IMPACT study showing benefits over dual therapies. And the international rollout continues. We expect the recently approved generic Advair to have minimal impact on this highly differentiated product, the first approved once-daily single inhaler triple therapy for COPD. And we look forward, too, to the CAPTAIN study for Trelegy in asthma, which is expected to report in the spring.

We continue to see strong performance also from our injectable asthma therapy, Nucala, despite the introduction of 2 new biologics during 2018. With additional investment, new patient growth in the U.S. has improved. And in other key markets where competition has also launched, including Germany and Japan, Nucala continues to lead both the total market and the new patients.

In 2019, we do expect the competition to intensify and near-term growth will be lower. But we believe the market opportunity is still significant, with less than 25% of suitable patients receiving therapy today. And we're excited about the opportunity to provide the convenience of home administration and to file for U.S. and EU approval of an autoinjector.

2019 is another important year for our HIV business and 2-drug regimens. In 2018, the dolutegravir portfolio grew 16%, benefiting from the launch of Juluca with its first full year of sales of GBP 133 million, demonstrating an encouraging indication of uptake for our 2-drug regimens.

We're maintaining our U.S. market share at 27% in a competitive marketplace. We anticipate U.S. approval for our dolutegravir and lamivudine combination in Q2, and we're also progressing our long-acting injectable 2-drug regimen, cabotegravir and rilpivirine, and will be presenting data from the pivotal ATLAS and FLAIR studies at a conference shortly. Regulatory filings are planned for later this year as well as for our therapy for heavily pretreated patients, fostemsavir. These 2-drug regimens will help drive our long-term growth while bringing more treatment options to patients to help them manage their HIV with less impact on their lives.

So in summary, we've seen good progress in 2018 in operational performance, in reshaping the portfolio and in strengthening the pipeline. And we'll be building on this progress in 2019.

In innovation, we will be focused on strengthening the pipeline further, particularly our growing portfolio of assets in oncology. And of course, we will stay very focused on the execution of our recent and upcoming launches.

In performance, we will continue to drive growth in operating performance across the group. And we'll be working hard to plan for the integration with Pfizer's consumer business, which we expect to close in the second half of the year.

And on trust, we want GSK to continue to lead with a broader contribution to society. Our first priority here is to innovate, and we'll give you regular and transparent updates on our pipeline progress. So you'll hear again from Hal at Q2. For trust building, we also remain very committed to our global health agenda, focused for impact on infectious diseases in the developing world.

And because everything and anything we achieve comes from the talent, energy and engagement of our people, we aim to be a modern employer to attract and retain the very best.

So after a year of progress in 2018, we are ambitious again this year. We believe we have the right teams in place to make it happen, and we've laid out a clear pathway over the next few years to the creation of 2 exceptional businesses. We will have a new focused global pharma and vaccines company, and we will create a new world-leading consumer healthcare company.

And so with that, I will hand you over to Simon.

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [4]

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Thank you, Emma. I'm delighted to be presenting to you such a strong set of results, my last as CFO after 32 quarters. I'm sure you all have saved some particularly challenging questions to round everything off, so I'm looking forward to answering those later on.

Overall, the group's results for the year are ahead of the top end of our guidance and demonstrate continued operational execution of our key strategic objectives, with strong performance in all 3 businesses. Our earnings release provides an extensive amount of information. So I'll focus on major points, our expectations for 2019 and important comparators to note for your models. As usual, my comments today will be on a constant currency basis, except where I specify otherwise, and I'll cover both total and adjusted results.

Starting with the headline results. Group sales up 5% to GBP 30.8 billion. Total EPS more than doubled to 73.7p, and adjusted EPS were up 12% to 119.4p.

Total operating profit was GBP 5.5 billion, up 43%, and showed strong progression on 2017. Higher charges for the revaluation of acquisition-related liabilities, principally the ViiV CCL, were more than offset by a stronger operating performance, lower restructuring costs, lower asset impairment charges and a favorable comparison with the charges taken in 2017 related to U.S. tax reform of GBP 0.7 billion.

Adjusted operating profit grew at 6%, with operating margin up 50 basis points, driven by margin growth in Vaccines and Consumer Healthcare. Pharmaceuticals operating profit was flat, with operating margin impacted by continued investment in our new products and a weaker gross margin in the face of ongoing pricing pressures.

Free cash flow delivery was significantly stronger at GBP 5.7 billion, up GBP 2.2 billion, reflecting continued focus on cash conversion throughout the group, with particular progress this year on working capital management. We've delivered on the dividend expectations we laid out, with 80p declared for 2018. We also expect 80p for 2019.

Net debt ended the year at GBP 21.6 billion, the increase from last year primarily driven by the GBP 9.3 billion buy-in of Novartis' Consumer stake and an adverse FX translation impact of GBP 0.8 billion, partly offset by the improvement in free cash flow that was significantly ahead of the dividend.

On currency, a slightly strong sterling compared with 2017, particularly against the U.S. dollar, resulted in a headwind of 3% on sales and 5% to adjusted EPS.

The next slide summarizes the reconciliation of our total to adjusted results for the year, and the rest of my comments will be on our adjusted results.

Turning to the top line. Sales up 5%, driven by momentum in all 3 businesses. Sales within the Pharma business were up 2%, driven by HIV, which grew 11% for the year, as well as the new Respiratory products. Within HIV, our dolutegravir portfolio continued to grow strongly, up 16%. Q4 saw good growth in international, offset by a slower quarter in the U.S., which was adversely impacted by year-on-year stocking patterns, which roughly halved the U.S. reported growth rate of 3%.

We continue to expect HIV will be a meaningful growth driver, including in 2019, as we build on the successful launch of Juluca and expand our 2-drug regimens. Respiratory sales grew 1%, with growth from the Ellipta portfolio, particularly Trelegy and Nucala, more than offsetting lower sales of Seretide/Advair.

U.S. Advair sales in 2018 were GBP 1.1 billion, a decline of 30%. And with the recent approval of a generic, we factored into our guidance a significant decline in Advair in 2019. In the short term, you should also expect particular volatility across Q1 and Q2 as the market adjusts inventory levels and responds to the supply available.

Relvar/Breo sales were up 10% for the year, driven by momentum in Europe and international, which offset a slight decline in the U.S. Given the expected impact on the ICS/LABA class of generic Advair, we expect Breo will see a sharper decline in the U.S. in 2019, resulting in a slight global decline for Relvar/Breo despite continued good growth expectations outside of the U.S.

We continue to focus on driving value and cash generation in our Established Pharmaceuticals portfolio, which declined by 4% for the year, at the better end of our expectations. Q4 benefited from around GBP 80 million of additional sales resulting from post-divestment contract manufacturing sales and the first installment of a newly won Relenza tender.

