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Edited Transcript of GSK.L earnings conference call or presentation 1-May-19 1:00pm GMT

Q1 2019 GlaxoSmithKline PLC Earnings Call

Brentford Middlesex May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of GlaxoSmithKline PLC earnings conference call or presentation Wednesday, May 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Simon Redfern

ViiV Healthcare Limited - Chairman

* Emma N. Walmsley

GlaxoSmithKline plc - CEO & Director

* Hal V. Barron

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

* Iain James Mackay

GlaxoSmithKline plc - CFO & Executive Director

* Luke V. Miels

GlaxoSmithKline plc - President of Global Pharmaceuticals

* Roger G. Connor

GlaxoSmithKline plc - President of Global Vaccines

* Sarah Elton-Farr

GlaxoSmithKline plc - Head of IR

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Conference Call Participants

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* Graham Glyn Charles Parry

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

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Laura Sutcliffe

UBS Investment Bank, Research Division - Equity Research Analyst

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Richard J. Parkes

Deutsche Bank AG, Research Division - Director

* Simon P. Baker

Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research

* Stephen Michael Scala

Cowen and Company, LLC, Research Division - MD & Senior Research 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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Good afternoon, ladies and gentlemen, and welcome to the analyst call on the GSK First Quarter 2019 Results. 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 Q1 2019 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; Iain Mackay, Chief Financial Officer; Luke Miels, President, Global Pharmaceuticals; and David Redfern, Chief Strategy Officer and Chairman of ViiV. We have a broader team available for Q&A. (Operator Instructions)

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

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

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Thanks, SEF, and hello, everyone. 2019 is an important year of execution for GSK, and I am pleased we've made good progress this quarter with growth in sales in constant exchange rates across the group and an improved group margin.

Group sales growth of 5% in CER terms reflected an increase in sales in all 3 of our global businesses with a particularly strong performance in Vaccines. The Pharma business continues to shift its portfolio shape well with strong growth from new launches. And although Consumer had a slow quarter, we remain confident and excited about the outlook for this business.

Group adjusted operating margin this quarter was up 1 percentage point on a CER basis. On a total basis, earnings per share were up 42% to 16.8p, and adjusted earnings per share increased 18% to 30.1p. Included within operating margin and EPS, there are a number of matters of note that benefited the quarter, and Iain will address these in just a moment.

Nonetheless, it's a strong start to the year, and we reaffirm our full year guidance. Our free cash flow this quarter was in line with our expectations with GBP 165 million, impacted, as you know, by the launch of generic Advair, the phasing of rebates and higher restructuring charges, all as anticipated. 2 years ago this summer, I laid out my long-term priorities for the whole company, innovation, performance and trust, all to be powered by a necessary culture change. And we've made a strong start to the focused areas for 2019.

We've continued to execute on our new product launches and have demonstrated strong growth with Nucala and Trelegy in Respiratory and most notably in Vaccines with Shingrix.

Strengthening our pipeline is critical to our long-term success, and we've made good progress here, too. In HIV, we've already had good uptake for the first of our 2-drug regimens, Juluca, and we're now seeing the next wave of important innovation come through. Last month, we received U.S. approval for the second of our 2-drug regimens in HIV for Dovato, and we're delighted to make this new treatment option available to treatment-naïve patients.

And just earlier this week, we filed for the U.S. approval of the first long-acting injectable HIV treatment, cabotegravir plus rilpivirine, and we're planning for a potential launch in 2020.

We're generating data to support 3 upcoming oncology filings for BCMA in multiple myeloma, for Zejula in the first-line maintenance therapy of ovarian cancer and for dostarlimab in endometrial cancer. And we were pleased to close the transactions with Merck as well as TESARO, further strengthening our growing oncology pipeline.

In performance, we've continued to drive growth in sales and improvements in our profitability. And we've been working hard on the creation of the consumer health joint venture with Pfizer and expect this transaction to close in the second half of the year. Integration planning is well underway, and we've recently announced the new leadership team for the JV, bringing key talent from both companies into the joint venture, including Brian's counterpart, Chris Slager, the President of Pfizer Consumer Healthcare, who'll be leading our new combined Americas business.

And lastly on trust, we want GSK to continue to lead with a broader contribution to society. The best way to build trust is to innovate, and we're committed to giving you regular and transparent updates on our innovation progress. You're going to hear from Hal again on our progress at Q2 this year.

We also remain committed to our global health agenda. We're embedding our more focused approach to achieve maximum impact. Last week, the World Health Organization initiated its first pilot of our RTS,S malaria vaccine in Malawi, and we've also dosed the first patient in a Phase II study for GSK'656 in patients with drug-sensitive pulmonary tuberculosis.

So in summary, we've had a strong start to an important year of execution with all of our priorities firmly on track. So I'll now hand you over to Iain, who's going to give you more detail on our Q1 financial performance.

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [4]

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Thanks, Emma, and it's a pleasure for me to be speaking to you in my first quarter as CFO of GSK. All the comments I'll make today will be on a constant currency basis except where I specify otherwise, and I will cover both total and adjusted results.

On Slide 8, you will see a summary of the group's results for Q1, which was a strong quarter with 5% revenue growth driven by all 3 businesses. Group total operating profit is up 10% with total earnings per share up 42%. And on an adjusted basis, operating profit was up 9% and adjusted earnings per share up 18%. There are a number of factors benefiting the first quarter operating profit. Notably, strong growth from Shingrix and introduction of authorized generics, favorable inventory adjustments in Vaccines and phasing of our R&D investments. I'll go through these in more detail in a moment.

We delivered GBP 165 million of free cash flow in the quarter, in line with expectations. And please bear in mind that cash flow generation is expected to be weighted towards the second half of the year.

