GlaxoSmithKline (GSK)

Q2 2012 Earnings Call

July 25, 2012 8:15 am ET

Executives

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Andrew Philip Witty - Chief Executive Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Simon Dingemans - Chief Financial Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Moncef Slaoui - Chairman of Research & Development, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Analysts

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Graham Parry - BofA Merrill Lynch, Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Alexandra Hauber - JP Morgan Chase & Co, Research Division

Gbola Amusa - UBS Investment Bank, Research Division

Jo Walton - Crédit Suisse AG, Research Division

Brian Bourdot - Barclays Capital, Research Division

Presentation

Andrew Philip Witty

Good afternoon, and thank you very much for joining me by link today. I'm sorry we're not doing this face-to-face. But I'm sure you'll understand, we're trying to avoid everybody being caught up in Olympic lane. And hopefully, this works for you in terms of avoiding being trapped in traffic.

We're going to review the Q2 results for GSK. And with me today, I've got Simon Dingemans, our CFO, who'll make some comments in a few minutes. And also, Moncef Slaoui, who will join Simon and I for question-and-answer at the end, so you'll have an opportunity to ask about pipeline assets, if you'd like.

Let me start by making a few general comments about the quarter. It's been an interesting quarter for the company, a very busy one, really a couple of big dynamics. The first is some very, very good progression of the advanced pipeline. We'll talk a little bit more about that. But clearly, during the quarter, we've seen a lot of very encouraging data, particularly around some of the bigger potential assets in the pipeline. While there still so much to do to bring those assets to the marketplace, it's clearly coming into shape as a potential driver of enhanced organic growth going forward.

Secondly, again, the quarter has been characterized by a continued deterioration in the external environment, especially in Europe, where we took a 7% negative price hit during this quarter. We think to some degree, that may be the worst it gets, but that all depends on government policy. So if nothing new comes out from now on, we think it starts to ameliorate going forward. But it all depends on the events coming out of the Italian, Spanish and other governments over the next few months. We'll have to wait and see. So this has been a quarter really with some short-term, tough external pressures, really offsetting some of the growth opportunity that we have in our investment markets and the quarter, where we've seen good progression on pipeline.

Overall, strategically, we feel that we've made good progress. And in terms of heading towards where we want to be, delivering sustainable sales growth and driving leverage in our margin, over the medium to long-term, over the next few years, we feel we made good progress. And I wanted to just review some of the headlines of that.

First of all, just to reiterate, the strategy remains exactly the same. This is something which has guided us well. And I think we have exactly the alignment we need within our organization, to deliver the focus on our investment businesses, the growth of our Emerging Market business, the strengthening of our Japanese business. All of that has really helped to deliver for us this year. It's interesting, even in this quarter, this time last year, our reported sales were falling about 4%. We're now moving into a period where we see this year coming out in line with last year. So that minus 4%, back to level this year. We would've liked it to be a little bit better than that. But within the scope of the pressures we see, we still think that shift of turn in momentum of the organization is really a key signal of what we're building toward over the future. We've got to this point because of the performance of our investment businesses, little bit offset by the pressures in some of our more mature businesses.

R&D continues to be a major focus for us in delivering now major changes in how we operate, major changes in how we make decisions. It what has put us in the position we're in today with really an unprecedented potential opportunity in our pipeline, really key for us in terms of the medium-term opportunity of the company.

The portfolio as a whole, really helped along by the continued growth of our Consumer business, the cleaning up of that portfolio. The divestment of the products are really helping to release the energy and the focus, delivering a 7% growth during the quarter against a market growth of about 4%, very nice recovery in the U.S. for us on the Consumer business and really across all of our key categories of oral care, particularly the Sensodyne business, nutrition, particularly the Horlicks business, and of course, wellness, particularly in pain, very good performance during the quarter from Consumer.

We also continue to be very positive about our Vaccine business. And while it's very lumpy and causes all of us, including yourselves, real challenges in forecasting because the tenders come in, in such unpredictable ways, and therefore, creates and amplifies quarter-to-quarter volatility, you can see during the year the continued development of this business, tremendous continued rollout of the Synflorix across the world, particularly in emerging markets, continued good growth of Rotarix, Boostrix, as well as the base businesses, very strong performance during the quarter from emerging markets. And we continue to expect during the rest of this year, although it will be variable between Q3 and Q4 because of prior year comparisons, we continue to expect our Vaccine business to be extremely robust driven by those new products.

Now I want to dive very quickly into the 2 mature markets and to give you a sense of some of the puts and takes there. But before doing that, just give a little bit of a sense of the overall movements in the business this year at the sales level. So what you can see from this slide is a simple bridge from where we were last year Q2. You can see the impact of the divestments of the various businesses. So this is the Vesicare divestment in particular, as well as the Consumer brands. You can then see the headwinds of the U.S. and European pharma businesses, which I'm going to touch on in a second, really completely overwhelmed by the growth being delivered by the Emerging Market, Japan and Consumer businesses. And I think this slide more than any I can show you demonstrates why the investments we've made in these businesses has been worth it. Because even in this much more difficult and unexpected environment for the developed markets, our new businesses have been able to neutralize that impact.

You, then, see a little bit of the impact from ViiV genericization, particularly of the old HIV products, takes us to where we are on CER and just the completeness I've shown you, the currency headwind as well. But really, what you see here is a story of really 3 parts, a piece of divestment, the headwinds in Europe and U.S., counted by continued strong performance in those growth businesses: Emerging Markets, up 9%; Consumer, up 7%; Japan, up 6%, all 3 performing extremely well.

Now let's look quickly at Europe. We talk a lot about price, but I wanted to share with you volume because I think volume just gives us a sense of how well we're doing competitively in this marketplace. This is an IMS-derived slide. You see 3 lines on this slide. The top line is the overall market. The middle line, if you will, and there, from the left-hand side, the middle line is the peer group of major multinational companies, and they're highlighted at the bottom for you in the footnote. And then the more variable line is GSK. Now 2 or 3 messages in this slide: this is volume; this excludes Avandia as a discontinued business but includes everything else; includes Vaccines, which are picked up in retail but not Vaccines, which are picked up through large government tenders. So just completeness to give you a sense of what this data shows.

2 takeaways I think you can see from this. Number one, the overall market is pretty slow anyway in volume, and if anything, just gradually slowing. And you can see that top line just trend in slightly down from an average of about 1% to somewhere in the middle of a 0 to 1% range. So whole European market volume, not terrible but certainly not dynamic. What you see within the GSK versus peers is 2 phenomena. In the early part, great volatility around the winter quarters. Why is that? 61% of GSK's European business is either in respiratory or antibiotic. So what you see there is the phenomenon of the light flu seasons that we've been going through in the last few years. More importantly, as you look at the more recent quarters, over the last several quarters, you see that GSK is performing either ahead or in line with the peer group for volume growth in the marketplace.

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