From Q1 2019, we will report the older Respiratory products, including Advair/Seretide, within Established Pharmaceuticals. And we'll give you restatement information ahead of Q1 so that you can update your models.

With the approval of a generic competitor to Advair, we expect the Pharmaceutical business overall to see a slight sales decline in 2019 before returning to growth in 2020, driven by our new products. This includes the expected top line contribution from Zejula now that we have closed the TESARO acquisition. Zejula sales for 2018 were $230 million, impacted by some adverse mix and some destocking in Q4. But overall share at the end of the year was very much as we expected. Our focus in 2019 will be on building the penetration of the class, but the PRIMA readout later this year will be key in expanding the market and our share.

Moving to Vaccines. Sales up 16%, driven primarily by Shingrix, a strong performance in hepatitis and good flu vaccine sales as well as market and share growth for Bexsero, offset by some declines in Menveo and a number of other Established Vaccines.

Shingrix sales were slightly ahead of our 2018 guidance as we made further progress in accelerating our production plans. More than 9 million doses have been administered since launch a little over a year ago, and we continue to target high-teens millions of doses over the next 2 or 3 years. Importantly, we now have in place the detailed capacity plans necessary to deliver the meaningful increase in doses this target implies. Those plans include a significant step-up in doses for 2019 so that we can maintain the momentum that was established through the second half of last year behind this important vaccine and ensure patients can complete their 2-dose course.

Flu sales up 10% as we increased share, delivering 43 million doses in the U.S. Across the year, we saw some pricing pressure, which we expect to continue into 2019 with increasing competition in this category.

Meningitis franchise overall was more mixed. Bexsero up 9% with demand and share gains in the U.S., but more widely, momentum was dragged by the completion of cohort catch-up vaccination programs in Europe. And Bexsero growth was also largely offset by Menveo, which was impacted by supply constraints and unfavorable CDC stockpile movements. We expect to return to stronger growth in the meningitis portfolio in 2019.

The momentum in the Vaccines business continues to give us confidence in the mid- to high single-digit outlook for sales compound annual growth out to 2020.

Turning to Consumer. Sales grew 2% for the year despite a drag of around 1 percentage point from the combined impact of the divestment of nonstrategic brands and the final quarter's impact of GST in India. Oral health and wellness continued to deliver broadly based growth, and the Consumer business gained share overall across the full year. Reported growth was impacted, though, by a weaker performance in Europe, particularly in the second half when we saw a much tougher competitive environment. We have responded, but these plans will take through Q1 to make a full impact.

In 2019, we expect reported growth also to be impacted by the loss of around GBP 100 million of revenue from the smaller divestments completed at the end of last year and the phasing out of low-margin contract manufacturing as we restructure the consumer supply chain. Given this drag, we now expect the 2019 reported revenue growth for Consumer in the low single digits, assuming we keep the India Nutrition sales for the full year. We remain confident in the prospects for the business and are on track with our margin objectives after another strong improvement in 2018.

Turning to operating profit. Our adjusted margin of 28.4% was flat at actual rates, up 50 basis points at constant currency. COGS as a percentage of sales was 40 basis points higher at constant currency, primarily due to the continued adverse Respiratory pricing pressures we are seeing within Pharma as well as the decline in Advair and some input cost increases and some specific fourth quarter mix issues. These more than offset significant improvements in Vaccines and Consumer Healthcare.

SG&A increased by 4% in the year as we invested in our recent launches in Vaccines, Respiratory and HIV, partly offsetting this with tight control in non-promotional spending across all 3 businesses. R&D costs were down 2%, reflecting the comparison with the charge for the PRV in 2017 as well as savings from recent portfolio prioritization decisions.

Investment in oncology accelerated in the second half, and we continue to expect overall R&D spending to pick up significantly in 2019. With the TESARO acquisition now closed and consolidating the costs fully, you should expect about half of the operating costs to be for R&D and the rest for commercial, medical and other SG&A.

Royalties were GBP 299 million for the year, down 17%, primarily reflecting the patent expiry of Cialis. And I'd expect 2019 royalties to be at broadly similar levels to 2018.

Moving to the bottom half of the P&L. Net financing costs for the year were GBP 698 million, reflecting higher debt following the acquisition from Novartis of their stake in the consumer joint venture. This was slightly better than the original expectations, benefiting from strong execution on our funding strategy.

For 2019, as we finance TESARO but continue to optimize our funding mix, we expect net financing costs of around GBP 900 million to GBP 950 million. This includes the expected impact of IFRS 16. We'll give you more detail on that before the first quarter results.

On tax, the adjusted rate was at the lower end of our expectations at 19% for the year, and we expect the 2019 rate to also be around 19%. The charge for NCIs was GBP 674 million, down GBP 119 million from 2017 as a result of the Novartis buy-in. We'll update you on the impact on minority interest of the Pfizer joint venture once we have more specificity on the timing of closing. Keep in mind, overall, we expect the deal to be broadly neutral to adjusted EPS in 2019 and accretive to adjusted EPS in the first full year post-closing.

Turning to cash flow. With a focus on driving greater cash discipline, the group made further significant progress this year, resulting in generation of GBP 5.7 billion of free cash flow for 2018. The increase of GBP 2.2 billion was particularly driven by progress on working capital despite the growth in the business, especially in inventory control and stronger collections.

Reductions in CapEx, lower legal costs, higher proceeds from intangible divestments also contributed. There were some phasing benefits but only in the order of GBP 200 million to GBP 300 million. The focus on cash conversion will continue into 2019. But as in previous years, you should expect cash flows to be weighted to the second half. 2019 cash flows will see a step down as the Advair generic flows through and we pay out the rebate payments on pre-generic sales of Advair. This will likely take a few quarters to unwind.

Given the improvements in cash conversion and free cash flow generation across the business over the last couple of years, we remain comfortable that the balance sheet can support our future investment requirements.

In 2019, we now expect adjusted EPS to decline in the range of minus 5% to minus 9% at constant exchange rates. This guidance reflects the expected impact of the recently announced transactions as well as the approval of a substitutable generic competitor to Advair.

On top of the constant exchange rate performance, if exchange rates remain at 31st January closing rates for the rest of the year, we would expect a positive impact on sales growth of less than 1% and around a 1% positive impact to adjusted EPS growth.

When we announced the acquisition of TESARO, we said that we still expect to deliver on our 2020 outlooks. Nothing has changed our post-TESARO view, and we continue to expect to deliver a percentage CAGR and adjusted EPS over the 5-year period to 2020, at 2015 exchange rates, at the bottom end of the range we previously indicated of mid- to high single digits.