Net debt at the end of Q1 was GBP 27.1 billion. The increase from the end of the year was primarily driven by the GBP 4 billion acquisition of TESARO, along with the adjustment arising from implementation of IFRS 16 of GBP 1.3 billion. On currency, a weaker sterling, particularly against the U.S. dollar and Japanese yen, results in a tailwind of 1% in sales and 4% to adjusted EPS.

Slide 9 summarizes the reconciliation of our total to adjusted results. The main adjusting items in the quarter were charges relating to intangibles resulting from the TESARO acquisition, major restructuring focused on the supply chain, representing noncash charges relating to ramp up of the program we announced in July 2018, and the revaluation of the embedded derivatives in respect of GSK's exposure to movements in Hindustan Unilever share price.

My comments from here onwards are in adjusted results unless stated otherwise.

On the next few slides, we've listed some of the key drivers of each business' performance and I'll also talk you through how we think they will evolve through the balance of the year.

Slide 10 summarizes the Pharmaceutical business where revenues were up 2%. Luke and David will take you through the performance of some of our key products shortly, so I'll just point out a couple of important considerations.

The dolutegravir franchise delivered growth of 7% while the established HIV products represented a decrease in the quarter. Dolutegravir in Europe showed a decline due to price erosion despite strong underlying volume growth as well as the release of government clawback payments in the comparator period.

Looking ahead, we continue to have confidence in the growth outlook of our HIV business. Our 2-drug regimen portfolio is important to our future growth, and we anticipate Dovato will become a key contributor that will take several quarters as we generate more data, gain broad reimbursement and as physicians gain experience with the product.

Respiratory sales were up 25%, reflecting the growth of the Ellipta portfolio with Trelegy delivering a strong performance as well as our injectable therapy Nucala. I want to remind you that from this quarter, we are reporting the Ellipta portfolio and Nucala within the respiratory category and all other respiratory products, including Advair/Seretide, under established products.

Relvar/Breo declined 5% globally and 27% in the U.S. despite good volume growth, reflecting the impact of generic Advair and pricing in the ICS/LABA class, which we've been signaling for some time now. We continue to expect Breo to see a decline in the U.S. in 2019, which will result in a slight global decline for Relvar/Breo despite good growth expectations outside the United States.

Our Established Pharmaceuticals portfolio declined 6% with U.S. Advair sales down 27%, as expected following approval of a generic competitor in February. As we said at Q4, it will take time for inventory levels in the market to adjust and respond to Mylan's supply. There continues to be a number of moving factors, including a successful launch for authorized generic, which is providing a boost to Q1 while the full impact of the Mylan launch has yet to be felt.

Keeping these factors in mind, our outlook for Advair remains unchanged. Ventolin performance was very strong in Q1, also driven by the launch of an authorized generic in January and reflecting a onetime benefit for the initial inventory build. Informed by these factors, we still expect the Pharmaceutical business revenues to see a slight decline in 2019 before returning to growth in 2020, driven by our new products including Zejula, Dovato, Juluca, Trelegy and Nucala.

Turning to the operating margin. We saw a decline in the quarter, mainly driven by an unfavorable product mix due to impact of generic Advair; TESARO dilution, which, in line with previous guidance, we expect to have a sustained impact over the balance of 2019; and R&D spend, where we are increasing spending behind priority assets, which will accelerate through 2019.

Slide 11 gives you a quick overview of Vaccines performance in Q1 with sales up 20%, driven mainly by Shingrix with continued strong demand in the United States. We remain on track to deliver doses in line with guidance previously given with good progress made this quarter.

Q1 revenues of GBP 357 million is a good indicator of our current expectations of our revenue run rate for the remainder of the year. The momentum in Vaccines business continues to give us confidence in the mid- to high single-digit outlook for sales compound annual growth out to 2020.

In Q1, we saw strong improvements in the operating margin driven by enhanced operating leverage, particularly from Shingrix in the U.S. It is, however, worth noting that there was a favorable inventory adjustment in the quarter. As a result, we expect to see Q2 Vaccines operating margins more in line with our medium-term guidance of mid-30s percent, which we continue to expect for 2020.

Turning to Slide 12. Consumer sales grew 1% despite a drag of around 1% from the combined impact of divestments and the phasing out of low-margin contract manufacturing. This was a lower growth quarter as we signaled at Q4, mainly due to a more competitive environment in Europe. We're seeing an improvement in performance driven by our end market response and expect growth to pick up in Q2.

For 2019, we continue to expect reported growth 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 contract manufacturing as we restructure the consumer supply chain. Operating profit improved in Q1, resulting in an operating margin of 21.7%.

It's worth remembering that Q1 is typically a higher-margin quarter due to pre-allergy season selling. Margin improvements were driven by continued manufacturing simplification as well as ongoing strong cost control. We are focused on ensuring we invest in the business to drive innovation and better growth, and we expect to see this come through in the remainder of the year.

Overall, we remain confident in the prospects for the business and are on track to complete the transaction with Pfizer in the second half of the year and the sale of Horlicks to Unilever by the end of the year, subject to regulatory approvals.

On this next slide, we summarize the sales and adjusted operating margin for the group, which I've already covered in some detail.

Moving to the bottom half of the P&L, there are a couple of things I want to draw to your attention. Interest expense increased reflecting higher debt levels, driven mainly by the TESARO acquisition, although there is also an adverse comparison to Q1 2018, which had a one-off accounting adjustment of GBP 20 million to amortization of interest charges. The introduction of IFRS 16 in the quarter also resulted in an increase on the interest expense line of GBP 11 million.

On associates, we had a onetime benefit of GBP 51 million reflecting our increased share of after-tax profits of Innoviva as a result of a nonrecurring tax benefit. And; minorities declined reflecting the comparison with Q1 2018, which was the last full quarter of distributions to Novartis for their share in the previous Consumer Healthcare joint venture.

