Question-and-Answer Session
Kevin Wilson - Citigroup
Yeah, thank you this Kevin Wilson from Citigroup in London. Three questions, if I may, JP. Firstly, in the U.S., the 2% decline in sales in the quarter. Could you break out the volume and any price element you saw, and perhaps also comment on the fading effect of Part D and to eligible as well?
Secondly, for Julian, what's driven the change in what you consider to be acceptable interest cover, if you're now happy to have a higher level of debt on the balance sheet than in the past?
And thirdly, could you also refresh us on your flu capacity for the coming season and next year, as well as perhaps give us some sense of what you think the pre-pandemic might do? Thanks.
JP Garnier
Thank you, Kevin. Why don't we start with Julian, and then David will take on the other two questions.
Julian Heslop
Thanks. We've always believed in having a conservative balance sheet, as you know. Even if you take the 2006 actual results and take the current debt of just over $3 billion and add on the incremental 8, you're still going to have an interest cover which is well beyond 10.
So I think the answer to your question is, I think, that's still very satisfactory and still very conservative. But it reflects an increased level of debt in the business, which I think is now appropriate.
JP Garnier
Okay David...
David Stout
In terms of the U.S., the 2% growth, I'm sorry, decline represents, of course, a combination of factors. Especially dragging down are all the generic impacts of Wellbutrin and Zofran, of course including the 30-some% decline in the Avandia sales.
Price had minimal impact. We took no price increases during the second quarter; it was just the spillover of the last price increase that we took in the last part of last year. So it's overall, I think, very good results, given especially the rebound in the performance of Advair in the quarter.
Relative to the flu, we had announced previously doubling of our capacity in Dresden, Germany and in our Laval facilities for seasonal flu. We now expect by 2010 that we would be able to produce over 150 million seasonal flu doses.
Of course, this is multiplied for our pre-pandemic by an infinite number. We've not been specific, but it is in the hundreds of millions of doses that we can produce on an annual basis, starting in 2008. We're still negotiating with the governments, and the only order that we've announced publicly so far is the Swiss government, along with some antigen that was bought by the U.S.
JP Garnier
Thank you, next question please.
Andy Cosen - Reabourne
It's Andy Cosen at Reabourne in London. The first question is going back to the big increase in the buyback, maybe if we ask the question differently, not in terms of interest cover but in terms of the balance sheet.
You previously talked about how industry risks were quite great, and also that your shareholders didn't particularly want the move that you've done today. So in terms of your balance sheet structure, could you give us a bit of an idea of what's changed?
And then the second question is just in terms of Alli. Do you think the 76 million represents stocking, or is it in any way representative of underlying demand? Thanks.
JP Garnier
Okay. On the change, I think, to be fair, we have a dialogue with our investors on a continuous basis. And I think lately the consensus of our investors was clearly that we were too conservative.
And even though there is some justification in having a pristine balance sheet, there is -- it's a matter of how much. And we looked more carefully at the leverage we could take on which would not diminish our flexibility to do deals, or for that matter to pick up a large tab for, let's say, an unexpected legal liability. Even though, we don't expect that to be certainly the case today, you never know what's around the corner.
So, based on that analysis we came to the conclusion that we could do this without really changing the fundamentals, changing our flexibility to do deals and to borrow large amounts of money. I mean if you look at all the ratios, this is still by all comparisons to other industries, a reasonable leverage. Julian, you want to add something to this?
Julian Heslop
No, I think you said it, JP I think we, at the end of the day still end up with reasonable leverage levels, reasonable interest cover capacity, and we're well-positioned to face whatever the future has for us.
JP Garnier
And John, can you speculate on what part of the 70 is out of the shelf.
John Clarke
Certainly, by all means. Let me stress initially that what we're doing at the moment is looking to build a very long-term business. So, the early numbers are not particularly indicative of that. That said, of the £76 million that has been sold today to the retail trade, around about 60% has gone through to the consumer.
That's what we would expect. But it's very early to make a prediction on what that means as far as the long-term brand sale is concerned.
JP Garnier
Thank you.
Graham Perry - Merrill Lynch
I'm going to state my question. This is Graham Perry from Merrill Lynch. Just to start off on the gearing again, it looks like there's the net debt to equity you would be looking at, if you complete the buyback by around mid-'09, would be north of 100%.
So, just wondering is that a ceiling for you? Is that a comfort level? Could we see you go higher? And does that ratio really matter to you? So, in short what I'm trying to get to is could we actually see you issue more debt over and above this beyond that period?
Also, could you detail any U.K. tax benefits of the current buyback, and whether there's an annual restriction on the buyback level that you could get to this year or next year?