So to conclude, a strong year of operational performance in 2018 with good progress from our new products and better operating margins. I'm particularly pleased with the improved free cash flow delivery after significant focus on this across the company. We're well prepared for generic Advair, the business is showing good momentum, and with the important strategic moves we have made recently now in place, we're confident in the outlook for GSK.

And with that, I'll hand you to Hal.

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [5]

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Thank you, Simon. At Q2, I set out our new R&D approach based on science x technology x culture. We made a commitment at that time to being much more transparent with you about the decisions we were taking and the progress we were making through regular updates. This is the first of those updates, and I'm very pleased with the advances we made to the portfolio in the last 6 months.

I believe our pipeline is now more focused on our most promising assets, allowing us to accelerate them while terminate those which have less potential. Eight assets have made encouraging progress, which I will describe in a moment.

Overall, we have significantly strengthened our oncology portfolio. Since Q2, we have added 3 new internally generated assets to the portfolio and, through business development, added 5: 4 from the TESARO acquisition and 1 from the strategic alliance with Merck to jointly develop and commercialize M7824, resulting in a doubling of the size of our oncology clinical-stage portfolio from 8 to 16.

On culture, I've made a number of key leadership appointments, most recently with Chris Corsico joining us from Boehringer Ingelheim to head up our newly created development organization, as well as introducing a new, more robust governance model, which as of October 1 is up and running and, I think, going very well.

In addition, we're in the process of redesigning the discovery performance units. And we'll establish a much smaller number of research units aligned with our focus on immunology and genetically validated targets. This is all helping us to create a culture of smart decision-making, single point of accountability and, importantly, focus.

Given the limited amount of time I have today, I'm going to focus on our pipeline and defer talking about the progress we have made on technology until the next Q2 update. But I could come back to this in the Q&A if you have any questions.

At Q2, I showed you this slide of our portfolio. At the time, we had 43 potential medicines in the clinic, 27 of which were immunomodulators. I would now like to talk you through the progress we have made in the last 6 months.

We've been focused on accelerating and strengthening our pipeline through disciplined decision-making and taking smart risks. At Q2, I signaled that there were some programs I was optimistic about and others I had less confidence in. Based on data, particularly interim analyses, we have been rigorous in terminating investments of the less-promising candidates and have now stopped 7 programs since Q2. These terminations have freed up resources to reinvest elsewhere in the pipeline, where we see more potential for developing transformational medicines. As I said, 8 assets have made encouraging progress, and I'd like to go over them now. I'd just like to mention that 4 of the assets, which are highlighted here with blue boxes, I have slides in subsequent minutes, which I'll go into more detail on.

First, tafenoquine was approved. And its 2 positive Phase III studies, DETECTIVE and GATHER, were recently published in the New England Journal of Medicine. Dolutegravir plus lamivudine, our second 2-drug regimen for HIV patients, was subsequently filed for approval, and we expect to receive that in the first half of 2019. With regards to cabotegravir plus rilpivirine, our long-acting injectable therapy for HIV patients, we've announced positive headline data for both the FLAIR and ATLAS studies and expect to present this data as well in the first half of 2019.

We also made one of the few major advances in TB vaccine development in nearly 100 years. A preliminary readout from our ongoing Phase II trial was published in September in the New England Journal of Medicine, showing the vaccine demonstrated a 54% reduction in the risk that TB-infected adults would develop active disease.

I'm pleased to report that our antibody to GM-CSF is progressing well, and we're moving into Phase III. I'll expand on this, as I've mentioned, a little bit later. Our BCMA program has advanced significantly. And at the Q2 call that we had 6 months ago, we -- I mentioned that we had initiated the pivotal study. I'm pleased to report that we actually have completed that study ahead of schedule.

We continue to be excited about our ICOS agonist. We have encouraging data in-house in combination with Keytruda and expect to share this at a conference probably second half of this year. We have also started 2 new clinical studies, one in combination with CTLA-4 in solid tumors as well as a platform study in lung cancer.

Lastly but equally important is NY-ESO cell therapy. Cell therapies are an important part of our strategy, and we're making good progress accelerating our first program in solid tumors. We hope to start a pivotal study for NY-ESO in synovial sarcoma next year, moving up our anticipated launch date by almost a year.

We are also evaluating activity in other tumor types, including non-small cell lung cancer with a more sensitive assay, our RT-PCR assay, as well as in multiple myeloma patients. We anticipate treating our first patient early this year.

I also talked at Q2 about how we would leverage business development to optimize our portfolio. And as you know, we have made a lot of progress here. The TESARO acquisition has added 4 new clinical immunomodulatory medicines to our portfolio and significantly strengthened our position in oncology. Also, yesterday, we announced the strategic alliance with Merck to jointly develop the TGF-ß trap anti-PD-1 bifunctional protein, called M7824, for various tumor types.

In addition, since Q2, we have also had 4 internal molecules advance into Phase I, 3 of which were in oncology.

So in summary, here's the portfolio as it currently stands. You can see, we have increased the number of new molecular entities in development to 46 from 43, and now 33 of which target the immune system. And more importantly, we believe that the quality of the portfolio is much improved.

This is a view of our oncology portfolio, which is clearly much more robust with twice the number of assets in the clinic than we had back in July. We now also have a number of molecules with diverse mechanisms of action, providing an opportunity for many innovative combination studies. And importantly, we are expecting to see 3 pivotal readouts this year, potentially resulting in new approvals in 2020. Those are the anti-BCMA ADC for fourth-line multiple myeloma: TSR-042, the anti-PD-1 in endometrial cancer; and the PRIMA study for Zejula in the frontline maintenance setting for patients with ovarian cancer.

I'm going to take a few minutes now to talk about the strategic alliance we announced yesterday with Merck to codevelop their first-in-class bifunctional fusion protein. Despite recent advances with checkpoint inhibition, many patients still do not respond to the anti-PD-1/anti-PD-L1 class of therapeutics. TGF-ß is believed to create a suppressive tumor microenvironment and has been implicated as a resistance mechanism to the treatment of PD-L1 or PD-1 blockade.

M7824 is the first-in-class bifunctional fusion protein designed to simultaneously block the PD-L1 and the TGF-ß pathways. It's a fully humanized IgG1 monoclonal antibody against human PD-L1 fused to the extracellular domain of the human TGF-ß receptor II, which functions as a cytokine trap for the 3 ligands, TGF-ß I through III. Preclinical data have demonstrated superior efficacy of this molecule versus PD-L1 monotherapy as well as benefit with chemotherapy and particularly with radiation therapy in multiple in vivo mirroring tumor models.