On free cash flow, we remain focused on driving greater cash discipline across the group and generated GBP 165 million of free cash flow in Q1. The reduction from Q1 2018 mainly reflects the adverse timing of payments for returns and rebates, which we flagged to you at Q4, and an increase in trade receivables on the back of stronger sales, particularly in Vaccines. This was partly offset by improved operating profits and lower contingent consideration payments, which last year included a milestone payment to Novartis.

As previously noted and seen in prior years, the generation of cash flows is expected to be weighted to the second half, and we expect to see a step down as the impact of Advair generic flows through and rebate payments are made on pre-generic sales of Advair.

For your reference, we provided a slide in the appendix bringing together the key points I've made on our outlook for the year. And to summarize, our guidance for 2019, including that with respect to the dividend, remains unchanged. Our financial priorities are improving working capital management and cash generation, allocation of resources to key priorities, including the pipeline and ensuring successful launch of new products and the integration of TESARO, completion of the consumer JV and disposal of the nutrition business.

And with that, I'll hand over to Luke.

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Luke V. Miels, GlaxoSmithKline plc - President of Global Pharmaceuticals [5]

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Thanks, Iain. Good morning and good afternoon. In Pharma and Vaccines, our focus on improved commercial execution continues. We've got a good start to the year, and overall, our growth this year will clearly be impacted by the launch of generic Advair. We are seeing our new products perform strongly.

Respiratory sales were up 25% at constant exchange rates. Pleasingly, Benlysta continues to grow at double-digit rates and Bexsero achieved sales of GBP 156 million, up 14% at constant exchange rates. I'll now go into more detail on some of our newer products.

Starting in Respiratory. Trelegy continues to do well with sales of GBP 87 million in Q1. Globally, launches have had a good start and we now have the only once-daily triple therapy for COPD in 30 countries around the world. 2019 will be an important year for Trelegy as we are executing our launch strategy in Japan and expect to have approval and launch in China later in the year.

We're also looking forward to data from the CAPTAIN study, which, if successful, could enable us to reach patients with asthma that struggle to breathe. In asthma biologics, Nucala remains the market leader in total sales and continues to grow quarter-over-quarter.

On past results calls, we signaled that we needed to improve our commercial execution with Nucala. There's more work to do, but we are seeing some encouraging signs. As you can see from this chart, it looks at an estimated new patient starts across both retail and non-retail segments, and we now have closed the gap with Fasenra in new patients and are now back to a 1:1 position versus our closest competitor.

We track several measures, but new patient starts remain a key target because the IL-5 class as a whole can grow a lot more. We estimate that out of the 340 severe eos patients eligible for a biologic in the U.S., less than 25% have received one today. Finally, we're excited about the opportunity to provide the convenience of home administration later this year. Next slide, please.

I also wanted to highlight Zejula, our market-leading PARP inhibitor for our current maintenance therapy of ovarian cancer in the U.S. In Q1, GSK reported sales of GBP 42 million. But when factoring in Q1 sales prior to the acquisition, sales were at GBP 56 million. Our share of the second-line maintenance for ovarian cancer is stable and we're looking to improve our competitive focus as we integrate our commercial operations.

Zejula is now approved in 35 countries globally with an established presence in the U.S., Germany, the U.K. and Italy. Our teams are now establishing coverage in France and Spain, and we plan to launch with a partner in Hong Kong before the end of the year. PARPs remain an important option for ovarian cancer patients, and we continue to believe the class is underappreciated. As we've mentioned before, evidence suggests that there is a significant opportunity to help many more patients than those with the gBRCA mutation, including those who are HRD-positive and potentially all comers in the first-line maintenance setting. Linked to this, we look forward to getting the prima data, which will give us more information about this opportunity by the end of the year.

Moving on, we're very pleased by the strong execution of Shingrix as we continue to expand and accelerate capacity to deliver the significant step-up in doses in 2019 versus 2018 that we had previously indicated to you. In the U.S., where demand remains high, we're seeing more than 75% of individuals who received their first dose of Shingrix complete the 2-dose series. In terms of who is getting vaccinated, it's consistent. We continue to see more than 1/3 of individuals aged under 65 and also more than 1/3 of those receiving Shingrix have previously been vaccinated with the competitor. And our capacity expansions remain on track.

And now I'll hand it over to David.

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David Simon Redfern, ViiV Healthcare Limited - Chairman [6]

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Thanks, Luke. Good afternoon, and good morning, everyone. During Q1, HIV grew 4% CER to GBP 1.1 billion, which comprised of dolutegravir portfolio of Triumeq, Tivicay and Juluca growing at 7% CER, offset by the anticipated continued decline of the mature portfolio. This was slightly slower growth than in previous quarters due to the significantly larger base of the overall business and the more competitive environment.

In the U.S., we remain encouraged by the performance of Juluca, which is continuing to gain share with growth in 2,200 scripts per week and over 1,800 physicians now prescribing, giving sales of GBP 70 million in the quarter. We have seen a pickup in Juluca since the publication of the 96-week SWORD data in October of last year, and this is now being further endorsed by the positive 148-week data. Around 65% of the Juluca business continues to be sourced from non-dolutegravir combinations. We believe this is a good indicator of growing prescriber confidence in 2-drug regimens, which will now be further reinforced by the launch in the U.S. of Dovato.

The U.S. business grew 3% CER with the dolutegravir portfolio growing by 4%, offset by the decline in the mature portfolio. In a continuation of a trend we have previously flagged, we have seen some switching at the margin of the Triumeq business in particular to both Juluca and competitor STRs and the overall market share of dolutegravir-based regimens in the STR and core agent market has declined slightly and is now around 26.5%.