And thirdly, a question on the upcoming Advisory Committee meeting panel on Avandia. I was just wondering whether you're concerned in any way that Takeda has not been asked to present at the AdCom at all; they're only there to answer questions, and whether we can read into that that there is no option here of a class label change, and any label changes that could come out of that recommendation would only apply to Avandia. Thanks.
JP Garnier
Okay. I'll take the last one, Graham if you don't mind, and then pass it on to Julian. We are not concerned about the choice of who speaks and who doesn't speak at the Advisory Committee. I think, you are reading consequences, which I am not reading. I know for a fact that there is a conversation going on between all the companies, including Actos sponsors with the FDA.
I think, there's a lot of data that is in the file concerning Actos, I think you should read some of the excerpts from the FDA submission and for that matter ours, that will confirm to you that there will be discussion of TZDs as a class. And therefore, I think you cannot rule anything and I think, you cannot draw any conclusion from what we have heard so far about the Advisory Committee.
And therefore, I think, all options are on the table including having TZD class labeling later on, or not. Certainly for CHF, that will be the case, but excluding CHF, which by the way is not part of the discussion on next Monday, if you look at ischemic events, I think that all the alternatives are still on the table.
And we cannot deduct from anything that has been said or done where the FDA is leaning, or whether the Committee is going to rule one way or the other. I think it's too early to tell. We'll find out Monday. And now, Julian?
Julian Heslop
In terms of your gearing point, it's a very fair question actually. I think, in most businesses, the answer is it's a pretty relevant measure, but in pharmaceuticals, as you know, we take our most valuable asset, which is our pipeline, and completely write it off.
And so, for that reason it's not a measure that actually influences our actions. So, the real key for me has always been interest cover. So, that's really what I look at in terms of determining the appropriate level of gearing, rather than its relationship to the sort of net assets of the balance sheet.
And in terms of tax, as we're doing it with a sort of phased share buyback program, yes, we do get full tax relief. If we were to do it in an absolute one-off, we wouldn't. So a large portion of it would be without tax relief. So, it is a relevant factor, yes.
JP Garnier
Yeah, and I think, to be fair, the £12 billion wasn't picked out of the air. We wanted to maximize our return, and there is a point of diminishing returns. If you don't get tax coverage, what's the point of increasing further the buyback?
But we could have done it from purely a structure standpoint, which could have gone beyond £12 billion, but we would not have the same kind of overall tax benefit. So, £12 billion is the right number as far as we are concerned.
Graham Perry - Merrill Lynch
And just to follow up on that point, the 2.5 that you've outlined for the second half of this year, though, to go over that would likely breach that level. So, we wouldn't expect to see you buy back more than the 2.5 for this year than you've currently outlined.
Julian Heslop
I think 2.5 is a very good call for the rest of this year.
JP Garnier
That's correct. Next.
Steve Scala - Cowen & Co.
Thank you. Cowen & Company in Boston. I have three questions. What does your EPS guidance for 2007 assume for Avandia in the second half of the year? Does it assume a continued decline, and if so, at the existing rate or moderation? Does it assume a flattening or a rebound?
Secondly, on Synflorix, has there been any progress on figuring out the U.S. clinical trial requirements, or will Glaxo simply not participate in the U.S. opportunity? And then lastly, I'm just curious as to whether the 400,000 patient epidemiologic study to be revealed on Monday includes any data on Januvia and its side-effect profile relative to the other agents, and if it does if you'd like to share with us the findings.
JP Garnier
Thank you very much, Steve. I always look forward to your questions, because they are to the point. Starting with the EPS and the speculation on Avandia, whether we expect it to come back or get worse over the second part of the year, I'd rather pass on this. Because, frankly again Avandia U.S. sales constitute 5% of our business.
There are lots of other moving parts, which we look at carefully when we talk about guidance. As I have said before, pretty much everything is ahead of our own internal plan, except for Avandia, which allows us to maintain the guidance. I mean otherwise, clearly we didn't expect Avandia to lose 40% of its sales, in effect, in the U.S. So we're going to just maintain the guidance.
If some things go much better or much worse than expected, which is very unlikely, on Monday and, more importantly, beyond, because what really matters is when the FDA speaks, then we will modify our guidance accordingly.
But, short of that, we're going to leave it the way it is. And we don't detail all the moving parts, and I have no reason, therefore, to do it this time. Sorry. On the Synflorix, David, you want to...
David Stout
Steve again, for competitive reasons we're still not commenting on our U.S. strategy, but again, remind you that our biggest market opportunity, we think still is in the EU, where the market is way underdeveloped and we intend to file Synflorix at the end of this year.
JP Garnier
And then Januvia is not included in the large epidemiology study.