M7824 has been tested in 14 Phase Ib signal-seeking studies across more than 700 patients and has shown clinical activity across multiple hard-to-treat cancers, including non-small cell lung cancer, HPV-associated cancers, biliary tract cancer and gastric cancer.

Together with Merck, we will explore the potential of this novel asset alone and in various combinations, with the 4 -- 8 immuno-oncology clinical development studies ongoing or expected to commence in 2019. Importantly, we have seen encouraging clinical data in second-line non-small cell lung cancer patients. And based on this, a randomized controlled Phase II trial was recently initiated to investigate M7824 compared with pembrolizumab as a first-line treatment specifically in patients with high PD-L1 expression, where the data to date is most compelling.

Not only does this strengthen our immuno-oncology portfolio, but I'm excited by the potential synergy with our existing assets, including our ICOS agonist, the TLR4 molecule and many of the recently acquired molecules from TESARO. We believe that the M7824's unique design, supported by alliance between 2 very complementary companies, will further accelerate our oncology strategy. I'm truly excited about the potential impact this first-in-class immunotherapy could have on the lives of many cancer patients.

Moving to TESARO. We -- the TESARO acquisition, which we announced back in December and completed a few weeks ago, is really a significant step forward for both our oncology pipeline and our commercial capabilities. I've personally been working very closely with Mary Lynne Hedley, the President and COO of TESARO, and have met with her team. And I'm even more convinced than ever that this is a great company with great science, great people and a great culture.

While TESARO brings more than just one asset, I want to spend some time reiterating the opportunity that we see for Zejula, which was the first PARP inhibitor to achieve a broad label for non-BRCA ovarian cancer patients. PARP inhibitors have really transformed the course of disease for women with ovarian cancer. As we dig deeper into the science, I remain convinced that the PARP class is underappreciated, and our commitment to functional genomics and other technologies will enable us to use Zejula to help patients beyond those who have the BRCA mutation, particularly those patients who have a defect in the genetic repair mechanisms called homologous recombination or so-called HRD-positive patients, which might represent, as you can see on the right side of the slide, as many as 50% of all ovarian cancer patients.

The reason we're so optimistic that patients with the so-called wild type or normal BRCA is shown here. TESARO's NOVA study explored 3 types of patients in a stratified manner: patients with the gBRCA mutation, those patients who were wild type for gBRCA, that is they have the normal gBRCA gene but who had evidence of homologous recombination deficiencies, as measured by the Myriad test, the so-called HRD-positive patients; and the third group who were BRCA wild type and who did not test positive for having HRD.

As you can see in these 4 Kaplan-Meier groups here, the benefit in the wild type but HRD-positive patients was almost as impressive as the benefit in those patients with the gBRCA mutation. These data give us optimism for seeing a benefit of Zejula in patients who do not have the BRCA mutation but are HRD-positive in the frontline setting. The PRIMA study, which is expected to read out at the end of this year, will definitively answer this question for us and could result in Zejula being approved as the first monotherapy beyond the women who simply have the BRCA mutation.

Now turning to GSK'916 or our BCMA ADC. This is a great example of how we're putting into action what we committed to at the Q2 call. When I spoke to you in July, we had just started the fourth-line pivotal study DREAMM-2. Remarkably, we will be able to fully enroll the study within about 3 months ahead of plan, and we expect to get the data in the second half of this year to support a file by the end of 2019.

Very importantly, we now also have seen updated PFS data from the DREAMM-1 fourth-line monotherapy study. We'd initially estimated a PFS of 7.9 months and presented that data at ASH in 2017. Now with further follow-up, our updated PFS has increased to 12 months. We expect this data to be published in a leading journal very soon. Of course, this is based on a very small number of patients, but nonetheless, very encouraging information.

Also since our last update, we initiated DREAMM-6, which is a combination Phase I/II study that will enable the second-line pivotal study, DREAMM-7, to start this year. All together now, we have more than tripled the number of patients treated since July, reaching almost 300 patients by the end of January, this past January.

In addition, by taking this more focused approach to development and prioritizing our investments and resources behind BCMA, this year, we will start 4 pivotal studies, DREAMM-3, -7, -8, -9, in the fourth-line, second-line and frontline settings. We know multiple myeloma is a competitive space, but it is also an area with significant unmet need remaining and where speed to market really matters to patients who are in need of new therapies. We continue to expect to be the first BCMA-targeting agent to reach the market due to our accelerated development plan.

Moving to GSK'165, a human monoclonal antibody antagonist of GM-CSF, a pro-inflammatory cytokine that is increasingly recognized to play a role in the mediation of pain in a number of diseases, including rheumatoid arthritis. There remains significant unmet need for patients with rheumatoid arthritis to obtain better responses and, particularly, better control of their pain. We have seen encouraging results with 165 in RA showing clinical responses, particularly in improving pain. These were presented at the ACR last year, and we hosted a call at that time that included an external expert for his thoughts.

Following meetings with regulators, we have nearly finalized an innovative Phase III program that we expect we can start in the second half of this year to support, hopefully, a filing in 2023. The clinical program includes patients who have failed methotrexate and targeted therapies and compares GSK'165 against both the JAK inhibitor as well as an anti-IL-6. We believe that this study design; the primary endpoint chosen, that is ACR 20 at 12 weeks compared to placebo; and the optimized dosing regimen will result in a successful program and potentially an even further increase in efficacy.

So in summary, while there is still much more to be done, we've made a lot of progress over the past 6 months. Having completed the acquisition of TESARO in January, we will continue to invest behind Zejula. We look forward to getting the PRIMA data in the frontline maintenance setting at the end of 2019. We'll also be looking at how we can optimize TSR-042, the PD-1 inhibitor we acquired from TESARO, which we expect to get pivotal data on in patients with endometrial cancer to support a filing in the second half of this year. I look forward to discussing and focusing on this important asset at our next update. We will aggressively develop our BCMA ADC and as well as our other oncology pipeline molecules, including the TGF-ß trap with our newest collaborator, Merck.

In 2019, we will continue to focus on optimizing the pipeline by investing in other promising areas of medicine, including the anticipated approval for dolutegravir plus lamivudine in HIV and filings for our long-acting HIV therapy and fostemsavir for highly treatment-experienced patients. We will continue to focus on technologies that will enable the pipeline to deliver transformative medicines. And of course, we will continue to drive the culture change that is necessary to improve our R&D productivity.

We are going to be generating a lot of data this year. There is a full list of all of that data in the appendix, but on the right-hand side of this slide, you can see the key readouts that I think you should focus on.