Tivicay/Descovy remains a popular and broadly stable business, and through the second half of the quarter, we have seen Tivicay MBRX improve. Future growth in the U.S. will come from our 2-drug regimens, Juluca and now Dovato in 2019 with cabotegravir+rilpivirine long-acting providing further momentum, subject to FDA approval from 2020.

In Europe, the dolutegravir volume grew 8% driven by share growth in most markets, but the overall HIV business declined 6% in the quarter. This was driven by 3 factors. Firstly, price cuts over the last few months in France, Spain and Italy. All these price cuts were government mandated. Secondly, a challenging 2018 comparator, which included a one-off clawback release on Triumeq in Q1 last year in Italy. And thirdly, the drag from the mature portfolio. We expect the impact from these factors to reduce to some degree as the year goes on. In the international region, the business continued to grow strongly at 29% CER, including good contributions from Japan and Brazil.

Next slide. Turning to Dovato. We are very pleased by the approval by the FDA in April and the recent positive opinion granted by the CHMP in Europe last week. We will continue to invest in generating further clinical evidence to support Dovato including in broader patient populations. This will include GEMINI 96-week data, which we expect to be available over the summer, and if positive, should help to reinforce confidence in the durability and resistance barrier of Dovato.

The TANGO and then subsequently SALSA switch studies, which we anticipate will enable us to file for a switch indication in the U.S., and also a number of other Phase IIIb/IV studies.

Turning to our long-acting injectable cabotegravir+rilpivirine, we have now filed in the U.S. with the EU submission to come shortly. Later in the year, we will report out the 8-week dosing study. This is important as it would enable patients to reduce their injections from 12 per year to just 6, quite an amazing shift, if successful, from current standard of oral -- daily oral care with 365 tablets taken per year.

And finally, fostemsavir, an important medicine for patients with few treatments options remaining, is on track and we continue to anticipate filing by the end of 2019. Overall, therefore, we continue to have confidence in the growth profile of our HIV business.

With that, I'll hand back to Emma.

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

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Thanks very much, David. So as a reminder, we've seen good progress this quarter on our priorities of innovation, performance and trust, and we are firmly on track with our key areas of focus. It's important that we now build on this momentum for the year. So we're driving improvements in our operating performance. We are progressing our pipeline with a number of major readouts to come. And we're working towards a successful integration with Pfizer once the consumer JV has completed.

Successfully delivering these priorities over the coming years will provide a clear pathway to the creation of 2 great businesses: one focused on Pharma and Vaccines, the other on consumer health.

So we are now joined for our Q&A with Hal on the line and also Brian and Roger. And so with that, operator, the team is now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Keyur Parekh of Goldman Sachs.

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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It's Keyur Parekh from Goldman Sachs. Two questions, please. One for Hal and one for Iain. Hal, I noticed there's a slight delay on the time lines for the BCMA study in the second-line multiple myeloma setting. Just wondering if you could give us some color around that. What's causing this data to go from first half to the second half?

And then, secondly, for Iain. Iain, as I look at Q1 and I look at what's implied for your guidance for the rest of the year, it seems like you're implying margin degradation of somewhere in the region of 250 to 300 basis points across the company. I realized there are several kind of factors that are going to drag margin down. But just help us think about kind of is there upside to that margin number? Where could there be potential for you to take guidance up as you feel more comfortable the rest of the year?

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

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Well, thanks very much, Keyur. And so we'll go first to Hal and then come over to Iain.

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

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Keyur, thanks for the question. As you know, we started a lot of studies to accelerate our anti-BCMA ADC program. And I should point out that our comments for the DREAMM-2 monotherapy study and fourth line remains on track and we're expecting to report out the data at the end -- later this year and file by the end of the year as well. As you point out, we've noted a delay in the pilot study in the second line. And that was really driven by discussions we're having with the FDA and actually decided to modify the protocol to enable us to have more patients and a more robust understanding of the dose response and dose exploration and to enable us to design the DREAMM-7 and 8 studies optimally. That resulted in an increasing number of patients, and so that's going to delay the readout.

But importantly, this is not driven by any adverse safety signals in the studies, just to remove any concern of that. And I should also point out that we're aggressively exploring options to make up for this delay in the dose exploration so that it'll have, hopefully, less impact on the ultimate approval date.

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

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Thanks very much, Hal. And so Iain, following on from our strong start, what about any comments on Keyur's question on the guidance?

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [6]

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Keyur, thanks for your question. In terms of key influences on outlook for the whole year, really no significant change from the guidance we gave at the fourth quarter. Key influences on it, Keyur, the full integration of TESARO, and with that, a significant step-up in R&D expenditures, specifically in that area. More broadly in R&D, continuing to invest behind our priority programs across the pipeline. Another key feature, which we still haven't seen the full impact of it playing through. In fact, really only the initial, is the Advair genericization and the impact obviously of Mylan, but also our own -- the introduction of our own generic Advair in that regard.

And then one other feature, which we have mentioned that sits within the first quarter, which is somewhat flattering to the operating margin, are a couple of inventory adjustments within the Vaccines business specifically, which would most definitely have an impact on the Vaccines operating margin, but also more broadly for the group. So more broadly within that range of down 5% to 9%, notwithstanding a really strong performance from Shingrix in the quarter, guidance for the moment, early as the year is, very much as it is. And it goes without saying, hopefully, that as the year progresses we'll keep you posted on how we see those margins developing.

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Operator [7]

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

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Jo Walton, Crédit Suisse AG, Research Division - MD [8]

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My questions are along the same lines. I wonder, as a new CFO coming in from another industry, whether you could give us your initial thoughts on particularly the cost structures that you see. You have highlighted tight cost control going forward. It's always interesting to hear another person's views of costs in this industry.