Steve Scala - Cowen & Company
Thank you.
Andrew Baum - Morgan Stanley
Hello, it's Andrew Baum from Morgan Stanley. Three questions, if I may. Firstly, just going back to the dialogue that JP referred to with investors, obviously, the industry and Glaxo is under pressure to create value for shareholders.
You obviously, doubled your share buyback. You are not geared your balance sheet, or will gear your balance sheet. Your payout ratio is already fairly high, moving up. Having done all this, are there any additional levers left to pull, having excluded the divestments of over-the-counter, particularly in regards to additional cost savings on top of your operational excellence programs? That's the first question.
Second question is, for the consumer health business. Obviously, there are a number of smaller assets, which potentially could be acquired and I'm talking companies rather than products. Should we anticipate any move by GSK in that direction, given your comments on the strategic fit within the Company?
And the final question, perhaps a little bit more color on the Coreg CR/Avandia sales force dynamic. Perhaps you could outline for us what percentage of the Coreg CR sales force effort was actively involved in promoting Avandia as well?
JP Garnier
Okay Andrew, first of all, other measures to increase shareholders value. Well, first of all, we continue to have a policy of increasing our dividends every year and even though we have a very good yield right now, you know we expect that to continue. And we'll have to wait and see what happens at the end of the year.
But that's traditional at the time when we make announcements about our dividends. As far as the business is concerned, I think we have lots of opportunities to once again beat the analyst forecasts.
We've done that pretty much for seven years in a row. We have some big plans to help out '08, and of course '09 and '10 should be very good years, because we have fewer generic losses.
And beyond, I continue to say that the way Advair will come to its sunset is affecting the analyst consensus on the sales line because many of them are predicting that there will be a cliff effect in Advair, I remind you the regulation in the U.S. market on the inhaled medicines is highly unlikely to produce an AB rated generic.
There'll be generics, but they won't be AB rated, which means that we will have a far softer landing, and that changes dramatically the projection of our sales growth over the next five years it's here and there. In terms of smaller assets, we look at our business all the time, and we look at smaller assets as well as big assets.
We have said why consumer healthcare makes sense strategically for the long run, and I'll keep those comments to that. And then finally, on CHF sales force...
David Stout
Yeah, because of the overlap in the target audience it was the exact same sales forces that were selling Coreg CR as selling Avandia. So, I mean, you can't just change that overnight, but I think, again, it shows the flexibility we have in our sales forces that within a four week, five week period we've been able to bring on board 2,000 reps now that will be able to promote Coreg CR in a first position.
Steve Scala - Cowen & Co.
And just, one follow-up to Julian from JP's answer that I was specifically trying to address the cost element in terms of improving the operating margin structure, either by outsourcing some of your maturing products ahead of patent expiration to improve gross margin or a number of parts within the P&L.
How much of more is that to come on the figures in the big plans that JP mentioned to you just a second ago?
JP Garnier
I mean, Julian can answer, but it's the same answer, Andrew, we will talk about our plans when it's time to talk about the guidance for 2008, we have said all along that we continue to believe there are opportunities to operate a large pharma business on a lower cost basis.
And we continue to strive in that direction, without depriving the key engines of the business, which is drug development and also marketing and sales. I mean, we don't want to cut our nose despite our face and reduce our sales growth.
I mean, if you look at our schedule of new product launches within the next years, '07, '08, '09, we're talking about up to 25 launches, clearly we need to have the resources to do that effectively.
We are growing our pipeline, our late stage pipeline has 33 assets that costs money. But we have made significant progress. We're able to do more with less, frankly and it's not surprising. If we're outsourcing up to 40% of our clinical trials, every trial we outsource, the cost is reduced by roughly 80%.
This is huge money saving for the company, so we're very comfortable that we will be able to continue in the future, whether there will be an above and beyond restructuring plan, we'll discuss that when our plan is ready we are considering all options.
Steve Scala - Cowen & Co.
Thank you.
Craig Maxwell - JPMorgan
Hi, it's Craig Maxwell from J.P. Morgan in London. Just couple of vaccine questions, on Synflorix, is that Europe only or is it maybe some other countries outside of Europe and the rest of the world?
I know it's not U.S., but just how broad do we define Europe? And then how does that stack up against the current Prevnar product? And then potentially against the 13 well in Prevnar product that's coming along in a couple years' time?
And if possible what are some of the strategic issues of breaking into a European vaccine market where there's already one major player. I mean, obviously, it was different from small molecules, those different buying points and so on. How do you just in essence go about doing that?
And then possibly if you could extend how you could possibly do that for maybe Cervarix against Gardasil as well?