Thank you for your attention, and I look forward to updating you again at our Q2 results and answering any questions you might have in the Q&A. And with that, I'll hand it back to Emma.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [6]

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Thank you very much, Hal. So in summary, 2018 has been a year of significant progress in terms of operational performance, reshaping of the portfolio and development of the pipeline. In 2019, we will be building on this with continued execution of our priorities of innovation, performance and trust, with an ongoing focus on the pipeline to provide a clear pathway to the creation of 2 exceptional businesses. And across GSK worldwide, we are all very committed to this tremendous opportunity to create substantial value for shareholders, patients and consumers.

So with that, operator, I think a bit ahead of our 45-minutes promise, the team is ready to take questions now.

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Questions and Answers

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Operator [1]

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Your first question comes from Richard Parkes from Deutsche Bank.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [2]

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This first one's just for Hal on the M7824 deal. Obviously, since the disappointment with zido, it seems like the industry has moved away from -- or trying to move away from making big decisions based on signals in single trials with the next-generation I-O agents. Obviously, with M7824, it looks like Glaxo is not necessarily following that trend given that's being advanced into pivotal studies. I just wondered if you could help us understand, you've obviously seen a lot more data, what makes you confident to do that? Or is this just a calculated risk? The second question is on the outlook for HIV. When I look at NBRx volumes in the U.S., it looked like they've declined on an absolute basis by 20% to 30% since the launch of Biktarvy. Obviously, the drug's only just launching now in Europe. I wondered if you could help us understand whether we should expect more or less impact to European new patient share as Biktarvy launches.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [3]

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Thanks very much, Richard. So we'll come to Hal first and then to David. And just to say, aside from the scientific commentary that Hal will add, just a reminder that this -- the construction of this deal is very heavily stage gated for GSK, and that will be based on data. But Hal, perhaps you'd like to comment on the question first.

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [4]

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Yes. Thank you, Richard. Well, let me walk you through why we're pretty convinced this is a smart risk to take. When you look at what advances have been made in cancer therapeutics by inhibiting PD-1 and PD-L1, it's really been very transformational. But it's important to remember that the vast majority, actually about 70%, 75% of the patients, either don't benefit or will relapse after therapy. And so there's a clear need to find new agents, either given in combination with or that can compete with these agents to provide patients with greater options. When you look at this asset, it's very unique. It not only combines the IgG backbone of a PD-L1 inhibitor but has this other component that allows it to be basically a receptor trap to bind the 3 isoforms of the TGF-ß ligands. And the preclinical data is pretty compelling here in terms of TGF-ß playing a role in tumor progression and particularly PD-1, PD-L1 resistance at the tumor level because of the suppressive effects that TGF-ß has been seeing in the tumor microenvironment. And so we think this very unique first-in-class sort of novel mechanism agent was very, very interesting. Now you combine that with a very unique situation, which is that they had for us to review almost 700 patients treated in various Phase I setting for signal seeking and, in fact, in that finding 4 different diseases that I mentioned earlier where there's clear evidence of activity. So based on that preclinical biology and the data generated in those 4 diseases and particularly the data generated in the second-line lung setting, where the response rates really did appear to be superior to those historically seen with PD-1 and similar PD-1 inhibition in similar settings. So you're right that we don't have randomized controlled trials. But it's that data that was exciting enough to initiate the Phase II randomized controlled trial against pembro. And as Emma said, the deal is structured in a way that gives us confidence that this was a smart risk to take, and hopefully for patients, this winds up being a superior therapy.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [5]

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Thanks very much, Hal. And so David, some specific questions around the dynamics of NBRx. I mean, I'd just also like to repeat that we do expect our ViiV business, our HIV business to continue to be a key growth driver for GSK, primarily because of the bet that we are making on 2-drug regimens, and we're very excited about all the -- hopefully both approvals and further data that's going to come through this year. But David, over to you.

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David Simon Redfern, GlaxoSmithKline plc - Chief Strategy Officer [6]

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Yes, thanks, Richard. Yes, as Emma and Simon said, we do expect ViiV to be a meaningful growth driver in 2019 and going forward, although the dynamics of that growth, I think, will vary a little bit across the world. So in the U.S., the Tivicay and Triumeq business is basically flat over the last few months. We are getting some penetration with Tivicay, particularly into new patients, but there is some switching of both products. So overall, we're broadly flat at around 35,000, 36,000 scripts a week, and our share is roughly just over 27% or around 27% of the core and SDR market. And NBRx is also pretty flat. So going forward in the U.S., the growth will come from ongoing momentum with Juluca. And we've actually seen a pretty decent pickup in Juluca in the last quarter, in part, I think, driven by quite a favorable reaction to the 2-year SWORD data that was presented. So Juluca beginning to build quite a strong momentum, and of course, importantly, the launch, once we get approval of dolutegravir/lamivudine, which we see as the key growth driver going forward. I think away from the U.S., in the European and international businesses, we expect the growth actually to be more broad-based across the whole dolutegravir portfolio, really building on the momentum we've seen this year. So the European business, dolutegravir, was up 17% and growing very nicely; and international business, up 35%, very strong performances in places like Brazil, Japan and so forth. And also, just remember that this year, 2018, we had a reasonable drag predominantly from the genericization, ongoing genericization of Kivexa/Epzicom, it's about GBP 150 million. And that will be less going forward.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [7]

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Thanks, David.

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Operator [8]

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The next question comes from the line of Tim Anderson from Wolfe.

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Timothy Minton Anderson, Wolfe Research, LLC - MD of Equity Research [9]

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Going back to the M7824, just a couple of questions. When do you expect that you'll have the first registrational data with that compound? I'm assuming that the Phase II study that you referenced that's randomized is not registrational. And also, can you talk about dose-limiting toxicities with the compound? And then second question on dolutegravir. I think in March, we're supposed to get the updated results from the Tsepamo study looking at the possible side effect of neural tube defects. I'm wondering if you can tell us any update on what you think that may show or if there's anything new to share on that.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [10]

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David, briefly on neural tube updates, and then we'll go back to Hal.

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David Simon Redfern, GlaxoSmithKline plc - Chief Strategy Officer [11]

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Yes. So as you say, Tim, that study is being run on to trying to get to the bottom of this issue. We obviously need to wait and see when that data comes out. It's a study not run by us but actually run by the NIH. All I can say at this point, as time has gone on, we have seen, I think, no new cases of neural tube defects and obviously more babies being born. So it looks less and less of a meaningful signal. But obviously, we need to see the definitive data when it comes out.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [12]

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Thanks. Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [13]

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Yes. Thanks, Tim. First, we're not really giving time lines on when we will have data that can be submitted for registration. That said, let me be clear that registrational studies in oncology can sometimes take different forms, and depending on the efficacy observed, there's always opportunities to think through novel strategies.