And the second question, going back to generic Advair. If we look at the prescription numbers, it does look as if there may be some capacity constraints with the generic because the generic isn't appearing to gain any more share and the share is stabilizing with yourself and your authorized generic. I wonder if you could just tell us what you think is happening in the market because maybe you've got a better sense of that than we have.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [9]

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Jo, so just firstly, on the Advair generic I think and then I will come back to Iain to speak for his first impressions. But it is early days. I don't think it's for us to comment on the supply of Mylan. But at the moment, we think we are completely where we would expect and there's no change to the outlook that we've previously shared in terms of our expectations for Advair overall in 2020. But, Iain, would you like to comment on...

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [10]

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Comment on costs. Yes.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [11]

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First impressions.

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [12]

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First impressions. As you quite rightly point out, Jo, there are both dissimilarities and similarities across the 2 sectors, believe it or not. I think initial observations, there are a number of important, I shouldn't call them restructurings, but refocusing of energy within the firm that I'm seeing the early indications of, and that is to the work that Luke and the team is doing across pharma commercial in terms of really orientating the commercial organization to the key priorities around product launch and building revenues. And through that process seeing some reorganization from that, very effective cost control in that regard.

Equally, as we've talked about before, the work that Hal is doing in the R&D organization about which we talked about in some detail at the midpoint last year also is focused on improving the overall effectiveness, but also the efficiency of the R&D organization.

So what I see initially is a strong focus in cost management across the organization, whether it's in the SG&A areas, whether it's specifically within R&D, whether it's within the supply chain across Vaccines, Pharma and very notably within the Consumer Healthcare space as well. So there -- I think my first impression is there's a very strong focus on improving the overall efficiency and effectiveness and margins of the organization with a broad range of activities across really every line and cost category across the P&L. So in summary, favorable.

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Operator [13]

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Next question is from the line of Graham Parry of Bank of America ML.

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Graham Glyn Charles Parry, BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research [14]

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So first question is on HIV. So we started to see some formularies, such as the Express Scripts national formulary, start to add HIV to its exclusion lists this year. GSK drugs are still on the formulary. But can you run through whether GSK is set to offer any increased rebates to keep the portfolio there and if you expect that to increase price pressure over time?

And then, secondly, on the Vaccines margin of 40%, I think you'd talked about what the 2Q should look like. But it would be helpful if you could just quantify and strip out both the rebate benefit to Shingrix and the phasing benefits across the portfolio so we can understand what the right underlying and ongoing level for both Shingrix and the rest of the portfolio would be as we are trying to calculate the rest of the year.

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

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Thanks very much, Graham. So first to David, knowing that we've never given detailed updates on our commercial relationships. But first to David, then Iain perhaps on the Vaccine margin.

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David Simon Redfern, ViiV Healthcare Limited - Chairman [16]

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Yes. Thanks, Graham. So as you say, we do have very strong formulary access for Tivicay, Triumeq and Juluca, very strong coverage. And as I've said, it's pretty stable. And we're in the discussions over -- with Dovato having been recently approved with the payers in the U.S. And the initial feedback we've had is in the WAC price, which is the lowest integrase STR in the market, has been favorably received, and those discussions are going very well. So no real significant change in the dynamic. I mean, I think the one thing that is going on with the payers is they're -- some of them at least are trying to much more actively manage their formularies to line up with the guidelines, and HIV is very guideline driven. The guidelines are updated regularly. So you see some formularies like ESI and others, excluding some of the older tenofovir-based regimens.

So that is going on. But overall, very stable. And we have very strong coverage and we're very optimistic about the coverage we're going to get for Dovato.

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

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Thanks, David. Iain?

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [18]

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Yes. Graham, on the Vaccines margin front, taking broadly the influence of both rebating and inventory adjustments across that portfolio for the quarter, it contributed positively about 5 points to the margin in the quarter together. And in total, in sterling terms, represented about GBP 70 million in total. So when you think about the guidance we provided previously, looking out to 2020, that gives you a margin broadly consistent with where we'd expect the Vaccines business to be in 2020. That is not to say that we would expect necessarily the Vaccines business to be at that level for the remainder of this year. But that is the impact and that rebating was specific to Shingrix, and then inventory adjustments were across a broader range of products within the portfolio.

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Operator [19]

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Next question is from the line of Tim Anderson of Wolfe Research.

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Timothy Minton Anderson, Wolfe Research, LLC - MD of Equity Research [20]

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I have a question on consensus modeling for Tivicay and Triumeq. According to the data that you guys collect, consensus really has those 2 franchises that as pretty much flat over a 5-year window on a global basis. But if I look at script trends at least in the U.S., it shows some pretty stiff competition from Gilead. So I'm hoping you can give us some perspective on whether you think consensus modeling, again for Tivicay and Triumeq, over something like a 5-year window is right.

Second question is just if you could disclose emerging market performance in the quarter including China performance?

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [21]

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Okay. Thanks very much, Tim. So I'll come to David in just a moment to comment a bit on shares and outlook in HIV, knowing that we never comment on the specifics of consensus. And in terms of emerging markets, we're up 6%. We don't explicitly disclose on China though we're happy, and I'm sure Luke will be happy to give some comments later if anyone wants to ask on what our plans are in our China business. But David, do you want to just comment on the outlook there?

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David Simon Redfern, ViiV Healthcare Limited - Chairman [22]

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Yes. Thanks, Tim. So we're not going to comment specifically, as Emma says, on consensus. But I'll just make a few remarks. I mean, firstly, obviously, HIV is a competitive marketplace, but overall, actually, I think we trade during Q1 very much in line with our expectations. There has been some switching at the margin, as I said in my remarks, particularly on Triumeq. But overall, we're running at certainly through the quarter at about 32,000 to 33,000 scripts, so relatively stable.