And then lastly on consumer, some of the retail brands, Lucozade, Ribena, Horlicks, oral care, how do they fit into the OTC strategy?
David Stout
Okay. Let, me first take the Synflorix question. So it's primarily Europe, but there are several international markets we'll be filing as well, but the real bulk of the opportunity is in Europe.
There are some very fine differences in the antigen mix between Synflorix and Prevnar we think there's a couple key antigens, however, that are the key drivers of hospitalization that will be a key differentiator for us. So that's a very important element of the Synflorix file, and the Synflorix marketing plan, so that's very important. Relative to how do you break into a market, whether it's Europe, Cervarix, U.S., Synflorix, unfortunately we have way too much experience coming second in the markets with vaccines and we've continued to do very well.
So often in the vaccine marketplace, this isn't like statins, where you may be the fifth or sixth one in, there are typically one, two and, in some rare cases, three competitors, and it's often very straight here's a lot of tendering as well. But we have a lot of experience doing that and we'll continue to draw on that experience.
JP Garnier
Yeah, just to add to what David said, the big difference is, being first in vaccine it has the advantage of generating revenues earlier, not to be underestimated. But you don't build a marketing anchor as with a drug for chronic use, because drug for chronic use while you capture patients who stay on the drug and renew their pact with you over the years.
So you have guaranteed book of business, so to speak when number two comes on the market, and he has to steal it from you, which is always hard. Well, in the case of vaccine, that's not the case because your customer you only get once. It's, sadly like the funeral home parlor business, the customer only shows up once, and once you have had that sale, you're not going to get it again.
So everybody, the clock starts to zero every 1st of January and the whole market is up for grabs, but again, I want to stress that in the case of Cervarix, all this really doesn't matter. Because the size of the opportunity is what is important in the marketing thrust, it's not whether consumers are going to use Gardasil or Cervarix; that's a secondary question.
The primary question is how many women are going to realize that they need to do this, that this is a must, and this simple intervention will avoid for them the risk of a deadly disease.
That's what is of interest, because I agree that Gardasil is doing well. But they're just scratching the surface in terms of market penetration, we're talking a single-digit percentage of the opportunity has been captured, we have a long way to go.
So I think it's in everybody's interest, Gardasil and Cervarix, to really clinch that catalyst that all OB/GYNs advise their patients to go and get the shots, and that's going to play a big role.
In terms of consumer, I think we have said it all, we have a very intertwined business between over-the-counter, oral care and pharmaceuticals. So it's very hard to separate those things.
They use the same backbone, the same infrastructure, and the same distribution channels, and they benefit from each other and they help each other, and there is tremendous advantage to not separate the two. In fact the sales force is going to physicians promote both sometimes, oral care solutions in the case of dentists, and antibiotics and so forth. So it's all mix and match.
That's not the case for drinks, drinks is a standalone separate business. It's true that it is strategically less related to the core. What has kept us faithful and loyal to the drink business, frankly is their outstanding performance.
I mean, they have outperformed every other division in the company systematically with double-digit growth in revenues and this quarter is no different, so as long as we continue to be very successful, you realize that three years ago some people advised us to sell our drink business.
And it's true that we would have made a onetime gain, but I tell you it's much more valuable today to have kept it than to have sold it three years ago. So we're going to be very careful and we're not going to sell anything that has a bigger long-term value if it stays in our hands.
So on top of that to separate the drink business, from the rest of the consumer business would create some negative synergies on the cost side that should not be misunderstood and should not be underestimated, but thank you for the question. And now we're going to go to the last question of the conference, please.
Unidentified Analyst
Hi, thanks for taking the question. Just going back to the share buyback, just wondered if you'd give a little bit more insight into how you got to that £12 billion figure? And particularly in terms of what headroom, it does give you for acquisitions and licensing. And presumably you'll be retaining your investment grade status and that sort of level of gearing as well.
JP Garnier
Well, let me just repeat that this changed nothing to our ability to in-license significant assets or buy significant companies, we can raise a significant amount of money even with this kind of leverage on our balance sheet. I think we have many banks that are knocking on our door, and if we needed to raise a substantial amount of money for a transaction we would be able to do so. So, we haven't lost any flexibility.
Now, back to the gearing, and so forth. Julian, you want to comment?
Julian Heslop
Yeah, of course, one more thing to add you're absolutely right, we retained, clearly, our investment grade. S&P have reviewed the credit rating and left it unchanged at AA. And we, obviously, we're waiting to hear from Moody's as to what their assessment is. But, no, we still have financial capacity for something that added value to the shareholders.
Unidentified Analyst
That's great...
JP Garnier
On that note, I want to thank you all for being with us today. And we look forward to talk to you very soon, I suppose. Bye-bye.
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