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [14]

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Yes. And I would just add, Tim, if you take a step back and look at the scale of the opportunity, I mean, pembro reported 7 billion, Opdivo was close to 7 billion, I think in the high 6s. So in terms of a relatively modest down payment, this gives us an opportunity potentially to disrupt this market.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [15]

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Thanks. Next question -- oh, do you want to add another comment, Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [16]

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Oh, I'm sorry, Emma. I just didn't get a chance to answer the dose-limiting tox part of the question.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [17]

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Go ahead.

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [18]

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I think the profile from an immuno-oncology perspective, we don't see any new immune-related side effects. There is the skin findings with acanthosis, the -- some skin disorders that we think are very manageable. But overall, we don't see that being a limiting force in the development program.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [19]

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Thanks. Thanks, Tim.

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Operator [20]

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Your next question is from the line of Emmanuel Papadakis of Barclays.

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Emmanuel Douglas Papadakis, Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research [21]

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It's Emmanuel Papadakis from Barclays. Maybe one on Shingrix. I mean, you're kind enough to provide a little more clarity on, I think, "a significant capacity expansion in 2019." You've previously alluded to some uncertainty as to the pace of step-up to that mid-high-teens target, and I think you also now specified it will be high teens. If you could perhaps give us a little bit of further clarity on what kind of volume expansion we should expect in 2019, that should be very well received. Also, any kind of comment on implications for margins? It looks like you're already at that mid-30s target. Any thoughts on that? And then maybe just a quick one on Respiratory. You've previously alluded to potential spillover, so to speak, of Advair generic pricing impact in the broader space, particularly for Breo. Could you just let us know what's embedded in your current guidance in terms of broader pricing risk for the Ellipta franchise?

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [22]

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Yes. I'll come to Simon in a minute. Just give you and make a few comments on guidance. There's no new update to the Shingrix margins. And obviously, the guidance range at the moment is about the impact of an Advair generic across ICS/LABA, which we've always flagged. And we still need to know the pricing and the supply right there, but Simon can make some more comments on those. And just to add on Shingrix capacity build. First of all, we're obviously absolutely delighted with the launch trajectory of this vaccine and seeing it as being a meaningful contributor to growth for hopefully years ahead as we pursue not only fully serving the markets we're in, but also eventually geographic expansion. We were also very pleased to mobilize very effectively across our supply chain, both in Europe and the U.S., to increase supply through the second half of last year, and then so are kind of confirming high-teens doses over the next 2 to 3 years. And you will have heard Simon mention, so I shall reiterate, we're looking to continue the momentum that we were able to establish in the second half, but we're not going to guide specifically for the number for '19. Obviously, we'll update you more as the year goes on. Simon, do you want to add on?

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [23]

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Yes. I think on the Respiratory side, I mean, we -- my remarks focused on Breo because that's where we -- the ICS/LABA category is where we see the main pressure points. And I know you've asked us a number of times on the impact on some of the other products. Clearly, there is a broader pricing dynamic that the respiratory sector is dealing with. But I think the particular Advair knock-on will just -- will be largely restricted to ICS/LABA.

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Operator [24]

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Your next question is from Graham Parry of Bank of America.

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Graham Glyn Charles Parry, BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research [25]

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Firstly, I'd say farewell to Simon, and thanks for working with you. And also welcome to Iain. And then first question on guidance. So could you just help us understand the assumptions baked into guidance for the rate of Advair generic decline. I think the sense is this is running at about 60% at the moment, so broadly in line with your internal plan and guidance. And also, the timing of the Pfizer consumer deal that's assumed in the guidance, I think you said second half '19. You're assuming a full second half of that deal being in action and some dilution from it. And then secondly, if you could help us to understand your views on the HHS rebate safe harbor rule proposal that came out last week, GSK's potential exposure to this and what comments GSK would be submitting back to the administration, either individually or via PhRMA.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [26]

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Thanks very much. So I'll come to Simon in a moment on the guidance questions and assumptions. I mean, broadly speaking, in terms of what was said about safe harbor, we support the administration's approach that's going -- which is about bringing more transparency to the kind of pricing value chain and continue to encourage thereby responsible pricing and, most importantly, passing on the discounts that manufacturers provide to patients so that out-of-pocket can be impacted. Obviously, we're digesting what's come through, and we're looking to collaborate as ever with the administration on participating in next steps. But it's -- we are broadly supportive. So Simon, do you want to comment on the guidance question?

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [27]

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Yes. Clearly, at this point, there's a pretty wide range of outcomes. But if you look at the various analogues, then you would expect to see most of the decline to the endpoint we previously indicated during the course of 2019, given we're sitting at the beginning of February. And I think as we've also said before, I think unlike a sort of conventional tablet-type generic, you would -- which would normally lose about 80% in the first year, you would probably expect less than that. But it depends very heavily on what supply they've got, and we don't know that yet, and we won't know really until they start to signal. But I'll just remind you, we said back in 2015, we would expect to end 2020 with GBP 200 million to GBP 300 million of sales of Advair. And if you assume most of it goes in 2019, hopefully, that gives you a reasonable range. Around Consumer, I think you should assume later in the second half rather than earlier in the second half. And that's why we're expecting a broadly neutral impact in '19 as we gear up to the first full year being 2020 and where you'll see the impact from the synergies beginning to kick in. So we don't know precisely yet. There's quite a complex regulatory process to go through, but it will be towards the end of the year. But...

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [28]

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We'll update you more as we go. Thanks, Simon. Thanks, Graham.

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Operator [29]

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Your next question comes from the line of Keyur Parekh from Goldman Sachs.

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Two questions, please. First, on HIV, Emma, I think you said you continue to see it being a long-term growth driver for the company. More specifically, as you've thought about 2019 guidance, does it incorporate any HIV growth for 2019? And if so, can you give us a flavor for what you expect that growth to be? And then secondly, for Hal, on the ICOS compound, your appendix slide shows that you've kind of got the data for the pembro combination in-house for the combination therapy. Can you give us a flavor for further data as I'm surprised you haven't -- if it's positive, why it hasn't been moved to Phase III as yet? And when do we actually see the data from that?

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [31]

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Okay, and thanks. So I'll come to Hal in a second. Just to reiterate, we do think that HIV is a growth driver for the company. You've seen a lot of activity from us in terms of 2-drug regimens, and a lot more to happen this year. That is where we expect the growth to come from, also to reiterate David's comments. And we do expect to see growth in '19. Obviously, that's going to be at a slower rate because the business is bigger and it's got a lot more competitive near term. But we're looking forward to that 3TC, we hope, approval and building that portfolio of 2-drug regimens looking forward. Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [32]

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Yes. Thanks, Keyur. So as you hear me say, I think we have encouraging clinical data, and we'll be presenting that at a meeting in likely the second half of this year. We continue to enroll patients in the study at a nice clip. And we'll be learning more about which indications we think are most appropriate to pursue and how to combine it with pembro and potentially other agents to optimize the impact it has on patients.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [33]

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Thank you.