What is true is that going forward in the U.S., we see the vast majority of the growth coming now from our 2-drug regimens, so Juluca initially, but hopefully now also Dovato and then for next year, subject to approval, cabotegravir. So that is where the growth will come from. And to some degree, there will be some cannibalization of Tivicay and Triumeq in the U.S., particularly probably Triumeq, into the 2-drug regimes and that will be fine. So that is where the growth will come from. Outside the U.S., it will be more broadly based, including Tivicay and Triumeq.

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Operator [23]

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Next question is from the line of Peter Welford of Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [24]

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I've got my customary 2 questions. So firstly, on Nucala. I wonder if you can just comment there in regards to the trends, I guess, you're seeing now starting to evolve perhaps in the marketplace. Obviously, a new competitor entering and also perhaps a new at-home administration reaching the market before yours. And so how you sort of think -- we should think about that product for the remainder of the year given, I think, some prior sort of more cautious commentary you've given perhaps ahead of this quarter?

And then, secondly, just on BCMA for Hal. Just with regards to the multiple myeloma combo trial with the Keytruda that you've initiated. Just would love to hear the thinking behind that trial given, obviously, there's been a number of setbacks with the PD-1s in this indication and also whether or not you're confident manufacturing for that is ready to be able to file by year-end when you get the data from the fourth line trial.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [25]

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Okay. Luke, and then over to Hal.

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Luke V. Miels, GlaxoSmithKline plc - President of Global Pharmaceuticals [26]

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Yes. Thank you for the question. So I mean, I think with Nucala, it's very much back-to-basics with us. We've worked very hard to establish a clear positioning in the market. We've focused on productivity of the sales force, the medical teams. And I think you're starting to see the benefits of that flowing through.

In terms of the broader dynamics, I mean, again, we -- I think we're holding our own. Dupilumab seems to be taking the bulk of its business from Xolair, not from the IL-5 class, and I think that -- there's no signs of that shifting at this point. In terms of -- and also our expansion beyond the U.S., I think we're doing quite well. I think we have a better understanding of the patient profile and the true size of the patient pool in countries in Europe. And we're doing very well with around 70% market share in Japan.

In terms of the auto-injector, I mean, it's very, very interesting. If you look at perception mapping around Nucala historically, there, we were able to work on the efficacy profile. We're able to work on the mechanism, all of these components. But obviously, one of the challenges that we had that was difficult to move with what we have available today, is this perception around dosing frequency. So the opportunity for the auto-injector provides another option for patients and physicians. So really, they have the choice whether they want to dose every 4 weeks in the office or write a script and enable those patients to subsequently dose at home. So it's an attractive option for us. We're very much focused on the launch. We expect approval in the second half of the year in the U.S. and Europe.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [27]

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Thanks, Luke. Hal?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [28]

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Yes, thank you for the question, Peter. First of all, yes, we will have the data to review by end of year and there won't be any concerns really from a manufacturing perspective in terms of filing the fourth line data.

So -- and the second part of your question. In terms of the PD-1 combination trial, it's important to point out actually that the BCMA ADC really has multiple mechanisms. It only inhibits the BCMA signaling, which is important for plasma cell survival and the, obviously, the toxin conjugate, the ADC component, gives it an enormous potential for destroying the plasma cells as well. But the antibody is afucosylated, which also gives an immune component, so a very enhanced ADCC. And lastly, what we observed preclinically is that there's a significant immune component to this therapy that may be due to the ADC or maybe even to the ADCC, but we see preclinical a very interesting immune response that we think will be synergistic with PD-1. You're right to point out that previous trials with pembro haven't been successful, in fact, I think taught us a lesson about how to think about PD-1 inhibition in diseases, in particular, myeloma. And we're going to leverage that finding where there sometimes is an early hazard that one needs to progress past in order to see the full benefit as you can see now with the longer-term follow-up.

So we think based on the mechanism and based on some preclinical data, we think that the -- it's a smart risk to take and we'll see what the data shows.

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Operator [29]

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Next question is from the line of Steve Scala of Cowen.

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Stephen Michael Scala, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30]

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In 2015, the company provided 6 or 7 pieces of 2015 to '20 guidance. Iain, I'm just wondering if you have embraced all 7 or if you are revising any. And just briefly, if you will allow me, Pharma was low single digit ex Vaccines. Vaccines was mid- to high single digit, but that now looks light. Respiratory at 2015 levels, that looks light. Consumer, low- to mid-single digit, that looks aggressive. Total company, low- to mid-single digit. EPS, mid-single digit. Tax rate increase 2 to 3 percentage points over the next 3 to 5 years. And if I missed any, please reflect on those as well.

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

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Iain?

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [32]

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Steve, that was a fairly kick-a** question. Thank you. Look, I think from where I sit, somebody that started my job 30 days ago, what I am particularly focused on is how we close out the remainder of 2019 and build on the progress that we made in the first quarter. I think at the fourth quarter, we talked about the 2019 guidance and how that took us through to 2020. And in that regard, the guidance that we updated then and that we've reaffirmed today I think is, hopefully, suitable guidance for you to think about what -- how the firm as a whole progresses through 2019 and then sets up for 2020.

Clearly, the composition of the business is changing somewhat. We're going into a JV subject to approvals with consumer health later this year, which will have an impact obviously in terms of how Brian and the team perform in that regard. And obviously, we've done the transaction in TESARO, which clearly changes the shape somewhat of pharma. And obviously, there's a couple of disposals going on as well. So I think the shape of the organization is changing. So if I would dare to suggest a way of thinking about the guidance is how we've updated at the end of last year, how we've updated today -- or rather reaffirmed around that with a strong focus on execution in 2019 and setting ourselves up for 2020.

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Operator [33]

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Next question is from the line of Laura Sutcliffe of UBS.

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Laura Sutcliffe, UBS Investment Bank, Research Division - Equity Research Analyst [34]

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Obviously, Shingrix is doing very well. I noticed you have killed your universal flu vaccine project, though. And so could you maybe just talk a little bit about what you are excited about in the Vaccines pipeline, what there might be coming up after Shingrix.

And secondly, I'm going to ask the question that Emma mentioned, about your ambitions in China. Could you maybe speak a little bit about that, too, outside of consumer health?

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [35]

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Of course. So we'll come to Luke in a moment on China. But since we have Roger Connor also in the room, who's been working not only on the improvements in our supply in Shingrix, but also responsible for the R&D organization there. So do you want to comment on the pipeline perhaps?

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Roger G. Connor, GlaxoSmithKline plc - President of Global Vaccines [36]

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Yes, will do. Listen, thank you very much for the question. You'll notice that there were 2 assets in our Vaccine pipeline that we have removed this quarter. First of all, not a concern. These are not priority assets. Just maybe to walk through the assets in particular. One was, as you mentioned, the universal flu asset, which is a partnered asset in Phase I and II that we have stopped following an interim data analysis. Just to emphasize, we're still very much committed to flu development, and we are looking at the early stages of our pipeline looking at alternative approaches in the universal flu space. Just for your information, the other asset that we stopped was a next-generation option for prevention of pneumococcal disease. We are looking at new technologies there. Again, not viable to go forward. Again, these are not priority assets for us and really allow us to stay focused on our priority assets in our pipeline. And maybe I'll just mention 2 very quickly. One is our RSV portfolio. I'm very excited about this. We have in respiratory syncytial virus 3 different vaccines in development. As you'll know, I'm sure RSV is the single biggest cause of hospitalization in infants under 1. And we have 3 vaccines in development. One for pediatric, one for maternal and one for older adult. And we look at that portfolio where actually we think there is a real potential for first and best-in-class vaccines within that portfolio.

And you may have seen already that our older adult and maternal vaccine in RSV, they both have received a prioritized Fast Track designation from the FDA. So lots going on in RSV for us and an exciting area. On our older adult, I should just emphasize as well, that vaccine will use the same adjuvant system as our Shingrix vaccine which proved very effective there.

And just on another asset in the pipeline that we are looking at very closely and prioritizing is COPD, chronic obstructive pulmonary disease. Again, this vaccine will use our adjuvant system. Again, it'll be a therapeutic vaccine. And we're looking to see how do we exploit the adjuvant technology to go into this therapeutics space. And on COPD in particular, it's the first vaccine against COPD, which is looking to really address exacerbation with and disease progression. Exacerbations are caused by, or associated with, let's say, bacterial presence. And we feel that a vaccine addressing those bacteria could have a big impact. So exciting times in the pipeline, but those are just 2 of the priority assets we have.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [37]

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Thanks, Roger. So Luke, China?

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Luke V. Miels, GlaxoSmithKline plc - President of Global Pharmaceuticals [38]

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Sure. Thanks, Laura. I mean, we remain very positive about China. I think in contrast to a number of peers, we have a very concentrated portfolio there. And so when we look at the opportunities, I think, in the immediate products that we have today, the first is Seretide. I think it's probably well-known to everyone that COPD is significantly under-treated even when it is diagnosed in China. So we see that as a major opportunity to expand the usage of their product there.

Cervarix, we're still in the early days of the introduction there. We have around 1/3 of the patients who are taking HPV or were vaccinated with HPV. And then linked to that is the opportunity to broaden the Vaccines portfolio within China. And then underlying all of these is really just working very hard in our commercial and medical execution in country and then, ultimately, working hard in partnership with Hal and his team to accelerate the introduction of pipeline assets such as BCMA and hep B into China.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [39]

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Thanks, Luke. I mean, in the end, obviously, we are starting, for the reasons you're all familiar with, from a lower base. That gives us opportunity for growth in arguably one of the most exciting markets at the moment, not least because of the deregulation that's going on around innovation, as Luke has alluded to. And we are set on slightly less exposure arguably in terms of the pricing around branded generics. So more to come there, and we'll see where the Shingrix approval goes in due course.

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Operator [40]

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Next question is from the line of Richard Parkes of Deutsche Bank.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [41]

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First one for Iain on free cash flow and the balance sheet. You called out, and you have done previously, a step-down in free cash flow generation this year due to generic Advair. But just wondered if you could give us some kind of steer on where that might fall out in terms of dividend cover this year and how you're feeling about what flexibility there is still in the balance sheet to do business development and maybe talk about what the path is to deleveraging the balance sheet and maybe get more aggressive there in terms of business development. That's the first question.

Then, secondly, on the HIV franchise. Obviously, European sales are declining. I think you flagged the price reductions. I'm just wondering how you expect that to play out for the full year. Can HIV in Europe still grow this year? And are you seeing any impact from cabotegravir launches in that number?

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [42]

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So David, why don't we go to you first, just comment on HIV, and then we'll come back to Iain? No, we don't guide on cash flow in the year. But I will come back to you, Iain, on your other broader finance questions.

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David Simon Redfern, ViiV Healthcare Limited - Chairman [43]

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Yes. Thanks, Richard. HIV in Europe, the volume actually grew very strongly with dolutegravir volume up 8% with some very good performances in France, Spain and Italy and actually particularly pleased about how Juluca has started in France. But as I said, there were some government-mandated price cuts in a few markets. So for example, in France, the fifth anniversary from your launch, you often have to take a price cut and that was the case with Tivicay. So these won't happen every year, but it's a normal part of life in Europe, which impacted the quarter and will obviously have an impact across the year. And then there was some comparative -- there was a one-off comparative in Italy. So the impact would dissipate during the year, but it won't totally go. But overall, pretty pleased with the performance.