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Operator [34]

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Your next question is from James Gordon of JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [35]

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The question is actually on TGF-ß. It's just, where is the company or where is Hal most excited about the prospects for the product? So is it in patients where PD-1 therapies really work well, and this is going to work even better, so a synergy angle? In that case, you are bullish about the head-to-head with Keytruda in PD-L1 high patients. Or is the excitement about using it in a broader population where PD-1 monotherapy is less successful, and this could sensitize? And is that why the [PHI regimen in] lung milestone, you're not yet committed to paying that because you're seeing lots of risk around actually showing you're better in high PD-L1 patients, and the opportunity is really about going broader but not necessarily being better?

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [36]

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Thanks, James. Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [37]

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Yes. Thanks, James. Well, I think that with these kinds of molecules, you have to really let the data tell you how to develop it. And the data to date suggest that the response rates in the second-line lung cancer setting were better than historically seen with pembro. And that gives us -- and particularly in the PD-L1 high. So the design of the program is, as you say, the latter example, where we're looking to go head-to-head in the PD-L1 high because we believe that the mechanism is that for -- because this molecule -- and it's important to remember this, the molecule has the PD-L1 backbone, so it can work like a PD-1 inhibitor. But at the same time, the PD-L1 -- because PD-L1 is expressed on tumor cells, this actually enables the combined trap PD-L1 construct to be targeted to the cancer cell. So when the cells become resistant through TGF-ß, we think that this will prevent that by inhibiting the TGF-ß locally. So we will work where the potentially PD-1/PD-L1 work, but be more effective by both having the TGF-ß there as well as preventing the resistance. Now of course, that's all preclinical and hypothesis. But that's what the data to date would suggest, is that we can actually work where PD-L work -- PD-L1 inhibitors or PD-1 inhibitors work, but better because of avoiding the resistance mechanism that appears to emerge. Maybe as we get more data, we'll find that it can expand even further beyond that. And that may be what we see in some of the other indications where the activity does seem to be in places where PD-1 inhibition or PD-L1 inhibition hasn't previously been very robust. So it's possible that both opportunities are pursued, but the lung cancer opportunity is one that -- as I described.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [38]

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Thank you. Thanks, James.

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Operator [39]

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Our next question is from Mark Purcell from Morgan Stanley.

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Mark Douglas Purcell, Morgan Stanley, Research Division - Equity Analyst [40]

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On HIV, there's a lot of focus on NBRx, but that's a market that's only about 7% of total prescriptions. So I'd be interested in any comments you can give in terms of how to make that population more dynamic by expanding the amount of switching that's going on in the marketplace with your dual strategy where you could ultimately get much significant -- much more significant market share gains going forward. That's the first question. And then secondly, on the 165 asset, GM-CSF. When you spoke last, Hal, you discussed a bit of uncertainty around the dosing of that asset and how to optimally dose that. It sounds like there's been some resolution or there'll be work over the next few months to resolve those questions. So I'd be very interested to understand how you're dosing it in pivotals and the discussions that you've had with regulators around dose. Would you give us some clarity there? And then just sneaking in a very quick one. On the Merck relationship on TGF-ß, I'm just wondering how broad that can become going forward given that the ATM/ATR assets would fit very nicely with your PARP strategy and moving ultimately into earlier stages of cancer.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [41]

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Thanks very much, Mark. And we'll let Hal pick up your 2 and 3 quarter questions. But first, over to David, with this sort of slight caveat from me, that there's only so much we're going to declare on our competitive approach to driving switch. But David?

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David Simon Redfern, GlaxoSmithKline plc - Chief Strategy Officer [42]

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Yes. Thanks, Mark. Well, as we've said, we -- and we've said this many times, we see the major part of our growth coming from 2-drug regimens, and I think in particular, hopefully, starting this year, dolutegravir/lamivudine, which is absolutely an opportunity in naïve patients. And that's where the GEMINI data was studied, but I think also in switch patients as well. So let me just make a few comments on that. I mean, I don't need to go through the 48-week GEMINI data. You've seen that. I think following the presentation at IAS, we've actually had a pretty strong reaction from HCPs in the U.S. and around the world. In general, it exceeded their expectations and, I think, particularly in 2 areas. The fact that the efficacy was maintained and was so strong at the higher viral loads has definitely been important, and the fact that we saw no resistance at all at 48 weeks has also resonated. And so there's a pretty active debate going on with HCPs thinking about exactly which patients they should prescribe it in. I think there's an important point here, which is the 48-week is really just the start of the dolutegravir/lamivudine story. We'll run the GEMINI studies on through 2 years and then 3 years. And we've seen from the Juluca update, after SWORD 100, that 2-year data is important. So that data in the middle of the year, I think, will be important. And we are also investing now very heavily in switch studies, as Emma showed on the slide, the TANGO study and the SALSA study, and in a whole range of further studies around overall patient quality of life and a whole lot of technicalities around DNA archiving and getting really to the bottom of resistance. So there's a lot going on there. And whilst this is a conservative market and it will take time to build the story, we are ever more confident in the potential of 2-drug regimes, and particularly dolutegravir/lamivudine.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [43]

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Thanks, David. Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [44]

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Thank you, Mark, for 2 thoughtful questions. First, I just want to -- we're not going to really disclose discussions we've had with regulators. But in the spirit of transparency, I wanted to show you what the design will likely evolve to and that we've made the commitment to move to Phase III. As you rightly point out, we highlighted 2 or 3 aspects of the Phase II program that we thought could be optimized. The first was to make sure that our primary endpoint in the study is ACR 20 and that that's done in the setting of compared to placebo. So that's the new design. It's kind of harder to see, it's a little smaller on the slide, but that's the primary endpoint. We also have on the left side that the 180-milligram every-other-week dose that was used in the Phase II study appeared between weeks 12 and 24 to be suboptimal. And what we were hoping to do is to design a study that would use something close to that, but on a weekly basis rather than an every-other-week basis. And as you can see in the design now, we have 150 milligrams weekly being given beyond the 12 weeks. So that actually will give us an increased exposure and a higher dose in that period of time when we, in the previous study and Phase II, kind of saw a flattening off of the -- and maybe even a diminution of the treatment effect over that time period. So that's the increased exposure that we were alluding to, hoping to get and, in fact, have designed into it. So that, I think, hopefully answers your question about why we're optimistic about both the design and the dose there. We've had limited, virtually no discussions with Merck regarding their DDR programs, the ATM and ATR, as you mentioned, but to say we find the opportunity to look at medicines that could be synergistic with PARPs in a very interesting way. And there are many that are emerging, and just stay tuned to see how we're going to be approaching that for the future.