I mean, in terms of the competition, it is obviously heating up in Europe, particularly in Germany, which is -- the markets are all very different in Europe. Germany is probably the most like the U.S. in the sense it's a free market for pricing and also the most favorable to STRs, and we have seen some switching at the margin there to the competition. But everywhere else, we've been growing market share and we're quite pleased.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [44]

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Thanks, David. So over to Iain. And just in terms of the BD appetite point, I will say we are largely focused on digesting exactly the rather significant number of deals we have in hand. But Iain, comments overall.

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [45]

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Yes, Richard, thanks for the question. Clearly, strong focus in terms of working capital management, cash flow generation across the company with that embedded in everybody's goals and objectives. Just talking about the full year, we talked obviously last year, very good year from a cash flow perspective with GBP 5.7 billion for the full year. What we talked about at the fourth quarter was the expectation of a couple of things. One, lower profitability in line with the guidance for the full year. Other things kicking in, the full impact of Advair, which we would expect to see coming through over the next quarter. So continuing to step up R&D and the investment behind our priorities in that pipeline, an important factor. Another thing, building on the announcement around the middle of 2000 in July with respect to restructuring. We'll see a bigger impact of restructuring in 2019.

So those factors, as we said at the end of the year, we'd expect to see cash generation somewhat lower than was the case in 2018, but nonetheless, a very, very strong focus in that area. Guidance today in the dividend, obviously, no change. Reaffirmed expectations around the 80p per share for the full year 2019. And in terms of thinking about capital allocation more broadly, Emma talked about really focusing on implementing, executing the transactions that we've got in the pipeline now and realizing value from those transactions. Clearly, one of those, the disposition of the nutrition business in India to Unilever, will generate a significant cash flow as that deal closes and will go largely to improving overall balance sheet capacity.

And when we think about that capacity, it's around supporting the pipeline, returns to shareholders through the dividend and this continued aspect of looking for business development that contributes to strengthening the long-term future of the firm, subject obviously to pretty strict return criteria and structuring within those transactions. But it would not be an understatement to say that there is very, very sharp focus across the firm on cash generation.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [46]

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Yes. Certainly confirm that. And just in terms of what the pathway is, I'll just remind everybody that in -- we're obviously very excited about getting to the close, subject to the necessary approvals, of the consumer deal. We're then going to be focused on the successful integration, which we are confident we can deliver. And then up to 3 years after close, we do intend to separate these companies. And that will create the reset of the capital structures for both businesses, which then creates a whole new level of capacity for that pharma and vaccines company focused on the science immunology to technology and genetics to both invest in further growth organically and inorganically and deliver returns to shareholders.

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Operator [47]

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The next question is from the line of Simon Baker of Redburn.

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Simon P. Baker, Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research [48]

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Firstly, just continuing off of Richard's question on free cash flow. Perhaps I could broaden out a little for Iain to get your perspectives at this admittedly early stage on where free cash flow conversion is, notwithstanding the one-off effects in the quarter, and where you think you could and should be in the coming years.

And then, secondly, a question for Hal. There was a report out from the IQVIA Institute last week suggesting the potential impact from various new technologies on R&D productivity. Given that the history of R&D is littered with technologies which have over-promised and under-delivered, be very interested to get your perspectives on what you think are the principal technological drivers of increased R&D productivity over the coming years.

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

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Fantastic. So we'll come to Iain first and then come over to Hal on the phone, knowing that, again, he will be giving you an update on this, including that question, I think, at Q2. But first of all, Iain, any further comments you want to make on cash flow?

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Iain James Mackay, GlaxoSmithKline plc - CFO & Executive Director [50]

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Not a great deal, just emphasize the focus around working capital management across the organization as a whole and looking broadly across the balance sheet and the wider portfolio in terms of opportunity to create monetization opportunities where returns are presently below hurdle rates that we've set. And that's a piece of work that we do across each of the businesses on an ongoing basis. The focus is there. Really nothing more precise on the guidance in that regard.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [51]

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Thanks, Iain. So Hal, new technologies for productivity?

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Hal V. Barron, GlaxoSmithKline plc - Chief Scientific Officer, President of R&D and Director [52]

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Thanks for the question, Simon. I think there's no question that the R&D organizations across pharma could benefit from improvements in productivity. And I would say the focus for us is being driven by the observation that only about 1 in 10 molecules that enter the clinic actually ends up becoming a medicine and helping patients. And we were pretty focused on seeing if we can increase that substantially. And the 3 technologies that we have identified that we believe will improve this dramatically potentially is human genetics and -- with the reduction in the cost of sequencing as well as a number of people and patients who have been signing up for various sequencing opportunities such as 23andMe, where we have now millions of patients who've donated their generic information to help us understand better targets, we think, is going to be a very important technology.

In addition, functional genomics, which is essentially taking that genetic data and being able to understand what does it really mean, what are the structural variants telling us about human disease, could also enable us to find much, much better targets. And given how massive these data sets can become when you do all these technologies, we really do believe that machine learning and artificial intelligence apply to these highly dimensional data sets can unravel the biology in a pretty profound way. And all 3 of these are growing in sophistication. And I'll be talking a lot more about this at Q2, but we've already started seeing some interesting targets that were never identified previously. And we think that because they're driven really by using the human as the model organism, if you will, using human genetics and functional genomics, we think this could have a significant impact on our probability of success, and therefore, our productivity. But more on that in Q2.

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Emma N. Walmsley, GlaxoSmithKline plc - CEO & Director [53]

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Thanks very much, Hal. And with that, I think we've come now to the end of the call. So I'd like to say thank you to everybody for joining. Good to hear your voices. And we look forward to catching up soon. Thanks. Bye.