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Operator [45]

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Your next question is from Kerry Holford of Exane BNP Paribas.

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Kerry Ann Holford, Exane BNP Paribas, Research Division - Analyst [46]

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Yes, 2 questions for me, please. Firstly, on COGS. You talked about the increased price pressure in Respiratory and now also Established Vaccines. Just the latter there. Is that a new issue for the -- at the end of this year? And can you tell more about this increased input cost that you highlight? Just trying to understand whether that weaker gross margin in Q4 is something that we should expect to continue into 2019 and beyond. And then secondly, on M&A and in-licensing, clearly, we've seen a flurry of recent deals. So I just want to understand your flexibility and your appetite to do more from here. And in the context of some cash constraints here, what is your appetite to do more potential divestments of noncore pharma asset disposals within that Pharma business? We've seen you quite active in Consumer. I wonder if there's more you can do now on the Pharma side.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [47]

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Right, Kerry. So I'll take the second question then I'll ask Simon to comment on the gross margin and COGS dynamics. So first of all, you've -- as you've noticed, we were reasonably busy through the last quarter in terms of our business development. And our #1 focus is to make sure we deliver the value from those deals, be it on the Consumer side or indeed the Pharma side. That said, I was extremely clear in July 2017 that our #1 priority is the strengthening of the pipeline. I'm pleased with the progress, but BD will continue to be a key part of that. And I think the Merck alliance that we announced yesterday is exactly the kind of thing that we want to continue to do, whether it be on assets or technology platforms. And there will be cases of us looking for creative business development. There'll probably also be examples of us looking to out-license things in the portfolio as well. A bit to your secondary comment, which is, will we continue to review the portfolio and making sure we're allocating our capital as intelligently as we possibly can? And yes, we will. But our #1 priority is to extract the value from the various deals that we've done. So with that, Simon?

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [48]

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Yes. Kerry, on COGS, I think as we've talked about for some time, we are seeing some pressure at the gross margin given the pricing environment, particularly in the Pharma business. And we're now seeing some more of that in the established and older part of the Vaccines portfolio, which have a higher degree of exposure to some of the tender business and the Gavi-type contracts. And that was a bit more visible in the back half of last year. But I think those trends will continue. It's one of the reasons why we're putting a lot of focus and effort into restructuring the supply chain to deliver some efficiencies to offset those pressures. I think Q4 specifically, you shouldn't read straight into 2019 because it had a number of specifics in there, particularly the Relenza tender and then some one-off sales of these -- of products that we've already sold. So we are contract manufacturing for third parties, which is a pretty low-margin business, but we delivered quite a heavy load of around that total of GBP 80 million that I referred to. So it was a particular factor in why there was such a sharp step-up in Q4.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [49]

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Thanks, Simon. So I think we have one last question. I really hope it's the last question for Simon.

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Operator [50]

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That question comes from Steve McGarry of HSBC.

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Stephen McGarry, HSBC, Research Division - Analyst [51]

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Apologies, Simon, it's not a financial one.

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [52]

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You're not upsetting me at all.

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Stephen McGarry, HSBC, Research Division - Analyst [53]

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It's on the pipeline. Just on M7824 and head-to-heads in non-small cell lung cancer versus Keytruda. What outcome would encourage you to develop that drug more broadly? Does it have to be better than Keytruda? Or is non-inferior [stroke] equivalent enough? And then following on from that, if you look at elsewhere in the industry, you've got Keytruda in trials in over 900 studies, Opdivo in almost 900 studies, and they consume the majority of R&D at those companies. Although it will be a great problem to have if M7824 was superior to Keytruda, how big could the clinical program and the R&D spend become at that point in time?

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [54]

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Thanks very much, Steve. So I'll hand it on to Hal. I think the main point to underline is your "good problem to have" point. One of the things that Hal has brought in with tremendous discipline, he referred to it when he talked about new governance, is really looking at the efficiency frontier across our R&D spend and the assets that we want to bet on and where we can get the biggest kind of returns. And so we are particularly disciplined about that. But you also remember that Simon said in his outlook for '19 that we do expect a meaningful uptick in our R&D spend, whether that be the continuing bet on our internal assets that we've accelerated, like BCMA, or indeed backing the TESARO teams and assets, too. But the key is to make sure we are also dropping off and canceling things that we don't think come high enough up that efficiency curve. So Hal laid out his "what's in, what's out, what's accelerating, what's adding" chart today. And that's something that we will, each 6 months, make sure we update you on to see what the progress is. So Hal, do you want to come back on the 7824 question?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [55]

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Yes. Thanks, Steve. I think I'll turn it over to Simon.

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Simon P. Dingemans, GlaxoSmithKline plc - CFO & Executive Director [56]

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It'll be a short answer.

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [57]

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Okay. So let me try to tackle the first one and then sort of reflect on the second one. The -- I think the study is designed as a superiority trial, just to be clear, in Phase II. Maybe your point is, if we don't achieve superiority, would there be an opportunity to move forward with something that had similar effects? I'd say 2 things. First, one thing you have to be careful about in these Phase II studies is they're usually powered, and the primary endpoints are usually on response rate, which doesn't always track to PFS and OS. And we've seen that with I-O agents in the past for a number of reasons. So I think that one has to both consider the effect on response rates but also look at the data as it relates to PFS and OS, although it will be very underpowered. But I want to point out that the philosophy, the sort of vision for our immuno-oncology group is to really develop transformational medicine. So I think that our focus is going to be on having benefit beyond Keytruda. It's a wonderful drug. It's done transformative things for patients. And we think we can do better. And this is one of what we believe are many smart bets we're taking to see if we can have superior therapies for patients with lung cancers and others. How big is big, and how big to go? Really, it's all dependent on the data. And I really think that we have a number of programs where you could ask the same questions. Should the data read out in a very profoundly positive way, they could result in lots of opportunities for us to do development and patients to benefit. But these are -- as was mentioned, it's high risk, high reward, and that's why we're doing a number of these. We think it's a smart bet, and I really hope this is the problem we have to face. So more as we can unravel data soon.

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Emma Walmsley, GlaxoSmithKline plc - CEO & Director [58]

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Thanks very much, Hal. So with that, I will reiterate my last public thanks to Simon. Thank you all for joining, and we look forward to updating you through the year, a year that we hope will build on the good momentum of '18, be very focused on delivering operational performance, planning for the delivery of value against our various deals and particularly a highly effective integration under Brian's leadership at the Pfizer joint venture and, most of all, updating you on our progress on R&D. Thank you very much.